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- Chinese Admitted To Bessent, They Knew Biden Was Weak
- "Strong Dollar" Policy Being Reversed By Trump Administration
- Dollar Recycling Shifting To Gold Recycling
"Gold has been interesting. For the month of April, 70 tons, roughly 7.4 billion in gold, was purchased via ETFs in China. That's double the previous month's record. I think tariff uncertainty added to buying, but what's interesting is the global share of ETF buying in China moved higher, from 3% of the global total to 6%. In the month of April, Chinese demand in that four-week period accounted for half of global ETF inflows." —David McAlvany
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Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. David, it's so funny how we talked last week about how different news outlets will say things differently, but behind closed doors, Treasury Secretary Scott Bessent just revealed that the Chinese told him behind closed doors that they ignored their trade commitments under Biden because they knew he was weak. Huh. I guess nobody else did, but yeah. They just admitted that.
David: All of my kids have, at one time or another, sat by a light switch on the wall, entertaining themselves by flipping it on, and then off, and then on again until I tell them to stop. Right?
Kevin: You know why they do that, don't you? They want your attention.
David: Maybe. I mean, tariffs are feeling a little like that now.
Kevin: Oh. Yeah.
David: Is it the fascination with pulsating waves of energy that fill the room with light, or is it the momentary darkness where ambiguity and the unknown stir a variety of concerns?
Kevin: So I've got a question for you, though, because Trump has cut his teeth, basically, building casinos and working in an arena where you probably have to put up with some mob bosses. Okay? Does what works in business, does that work in international relations?
David: That was a question that Joseph Nye asked in a Financial Times article just a few weeks ago, and I was thinking about his passing this last week. He served under two presidential administrations, strongly promoted US-Japanese relations, best known for his ideas of soft power influence and complex interdependence. It is worth asking the question. What works in business may or may not work in international relations.
So his first big idea, soft power, getting what you want through attraction rather than coercion or payment, that's a little like social capital, street credibility, at least a few of my kids would say rizz. That's the word of the moment, short for charisma. The allure of the American dream, better opportunities, they draw immigrants from around the world. Back in the 1990s, Levi's jeans in Moscow were the American stuff people had to have. I mean, I know a guy that flew plane loads full of denim from here to there. Kevin, you know him, too. You used to fly with him.
Kevin: That's right. Yeah. He was moving stuff into Russia.
David: Yeah. Communism had a grip on the mind of Russians, but America was gaining a grip on the Russian heart. Maybe it was American materialism to be more precise, but we had this sort of street credibility. We had this— Even if you think about the American dream, we have an immigration problem. China doesn't have an immigration problem. Russia doesn't have an immigration problem. Who wants to be in those places?
Kevin: Who wants to move in? But I think about that. So Nye talks about soft power, and it reminds me of Otto von Bismarck back in the 1870s. He was a brilliant guy who realized that if you could put together a lot of different agreements, complex agreements, you could have peace and prosperity for a long time. The problem is, Otto von Bismarck died, and it led to World War I. Okay? When things start falling apart, that's where that international relations thing, if you're using soft power, it better work for everyone, not just the guy who put it together.
David: Well, Nye's other big idea was that of complex interdependence, and I think probably the best example of complex interdependence is the European Union, where you have so many economic strings attached. You've got trade. You've got labor. You've got mobility. The implications of war are almost unthinkable with a shared currency and the attempt at a shared regional identity. So you think of military rivalry and cross-border threats. That gives way to mutual benefits from cross-border trade.
Other examples of complex interdependence would be the US and China. Trade is key. Treasury funding has been key. We have countless interlinkages between supply chains, and manufacturing, and material support of the U.S. Treasury market. Even the global financial system, if you think of it as a complex and interdependent system, governed to a degree by self-interest, but also by institutional linkages like the Bank of International Settlements, the World Bank, the IMF. What we often see is cooperation in the case of crisis lest contagions were to sweep the globe. We—actually the Fed—help with liquidity, and then there's other central banks that stand in, as well, to grease the gears of commerce and capital. This is a complex interdependent system.
