Cooler Heads Will Prevail
This week HAI will be short and to the point. Friday witnessed a historic sell-off in the precious metals. Gold dropped 9.11%, silver crashed by 26.91%, and the precious metals mining stocks were clubbed lower by 12.58% on the day. These are all huge declines for one single day, and are likely the cause of sizable concerns on the part of readers holding assets in the precious metals sector. Let’s address the Friday massacre head-on.
Simply put, in HAI‘s view, the risk that Friday’s violent reversal lower in precious metals marked a secular top in the bull market is extremely low.
To reiterate HAI‘s big picture view, the U.S. and the world are in the midst of a monetary regime change—amounting to a 100-year storm—in which the prevailing petrodollar (global dollar recycling system) is realigning toward a new gold recycling system where gold serves as the new (albeit old) primary global reserve asset instead of U.S. Treasuries.
This 100-year storm is the catalyst for a massive global capital rotation (which we know has already started) into gold, silver, precious metals miners, and hard assets more broadly.
That capital rotation is a large-scale secular trend that has only just begun to kick into high gear—it almost certainly didn’t just stop and reverse on Friday. Rather, as HAI noted last week, enhanced volatility was to be expected as gold and silver were technically extended and negotiating major round-number price targets/resistance at $5,000 and $100 respectively.
Now, the mainstream media narrative is that the sell-off was associated with the news that Kevin Warsh was named as Trump’s nominee to replace Jay Powell as the new Fed Chair this spring. According to the media, Warsh’s nomination represents a “hawkish” policy surprise.
But realistically there’s no room in the room for an honest-to-goodness policy hawk when the U.S. has a sovereign debt crisis and a resulting imperative for rate cuts and some form of yield curve control. In HAI’s view, this is all just lipstick on the pig of a necessary monetary regime change.
In other words, to borrow from the tale of Humpty Dumpty, Kevin Warsh and all the king’s men (even if they actually wanted to) couldn’t put the petrodollar system back together again.
In HAI‘s view, the Warsh announcement wasn’t the only cause, but rather a convenient trigger and perhaps accelerator for a precious metals correction that was already going to happen at some point.
Furthermore, the notion that Warsh is a hawk that can/will stand in the way of, or even reverse, the ongoing global monetary regime change is, in HAI‘s view, stretching reality far afield into the land of make-believe.
After all, Warsh’s hawkish credentials have been vastly overstated. In a 2018 Wall Street Journal op-ed, Warsh implored the Fed to reverse course on rate hikes following minimal market turbulence and despite a still-resilient economy.
Even on Friday, Warsh’s former colleague Stan Druckenmiller said in the Financial Times, “The branding of Kevin as someone who’s always hawkish is not correct… I’ve seen him go both ways.”
In the FT article, Druckenmiller also seemingly let the overriding cat out of the bag when he said, “I’m really excited about the partnership between him [Warsh] and [Treasury Secretary] Bessent… Having an accord between the Treasury Secretary and Fed Chair is ideal.”
Druckenmiller’s comments seem to indicate that the prerequisite for the job as Fed Chair was a willingness to agree to an “accord” with Bessent’s agenda—which is, by default, Trump’s agenda.
So while the surface billing is the surprise appointment of a policy hawk, the questions remain: just how hawkish is he (not much, really), and what was promised to get the nod (an accord with Treasury and Trump, it seems)?
Perhaps that is why, even after a huge decline recently, the U.S. dollar didn’t manage a notable rally on what should have been, according to the hawk narrative, a strong dollar stimulant.
In HAI‘s view, the loud narrative noise is likely to soon fade and be replaced, again, by fundamental reality. That reality is a trapped Fed that needs to cut rates and loosen policy regardless of inflation (whether it’s Powell or Warsh) and a world moving off the petrodollar toward a renewed hard money standard with gold as the anchor.
In HAI‘s view, any further weakness in the precious metals in the weeks ahead is likely an excellent buying opportunity. Despite a Friday drubbing in the precious metals, in HAI‘s view, cooler heads will soon prevail.
Weekly performance: The S&P 500 was up 0.34%. Gold was off 2.68%, silver was crushed by 18.21%, platinum was creamed by 21.89%, and palladium was hit by 17.56%. The HUI gold miners index was off by 11.66%. The IFRA iShares US Infrastructure ETF was off 0.72%. Energy commodities were volatile and higher on the week. WTI crude oil was up 7.68%, while natural gas surged by 21.47%. The CRB Commodity Index gained 3.67%. Copper was off 0.18%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 0.51%. The Vanguard Utilities ETF was up 1.54%. The dollar index was off 0.50% to close the week at 97.11. The yield on the 10-yr U.S. Treasury was up 1 bp on the week, closing at 4.24%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
