Bond Market Rejects The Fed: Why The Rules Just Changed For Gold

[00:00:00] Jeremy Safran: All right, that was the week the usual rules stopped working. The Federal Reserve held interest rates and the bond market rejected the decision. The 30-year Treasury yield jumped to a 19-year high while short-term yields fell. That is, investors signaling they do not believe the inflation fight is over. American warplanes hit Iran again and the shipping through the Strait of Hormuz stayed well below pre-war levels and oil fell anyway. Technology stocks fell into a correction on Wednesday, then rallied sharply on Thursday, and gold went below $4,000 back above $4,100 inside two sessions. So I put it to three of the most respected voices in the market on three different days, and they gave me three completely different answers about where gold goes from here. One says the reset has already started, one says lower first than a generational run, and one says that the high may already be behind us. Let's go through it. Welcome to This Week in Focus. I'm Jeremy Safran. Now, before we start, thank you. The comments this week were excellent. Hundreds of you debating whether gold's correction is finished. Keep them coming because we read them, and they shape what we ask. Now, let's get into the week. Start with Wednesday because everything else this week ran off of it. The Federal Reserve left interest rates alone at three and a half to three and three quarters percent, and it was not unanimous. Three officials Lori Logan, Beth Hammock, and Neil Kashkari dissented. Now, they wanted to raise rates, warning that waiting too long risks the need for even more aggressive policy moves later. Now, Chair Kevin Warsh stated that he would not hesitate to act on inflation. Markets took about an hour to decide they didn't buy it. The 30-year Treasury yield rose to nearly 5.24 percent. That is a 19-year high. Short-term yields fell, and the gap opening up is one of the widest after the Fed meeting since the 1990s. Now, I was on air with Gareth Soloway of Verified Investing. While it was happening, here is what he [00:01:56] Gareth Soloway: made of it. That's what I'm getting from this right now, is it's saying that longer term, and this is duration-wise, is that there are still issues. There's this inherent inflation, and as much as the tough talk from Kevin Warsh today was in terms of, he said, "We're going to get this under control." The market right now is telling me they're not buying it. They're not buying it. Again, I go back, unfortunately, to President Trump. When he appointed Kevin Warsh, or before he appointed him, he said, "I will not appoint someone who's going to raise rates." The market might be saying, "Kevin's talking about other methods of doing this. He's talking a tough game, but is he really going to follow through?" And maybe the long end of the yield curve here is telling us something. [00:02:40] Jeremy Safran: And the market right now is telling me they're not buying it. That was Wednesday afternoon. By Thursday morning, the data made the argument more complex. The economy grew more slowly than expected last quarter at one and a half percent, but consumers spent more than forecasted. And this morning, we received fresh data that U.S. employment costs grew at a steady pace at 0.9% to the second quarter, and yet the long bond stayed under pressure. So that is the backdrop. Now, here is where it gets interesting, because on gold, these three men are not even kind of in the same conversation. Let's start Monday with Willem Middlecoop, author of The Big Reset. His argument is that the correction is nearly finished and that China has been kind of quietly using it. [00:03:22] Willem Middlecoop: Willem Middlecoop: We know that China is a very active buyer on dips. We know that in copper, we know that in oil, the same goes for gold. And if you look at the latest numbers coming from China, China invested more than 150 tons of gold. They bought more than 150 tons of gold just in one month, in June this year. And that shows that they like lower prices. They like this correction. I think this correction is almost over. And if you look at the numbers coming from China, this huge demand for gold and also for silver, both the gold and silver demands coming from China is, let's say, 150%, 200% higher than we've seen last year. So they're very active buyers now. [00:04:14] Jeremy Safran: Willem Middlecoop: That 155-ton figure is his own estimate, well above what China officially reported. So take it as his read rather than a settled fact. But his major big claim is one we're sitting with. He says that the monetary reset people keep waiting for isn't coming because it's already underway. [00:04:32] Willem Middlecoop: Willem Middlecoop: This is surprising to most people because most people would think this is a binary event, a monetary reset. You know, one day on a Saturday or Sunday afternoon, we have this IMF press release and then gold would be revalued to let's say $20,000. But I think a monetary reset is more gradual process. It's not a binary event. I think we're in the start of this process. So we're in the start of the gold revaluation. And that's also where Deutsche Bank came, well, to the end of their report, to its conclusion that we're in this process. We're in actually the first innings of this process. And don't forget that the main asset for central banks used to be your treasuries. Well, this has been coming down quite a bit. Central banks used to have, let's say, 60% of their reserves in US treasuries. And it's down now to, I think, 27. Oh, sorry. The foreign holders of US treasuries, they're always on 35% of outstanding US treasuries. That's down now to only 12%. And