Kevin: It's called symbiotic, right?, where we scratch your back, you scratch ours. That's worked for about 40 years, but it's also put us about $37 trillion in debt, Dave. So I'm sorry that Nye passed because I know that he was a guest that you would've liked to have on the show. In fact, there've been several times where we've looked at having a guest, and they were just getting older, unfortunately, and we never did have them. I know these are conversations you'd like to have had.
David: It makes two men from Harvard that I had intended to invite to the Commentary. Nye passed in the last week, Thomas Schelling in 2016. I invited Schelling that spring, and he pushed it forward to the autumn, sort of post-vacation, which never ended up happening. He broke a hip and never fully recovered. The Strategy of Conflict was one of his books that has had an influence on me. Arms and Influence, Micromotives and Macrobehavior, they've all been worthwhile reads, and Schelling probably, just for context, had more influence over avoiding nuclear war—the world avoiding nuclear war—than any other person.
He was an economist, studied behavior, theorizing about conflict avoidance and constantly working through scenario analysis. I think one of my appeals to his version of economics is he was not the math-driven econometrician that you so often find in economics departments today. He won the Nobel Prize in 2005. However, we interviewed one of his students, Robert Jervis. It was actually Jervis that introduced me to Schelling—in a bibliography, of course. Jervis sat at the intersection of psychology, international relations, and economics. You can find on the— I've got a bookshelf here, and it's just the guests we've had on the Commentary. The Logic of Images in International Relations was one of his books, How Statesmen Think, and another one that was a big influence for me, System Effects: Complexity in Political and Social Life. Those are all kind of embedded in my brain.
Kevin: As we look, Dave, at history, a lot of times we think, gosh, war has just been the consistent theme, but the truth of the matter is, war is actually the anomaly. It's the outlier. The material war, where you have kinetic warfare and people killing each other, yes, there's one, or two, or five going on worldwide, but peace is actually something that doesn't get a lot of headline. When you've got these guys behind the scenes going, "I think I know a way that we can't fight." That usually doesn't make the headlines.
David: Right. Well, I think about the conversations I would like to have and know will never happen except in the margins of the bound books, questions that these men are suited to answer that I think would shed light on where we're at in time and what's likely to evolve. What wisdom would they share with us? What has been may not remain forever.
You can think about that in terms of the history of a great empire. It's one of the other things that we have in our office, is walls full of maps of ancient and expired empires. Through steps and missteps, you've got policy decisions which affect trajectories and public outcomes, not only in the present, but decades into the future. Countries grow strong, or countries become weak by the ideas they feed on and the decisions that are made based on those ideas.
Kevin: One of the things that you've repeated to me, and I just figured out why, is ideas have consequences. I didn't realize that that was required reading for you when you were 14 years old.
David: Oh yeah. Henry Grady Weaver's classic book Ideas Have Consequences. I think it was required summer reading when I was 13 or 14.
Kevin: Okay.
David: We continue the tradition. We've just made the book list for each of the kids, and they kind of roll their eyes. I have to remind them to read a certain number of pages a day, or they wait until the last week. Then, it's impossible.
Kevin: Yeah, but maybe when they're 50, they'll be talking to somebody, saying, "Hey. I had to read this book when I was 14."
David: Right. Ideas have consequences. It's summarized by the title. Sort of states the obvious and is implicitly a cause/effect sequence. Jervis and Thomas Schelling were both fascinated by consequences, but even more so unintended consequences. Today, we are watching in real time, we're seeing that actions are as consequential as ideas. Time's going to tell whether it's for better or for worse. We've talked to—
Kevin: Yeah. George Friedman. Yeah. He said we'd have a storm before the calm.
David: Yeah. So is it the storm before the calm or the calm before the storm? The fear is we're facing the end of American influence or the beginning of influence of a different kind. Some form of soft power died the same year that Joseph Nye did, in 2025. We are seeing changes. Right? So perhaps ideas like complex interdependence, also from Nye, will live on independent of a president or a cabinet or a party, working as a check on policy choices. Certainly, the financial markets revolting when appropriate and serving as a disciplinarian, that has been in effect. You remember James Carville's comment. "I used to think that if there was reincarnation, I wanted to come back as the president or the Pope or as a 400 baseball hitter. But now, I'd like to come back as the bond market, because you can intimidate everybody."
