Noise vs. Signal
This week in the wild world of markets, volatility was again the name of the game. Now, volatility comes in essentially two forms: intra-trend volatility and trend-changing volatility (or noise vs. signal). In HAI‘s view, what we’ve seen over the last two weeks is distinctly the former—a noisy dose of intra-trend volatility not to be confused with signal. In short, the pertinent trends are for precious metals and commodity strength, along with a weak dollar and a weak U.S. bond market.
In HAI‘s view, amid the volatility the real opportunity (signal) remains squarely focused on precious metals and, more broadly, hard assets over their financial counterparts.
To reiterate HAI‘s big picture view on the secularly pertinent trend: 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 into gold, silver, precious metals miners, and hard assets more broadly. This rotation has already started.
In HAI‘s view, that capital rotation is the large-scale secular trend that will define capital markets for the foreseeable future—and it’s only just begun to kick into high gear.
Now, as discussed last week, the recent bout of extreme volatility within the ongoing market trends was triggered by the news that Kevin Warsh, “the hawk,” was nominated to be the new Fed Chair. The knee-jerk narrative has been that Warsh will restore Fed independence, Fed credibility, and re-anchor the world to the dollar system we’ve all been accustomed to for decades.
In HAI‘s view, this new Fed restoration narrative is almost certain to age about as poorly as last year’s narrative that Elon Musk’s DOGE would solve the U.S. fiscal crisis. Again, in HAI‘s view, the new Warsh narrative is pure noise. The real signal is that of genuine monetary regime change that is, under the surface, increasingly being embraced by all sides, both foreign and domestic.
In March of 2009, the People’s Bank of China (PBOC) released a three-page white paper for the Bank for International Settlements calling for a global shift away from the global sovereign currency reserve system. The PBOC instead advocated a neutral reserve asset to replace “credit based national currencies” being used as the global reserve asset.
As the PBOC white paper explained, “The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit based national currencies... When a country’s currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances.”
Then a PBOC representative, Dr. Yao Yudong, in a June 2015 presentation in Singapore called “World Needs New Reserve Currency,” explicitly noted that “the gold market and the Shanghai Gold Exchange International (SGEI) are vital to the internationalization of the yuan…we would like to increase usage of yuan in trade invoicing by using gold.”
In other words, China’s intention is to internationalize the yuan into a reserve currency, but not via the post-1971 petrodollar model. Instead, China wants to accomplish its goal by using the Shanghai Gold Exchange International Board to make yuan easily convertible into gold—internationally—as the super-sovereign neutral reserve asset that’s “disconnected from individual nations” and “credit based national currencies.”
This week, the Financial Times reported remarks published last Saturday by Qiushi (the Chinese Communist Party’s flagship journal and window into high-level policy intent) of a 2024 speech by Chinese President Xi Jinping. According to the FT, the Chinese President pledged to build a powerful currency with global reserve status.
According to the article, Xi said, “What constitutes a strong financial nation?… First, it should have a powerful currency, widely used in international trade, investment and foreign exchange markets, holding the status of a global reserve currency.”
Again, crucially, in HAI‘s view, Xi’s comments must be interpreted through the lens of Dr. Yao Yudong’s 2015 remarks that, “the gold market and the Shanghai Gold Exchange International (SGEI) are vital to the internationalization of the yuan… We would like to increase usage of yuan in trade invoicing by using gold.”
In that context, Xi’s 2024 declaration pegs the ambition of yuan “reserve currency status” to the yuan’s convertibility to gold as a neutral super-sovereign reserve asset that’s “disconnected from individual nations” and “credit based national currencies.” In other words, the internationalization of the yuan and the yuan’s ascent to reserve currency status aren’t about competing with the dollar on dollar terms, rather, they’re about elevating the yuan because the new yuan is the gateway to a new, neutral, gold-based system.
In HAI‘s view, it’s clear that China is embracing the push for monetary regime change, but what about the U.S?