it's the total treasury holdings for central banks worldwide. It's less than 25% of their total financial assets now. He also shared an interesting [00:06:04] Jeremy Safran: story I hadn't heard before. It was about a book event in Beijing in 2015. And what a former Chinese [00:06:11] Willem Middlecoop: central bank banker told them afterward? Well, I've got a very nice story to tell on that point, because the Big Reset was translated and published by Raman University Press, academic press in Beijing. And when I was there, and I think it was 2015, for the introduction of that book, I gave a small presentation for a Chinese monetary institute. And I explained all the gold buying by the Chinese central bank. But then one of the officials present in that room, he corrected me. And he said, well, it's not just the Chinese central bank buying all this physical gold. We have two more very important government institutions who are also hoarding gold. So I think that also explains why the numbers of the World Gold Council and other publications don't show the total demand. And if you look at total fiscal gold demand coming from, let's say, the Silk Road countries, so let's say the Asian countries like India and China, they've accumulated over 50,000 tons of gold since the great financial crisis of 2008. And that's an awful lot. [00:07:32] Jeremy Safran: All right. So that is Monday. Gold's correction is nearly over, and the system is quietly rebuilding. Wednesday, Gareth Soloway sat down and told me almost the opposite in the near term, in something far more dramatic in the long run. Now, he has been bearish on gold most of the year, and he put a number and a date on where he thinks this cycle ends. Take a listen. [00:07:50] Gareth Soloway: It's based on a calculator that I created. And essentially, the calculator takes into effect multiple factors. One is how fast is the money supply? And again, we're not talking US money supply, global money supply running. And right now it's running at 7%. So if you just assume over the next five years at 7.5% or greater, that starts to push the cycle of gold. And what we looked at here is when you have the first cycle between 1980, the second peak was 2011. So we're talking, I mean, 31 years there of interim cycle. And then the next cycle, it was just 2011 to this 2026 high. And so what we're seeing is because of the increased US deficit and global debt, the increased money supply, real rates and inflation, all of these are creating shorter cycles in gold and then more dramatic moves to the upside. And essentially, it's a calculator that calculates the probabilities of the next move. And again, it's telling me that 13,000 is going to be the next peak. But again, between 2029 and 2031. Now, like you said, people are going to hear that and say, oh, I don't want to wait that long. But keep in mind, that doesn't mean we're not going to make new all time highs before that. It just means the next cycle peak, the one that we dream about, that may just take a few years to come by. And it's really at shortest about three years out. [00:09:11] Jeremy Safran: All right. So $13,000 gold, but not until 2029 at the earliest. And underneath that model is one [00:09:17] Gareth Soloway: structural argument that he keeps coming back to. I believe gold is growing about 1.7% per year in supply versus the printing of money, the debt increase, all of these other factors. And that's one of the reasons why this model shows that there is such significant upside in gold, because there's no chance, in my opinion, there's no chance we can go back to Volcker, right? I mean, could you imagine with the US debt where it is, if interest rates even went up to 10%? And so when you have that in effect, it means that Volcker can't come back, which means you're not going to get a downside move like we saw in the 1980s in gold. And in other words, it's going to drive gold [00:09:51] Jeremy Safran: higher quite substantially. Which brings us to Thursday and the most contrarian view of the week. Now, Mike McGlone on Bloomberg Intelligence doesn't think that gold goes slower before it goes higher. He thinks that the high for this cycle may have already been behind us and that the treasury bonds take the safe haven job back from gold. Now, it is a call, he will tell you himself, he has been wrong [00:10:13] Speaker 4: for three years. The number one thing for my call that has been wrong for almost three years now and bond yields to be the next big trade, that's my main call for this year, is the stock market has to go down. So I look at that long bond as we speak, speak 5.21%. That's a huge headwind for any non-income producing asset, starting from Bitcoin to gold. There's no reason, I mean, you got to have some major inflationary forces to make those viable versus a 5% long bond in U.S. Treasuries. But the bottom line is the number one source for inflation is U.S. stock market. It's still up almost 10% in the year. If it drops 10%, that's 25% in GDP, the most on a year basis since 2008. So I look at treasury bonds right now as basically a put on the stock market with positive carry and no time decay. Putts, as you know, in my experience trading puts, I oftentimes will be right on the market. My puts will expire before I get a chance to be right because they'll be wrong first. But to me, that's the way they are right now. And the bottom line is this second half of the year will be the major determinant. I'm looking at it as going to be a ho-hum year, stocks going up, which means you're probably not going to make much more in treasury bonds. If the stocks drop, that 5.2%, I think it's going to drop towards 4% in a heartbeat. And if stocks stay down, it's just a major