Kevin: Well, and that's true. Now, would you consider the bond market soft power or hard power?
David: Hard power. In a hyperfinancialized world, the credit market ties everything together, and perhaps it remains the case that complex interdependencies in the credit markets create immediate feedback for policymakers. Certainly, that's what we saw a few weeks ago. Bessent and Trump pushing out tariffs 90 days was in response to an unwind in the credit markets. Credit spreads were increasing. Credit default swap prices were rising. The VIX, which is a measure of volatility in stocks, and the MOVE Index, also a measure of volatility but in the bond market, screaming higher. As the duo peered into a financial abyss, they chose to step back. So did the markets, jumped back, rallying off of lows with policymaker acquiescence.
Kevin: Well, I'm talking about looking at the different news feeds. Bloomberg, of course, doesn't like Trump, so they talked about this weekend's talks, saying that Trump had to yield to Xi's demands. Then, of course, you flip over to Fox, and it says that, of course, Trump moved the needle, which he did. I mean, let's face it. The needle is moving, and depending on who you want to say is winning or losing, I guess it doesn't matter.
David: When the markets are finding some relief in what is happening— A rally continues in line with the trade deals getting done. The UK deal has a rough outline to work from, with details still to be flushed out. The Chinese deal for 90 days feels like another damnable light switch moment. It's on. It's off. It's on. It's off. It's enough relief for investors to be consoled for a time. News media outlets can't help but point to Trump's litany of failures, your point about Bloomberg, and I think the lens the critic looks through seems particularly sharp with the Donald, and was never even looked through with Biden. To be frank, commentary from the right is sort of sycophantically hyperbolic. Commentary from the left, hyperbolically contemptuous and deranged.
Kevin: Shouldn't you just ignore both of them and try to be objective?
David: Yeah. Yes. Yes, because the reality is Trump is neither the Messiah nor the devil incarnate. There is a decent chance that he damages our economy with long-term negative effects, which puts him in a uniquely presidential cohort. Biden, Obama, Bush II, Clinton, Bush I, Reagan, Carter, Ford, Nixon, Johnson, I mean, tell me which one of these didn't grease the skids for new and radical spending measures which have us today paying 25% of all tax revenue just to cover interest on the national debt.
Kevin: Wouldn't you love to see that reverse? Wouldn't you love to see that reverse?
David: Well, expectations are for an additional $22 trillion to be added to the 37 in outstanding liabilities over the next 10 years. One thing that's difficult to refute: Trump is doing things differently, for better or for worse. But there are indications that his second term is not merely another administration kicking the can down the road. If he fails, he fails trying versus merely capitulating to the status quo.
Kevin: Well, and an example of that objectivity would be the inflation rate, the CPI.
David: Today's headline, CPI for April moves to 2.3%, below the 2.4 expected, the lowest since February of 2021. Core CPI came in at 0.2 month over month, below 0.3, which was expected, leaving core at 2.8. Supercore, another measure, dropped to 3.01 year over year.
Kevin: So it's dropping.
David: Well, it was also the lowest since December of 2021. Bloomberg runs the headline, US Inflation Seen Picking Up in April with Modest Tariff Impacts. Not only from the headline, but throughout the article, inflation is ripping. Tariffs will make it worse. I read that Bloomberg article first, and it took me a minute to realize that CPI was down and not up. Everything they said painted Trump policies as driving inflation higher, as evidenced by CPI. You have to step back and recognize that rarely do the facts speak for themselves, not in today's world of journalists moonlighting as activists.
Kevin: So if you were to ask somebody on the street, if they knew a little bit about history, when was the last time that we actually had a budget surplus, not a budget deficit, if they understood what the news has told us, Clinton was the last time we had a budget surplus. But didn't we just get a surplus here this first quarter?
David: Just to clarify on inflation, it's not as if inflation is going away, and it's not as if tariffs are going to be benign in that category. They certainly will drive inflation higher. But the stat is the stat, and the fact that they had nothing good to say was a bit surprising since it was actually down a tick. So what about the April budget surplus? 258 billion, a 23% increase from last year, and that combines strong tax receipts with the increased collection of import duties. Good news, at least for the month. We have October 1st to the present, so this is the first seven months of fiscal year 2025. Remember that the fiscal year is not the same as the calendar year.