In his speech “From Hamilton to Today: Trade and U.S. Economic Strategy,” U.S. Trade Representative Jamieson Greer’s speech at Davos two weeks ago sounds to HAI‘s ear strongly aligned with China’s calls for a neutral reserve asset.
Greer’s speech referenced economist John Maynard Keynes’ Bretton Woods proposal for a neutral reserve currency to balance trade:
“Keynes—and his contemporaries like Joan Robinson—argued that, in most circumstances, a country’s persistent global trade surplus is very strong evidence that it is pursuing economic growth at the expense of its trade partners. In other words, a country that is structurally exporting more than it is importing likely is harming the rest of the world to fuel its own growth.
It is not producing to meet its needs or trade for import: it is trying to have a shortcut to growth at others’ expense. To put it even more clearly—a country should export in order to import, and if that is not happening then it is a clear sign that something is wrong.
Many of Keynes’ most creative ideas for how to deal with this problem, including a proposed global currency, were left on the cutting room floor at Bretton Woods. The system that emerged did not include structural mechanisms to discourage countries from accumulating persistent trade surpluses.
If I am being honest, the fact that the United States was running a massive trade surplus at the time may have had something to do with it. That is unfortunate, and we all have to deal with the results today.”
In HAI‘s view, the crucial signal amid the current cacophonous noise is all parties’ agreement that the system that was can no longer be. China must free itself from the dollar, and the U.S. must reshore and revitalize its manufacturing base by freeing itself from Triffin’s Dilemma.
A new system based on a neutral reserve asset is now necessary for all parties. That neutral reserve asset is gold. To do the job, though, the gold market must get a whole lot bigger. And in an asset class defined by scarcity among other attributes, that means the gold price must rise immensely. That process has begun, but, in HAI‘s view, the process is far from finished.
This week also offered important further evidence that, implied within this monetary regime change is the fact that real assets are asserting their increased value over paper assets. A Reuters headline stated this week that, “Vance says U.S. will establish price floor system for critical minerals, while Bloomberg reported that, “Trump Launches $12 Billion Minerals Stockpile to Counter China.” Price floors and critical minerals stockpiles are another way of saying, “we need the ‘stuff’ more than the paper. We will print the paper to get the ‘stuff.’”
So again, the signal (as opposed to the noise) is a global monetary regime change from dollars and Treasuries to gold as the new neutral reserve asset, and a resulting global scramble to exchange paper for real “critical mineral” assets “to counter” what China has already been doing for over a decade. HAI suggests investors note the signal over the volatile noise. After all, it is the signal that explains why gold, silver, mining companies, and hard assets broadly are all breaking out versus financial assets.
Now, despite the fact that this week ended with some very constructive signs, gold, silver, and commodities have all been struggling for a week or so. We could certainly see more short-term downside. That said, in light of the fundamental signal outlined above, HAI suggests readers recall legendary hard asset investor Rick Rule’s experience with his past 10x investment returns. As he says, he always had a median expected time frame of five to six years, and nearly all his massive wins had 40%–50% retracements along the way.
In HAI‘s view, the signal is clear, and that signal very much favors gold, silver, and select commodity investments. HAI‘s intent is to be on the right side and give it time. Or, as legendary trader Jesse Livermore put it, “be right and sit tight.”
Weekly performance: The S&P 500 was nearly flat, down 0.10%. Gold was up 1.58%, silver was slammed by 7.86%, platinum was off 1.14%, and palladium was up slightly by 0.53%. The HUI gold miners index recovered by 3.23%. The IFRA iShares US Infrastructure ETF jumped 4.59%. Energy commodities were volatile and lower on the week. WTI crude oil was off 2.62%, while natural gas sank by 21.83%. The CRB Commodity Index dropped by 3.31%. Copper was off 0.67%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 1.70%. The Vanguard Utilities ETF was nearly flat, up 0.06%. The dollar index was off 0.72% to close the week at 97.69. The yield on the 10-yr U.S. Treasury was off 2 bps on the week closing at 4.22%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