cycle kicking in very similar to what we had in 2007. [00:11:33] Jeremy Safran: That correlation is crazy, huh? [00:11:36] Speaker 4: Yeah. So that's the key thing I want to point out to is when people, I love when people point out is the unstoppable deficit spending. It's not just in US. You see it picking up in the rest of the world. And most of all, we have it very high in China and it's picking up in Germany and Europe because of defense spending. But I like to point out total US debt in this country is between 39 and 40 trillion dollars. Sure. That's unstoppable. I get it. But US stock market cap is over 80 trillion. That's two times the highest since 2007. US debt in this country, that liability is minuscule versus that top asset that's real time, the stock market at two times that. That's the last time we had bond yields at these levels. So I'm still very comfortable with that call. It's on the back of selling gold and selling Bitcoin at really stupid levels and just got too expensive and hiding out in treasury. So that's still my main theme for this year. And here's what he said on energy. I fully expect crude oil to gravitate towards 70. 70 has been the absolute high-value price for 20 years. So it's basically the apex of the bell curve and then do a normal rotation back down towards 40. Why is that not profound? Because the average cost of production in the world's largest producers is $55 a barrel. That's the US. We can produce more with less. We have a major surplus with Canada approaching in two years. If prices don't go down, that's going to approach 10 million barrels a day of crude oil and liquid fuels. In 2008, it was a deficit of the opposite. See where cycles are going? OPEC matters, but the rest of the world's having a major problem. And also, and I think the key thing to end with is what's happening in China. They're curtailing demand probably. Why? Because what do we know? Almost 60% of sales and automobile sales are EVs. In 2022, before the Russians invasion Ukraine, that's close closer to 10%. See the shift? [00:13:15] Jeremy Safran: So there it is. Three people. Three different answers. The correction is nearly over. The correction has further to go. The cycle high is already in. What I'd point out is what they are not arguing about. That all three spent this week looking at the same thing. A bond market that doesn't trust the Fed and a system where the old reflexes are missing, or I guess misfiring. Now, they just drew kind of opposite conclusions about what that means for the metal. And then on Thursday, while all three of those arguments were still hanging in the air, the actual numbers showed up. The World Gold Council published its demand figures for the second quarter. Central banks bought 289 tons of gold, up 62% from the same quarter last year. If you are bullish, that is your evidence. Official buying stepped in hard while the price was falling. But read the rest of the report, and it's even more complex. First, that 289 tons is a record for a second quarter. It's not an all-time record quarter, though. Second, add the two quarters itself, and the central banks bought 345 tons in the first half of the year, according to the World Gold Council. That is the weakest first half since 2022. And the reason is that Turkey, Russia, and Azerbaijan were selling in the first quarter. So the 62% jump is real, but it sits on top of the slowest six months in four years. Third, who is actually buying? Poland was the largest buyer here, adding about 51 tons. Central banks in China added 33 tons, bringing reported holdings to 2,346 tons. And Russia was the only sizable seller, down about 22 tons. Now, here's kind of what did not help gold this quarter. I mean, investors pulled out money out of the gold funds. Exchange traded funds, those ETFs saw it flows at roughly 45 tons. Jewelry demand also fell to its lowest quarterly level since the pandemic. And if in India, it dropped about 15% after the government raised its import duty to 15. And after the prime minister personally appealed to citizens to stop buying gold, but spending on jewelry still rose 14% in dollar terms. People bought less metal, but they paid more for it. And just to give you a live read on the tape this Friday morning, spot gold is seeing early weakness. It's currently trading at about $4,047 an ounce, down about 1.36%. Now, a lot of that pressure is coming from the dollar recovering after Japan's currency intervention stalled out. But there is some breaking news in the currency market right now. Reuters is reporting that the U.S. Treasury has informed the banks that it may intervene in the yen market today. Now, the Treasury has told the banks, quote, to stand ready for future action channeled through the New York Fed. This is news that has kind of pushed the yen higher against the dollar, pulling off four decade lows. Remember, it is early in the session and we're taping right into it. So obviously we'll continue to monitor monitor this development. You know, that was a second story of the week, and it may end up mattering more than the Fed. South Korea's stock market fell roughly a third this month in triple circuit breakers on consecutive days. And here's at home that Asdaq 100 fell into correction on Wednesday before rebounding hard on Thursday. It ended again a six year losing streak to close up at 2.8 percent. Now, Soloway's explanation for this violence wasn't about artificial intelligence. He says it was more about the plumbing. But keep in mind the Kospi is [00:16:44] Gareth Soloway: two stocks, make up over 50 percent of it. And this drives me nuts. And I don't mean to kind of go off on tangents in in this interview, but you had a lot of officials over there in