So from October 1st to the present, we still show a deficit of 1.049 trillion. I'm not suggesting that we're out of the woods, but April is a standout month. We've got increased tax receipts. We had deferred payments coming from California—they certainly tilted the scales—along with the tariffs. So we would not conclude that the full year 2025 will put us in surplus. There's some one-offs that can't be repeated.
Kevin: So it's not a quarter. It's April. April, we've got the surplus. Right?
David: That's right, but it's a positive sign nonetheless. To your point earlier, we have not run a surplus since 2001.
Kevin: Was it 2001?
David: Yeah, because Bush inherited it for the first bit.
Kevin: Oh. Okay. Okay. Well, all right. I want to bring something up that we heard in the meeting this morning because when we went off the gold standard in August of 1971, the commitment was that the U.S. Treasuries would be run very, very effectively with a strong dollar policy, that countries could count on the dollar as being as good as gold. Well, that's worked for quite a while, but the Trump administration's been pretty vocal about saying they're planning on having a weaker dollar. What does that look like?
David: It was former Citigroup CEO Walter Wriston that said that capital flows to where it is welcome and well-treated. He wrote a book many years ago called The Twilight of Sovereignty: How the Information Revolution is Transforming our World. We've said over and over again that the bond and currency markets hold significant signals for financial market stability. Again, just to shift the conversation from economic metrics for a moment, the Financial Times ran an article on the 7th highlighting and exploring the Asian currency markets, and, again, this question of, does capital continue to flow to the US, does it feel welcome, does it feel well-treated, to Wriston's point?
"The Coming Asian FX Avalanche" is the title of the article, and the authors speculate that two and a half trillion dollars in foreign currency reserves held by China, Taiwan, Malaysia, and Korea—and still, it's increasing by 500 billion a year— This kind of goes back to our conversation about trade dollar recycling and that system coming into question. We've just seen our first major repatriation. The US-Taiwanese dollar exchange rate had one of the most violent swings in recent memory as US dollars were sold and repatriated back to Taiwan.
The bulk of export earnings have been held in US dollars, with the assumptions that you were talking about—strong dollar policy justifying those positions. The current U.S. Treasury might in fact get what they want in terms of balancing trade if in fact those dollars are not recycled. Bessent and his team see an undervalued set of Asian currencies as a form of trade manipulation. So you could say if they're undervalued, then the US dollar is overvalued, and Bessent would like to see the dollar trade lower. So we are, in fact, moving into an era where a weak dollar policy is chosen instead of what has been the standard since '71.
Kevin: So if you're a foreign bank, and you know that that's happening, you're going to have to recycle your money into something else other than dollars.
David: But the U.S. Treasury might get more than they wished for. If another round of appreciating Asian currencies and depreciating US dollar holdings occurs—and again, with this in mind—those who are long US dollars, they may, in fact, have the equivalent of an unstable snow condition. That's the reference to the avalanche. Just to quote from the article, "The overhang of liquid dollar holdings is just too large if the dollar weakens, the Fed cuts rates, and China stages a cyclical rebound."
In other words, both the push and pull factors that kept the export earnings in dollars outside the home countries in the past years will potentially flip signs in the coming quarters. At the same time, many of those holding long dollar exposures know well that the dollar is overvalued. Well, again, we come back to the U.S. Treasury and the Oval Office. They agree with the overvaluation assessment, and would like to bring the dollar lower on a relative basis.
Kevin: Yeah. They want to see the lower rates. They want to see the dollar actually competitive with other currencies.
David: Yeah. Add to that the desire to see lower rates, and the Treasury Department would like to see the same. Of course, they're not getting any cooperation from the Treasury market. They're being rebutted. The policymakers are sort of at odds with where the market is moving as rates have gone higher. You may well trigger the avalanche. Then, we come back to that point of the cyclical rebound in China. They have tremendous latitude for fiscal stimulus, and I think we'll see it at scale this year.
Just before the meeting this last weekend between the Chinese and US delegates, you had reserve requirements coming down. You had a number of measures, up to $138 billion in stimulus made available through the banks. So the supply of Chinese credit is on the increase. Demand is not really matching it. I think the monetary policy tools, what we saw being used last week, was just to buffer US tariff impacts, but the real action starts when fiscal stimulus begins.
So a cyclical rebound in China, as weak as they have been in some respects, they have the latitude to stimulate in ways that we don't. So with Chinese inflation stats actually going negative, that's where I think they have latitude. If they did fiscal stimulus like we did during COVID, they're not necessarily going to be decimated by a surge in inflation. The US is not in the same position to flog monetary policy, to flog fiscal policy.
Kevin: So was it J.P. Morgan, their analysts, that said that if just half of 1% of foreign monies that are held in dollars comes into gold—I'm going to bring gold up because where else do you go, I mean, when the dollar's going to be weakened? If half of 1% went into gold, you're looking at, what, $6,000 gold?
David: That's right, and this is predicated off of about a 25, I forget, somewhere between 25 and $27 trillion of foreign holdings, US dollar assets. Gold has been interesting. For the month of April, 70 tons, roughly 7.4 billion in gold was purchased via ETFs in China. That's double the previous month's record. I think tariff uncertainty added to buying, but what's interesting is the global share of ETF buying in China moved higher, from 3% of the global total to 6%. In the month of April, Chinese demand in that four-week period accounted for half of global ETF inflows.
It's not just tariff concerns. Chinese equities have underperformed. Chinese real estate remains under pressure, and gold had an impressive 2024. Year-to-date performance has attracted attention, and it's worth keeping in mind that the motivations thus far in terms of people moving to gold, one of two things, central banks reallocating reserves or investors chasing a trend, playing momentum. I would merely comment here that when gold finally hits stride and is sprinting, not walking towards the finish line, it will be driven by fear, not greed, and I think greed is still one of those factors that's there today.
The World Gold Council noted that for the first quarter total gold demand increased by a mere 1% versus Q1 2024. But if you account for a 1% increase in tonnage demand and translate to dollars, it is actually a 26% increase in demand, from 91.16 billion to 114.96 billion. I'm just using the average price in 2024 of 2,388 versus the average price thus far this year of 2,979.
Kevin: Well, and you talk about the motivation between greed and fear. Your family's company has been around 53 years. We know that sometimes there's greed in the gold market, but that's not really that great of an effect. It's the fear aspect that is huge. I would just point out, Dave, for our listeners, please go to our website mcalvany.com. Go over to the news section, and read Morgan Lewis's Hard Asset Insights. This last Friday's was just outstanding because it explains the correlation between the central bank buying—which is not fear-based, it's just simply preparing for a lower dollar— The central bank buying and the correlation to the price of gold, really since 2008, is almost one-to-one.
David: Well, and maybe it's a preparation for less dollar hegemony and seeing the importance of gold in the absence of that dollar hegemony. So reflect on the market opportunism present in global gold demand today, and it really is fixated on 2024 price performance and year-to-date 2025 price performance. Layer in what we see as a long-term trend of dedollarization and a reduction of exposure to US dollar assets. This is the dollar recycling to gold recycling. Your point earlier, I think, is great. J.P. Morgan describes it that way. Half a percent allocation of foreign-held US assets to gold lands you at $6,000 an ounce.
Capital flight from US assets has already begun. If you want to look at the DAX, you want to look at the CAC, this is the German equities market, the French equities market, a variety of emerging markets, they've already proceeded, as if on script, year to date. Their performance has been exceptional, while US equities have witnessed outflows. Yet the Financial Times is suggesting an avalanche of foreign currency flows out of dollars and into Asian currencies.
Kevin: So you would say when gold takes two steps forward, it may take one step backward?
David: Well, I'd say watch the credit markets, watch currencies, and don't be surprised by gold's current step back setting the stage for 10 steps forward.
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You've been listening to the McAlvany Weekly Commentary. I'm Kevin Orrick along with David McAlvany. You can find us at mcalvany.com and you can call us at (800) 525-9556.
This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial adviser to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.