Asia saying, "Oh my goodness, we need to meet. This is horrible. It's dropping." And they introduced all these 3x ETFs. So when someone buys a 3x ETF, one share, the underlying ETF has to buy three shares of Samsung or SK Hynix. And the problem with that is it's great on the way up and accelerates the move. But when people sell that, then it's 3x shares on the way down. And so you can't have it both ways. And these officials, if they're going to put in these type of things, it's great for that upside move, but it's also going to crash the market. And that's what we've seen here. We've seen a massive unwind. I mean, think about this. Sandisk here in the US broke $1,000 today before putting in a bottom down from $2,350. And again, just a reminder, you know, a general announcement. When you see everyone screaming buy, it's usually time to sell. And this was another example in the AI memory space where [00:17:52] Jeremy Safran: that is exactly what happened. And underneath the stock moves, credit was flashing too. The New York Fed says dysfunction in the investment grade corporate bond market hit its highest level in nearly three years. Then the market split the difference. Microsoft rose 16%, adding roughly $450 billion in the largest single day gain by any stock on record. Meta fell about 9%. The market didn't punish AI spending. It punished spending it couldn't see a return on. Now one more from Wednesday, because it's rare that you get to check a call this fast. Now, while we were live, the S&P rolled over on the screen behind him. Soloway stopped and gave me the level where he thought he [00:18:31] Gareth Soloway: was watching. By the way, I just want to show you this S&P chart. This is a line in the sand that's going to determine if we have a bigger correction or just a pullback. Here's a trend line going back to the highs in 2021's bull market connected through this high here in 2025. And look at how the market behaved. It broke out. It retested, bounced, retested, bounced. Now it's back again to this trend line. And the reason I'm bringing this up is that if we break this line and we have a daily close below, that would be a warning sign to me that the S&P here could head down to the highs from early this year, which would be all the way back to about 7,000 on the S&P. So really big level here right around 7330. Watch that on a daily closing basis on the S&P. We stay above it. The bull market's intact here in the near term. We break below it. We're likely going to 7,000. So 7330 on a daily [00:19:28] Jeremy Safran: close. The S&P closed on Wednesday at 7,316. So just below it by his own framework that opened the door towards 7,000. But then Thursday happened. The S&P rose 1.7%, closed at 7,437. Comfortably back above that line. So he called the level, the market tested it, and the level held. That is the accountability looks like on a call. Now let's land why it matters. Your own, some of your own metal rather, and what you want to know what to do with it. Soloway is bearish near term, but still kind [00:20:01] Gareth Soloway: of owns physical gold. Here's how he squares that. Yeah. So for me, I still have to watch this chart because I'm not convinced. And listen, to be fair, I have gold holdings that are long-term, like physical metal holdings. And so I'm not in a rush to buy more. The level where I will start accumulating more gold is at around 35 to 3,700. So we're almost there. We get one more little flush down. I would accumulate more long-term. Now on a swing trade basis, when we look at the chart, the chart is always my guide on a swing trade basis. So looking at the chart, as soon as we take out this high pivot here, we'll go to the charts here, this right here, once we get above this, that's where I would buy as a swing trade basis. But again, for my long-term holdings, I just buy physical and I wait until I get it to a level where I feel comfortable. You know, I never want to sell my physical. If my physical, silver and gold is my insurance policy, where if I don't need it, if catastrophe doesn't happen, I pass it on to my kids. [00:21:02] Jeremy Safran: So 3,500 gold, 3,700 is where he kind of adds here. And he says he'd never sell the physical. And for Villa Middlecoop, when viewers ask how to position their smaller capital, his answer comes [00:21:14] Willem Middlecoop: back to physical silver. Oh, I get this question a lot. Also by people who say, I don't have that much money and I can't spread my risk over, let's say 25% in real estate, 25% in gold, 25% in equities, and 25% in Bitcoin, like I often give out as my model portfolio, but everybody can buy a bit of physical silver. Everybody can buy a small piece of Bitcoin. Bitcoin is in a bear market now. I think that bear market will be over quite soon as well. I'm quite sure that the correction in gold and silver almost over. And I wouldn't be surprised when silver will jump back to $100 in a very short period of time. So if you buy just a bit of silver, you can do well. And I'm on the record because I gave a presentation at the VRIC in January and in March at the PDAC in Toronto that silver, the bull market for silver, this bull market for silver won't be over before we see $500 silver. And that's just 5x from the $100 we already reached, let's say at the end of last year. So the scoreboard for the week, [00:22:33] Jeremy Safran: the Fed held, the bond market said it doesn't believe them. Technology fell apart and put itself back together inside about 48 hours and gold traded $100 range and settled right back on the line. It's been circling for about two weeks, but the real wild card is playing out right now in the currency markets with the US Treasury putting banks on notice that they may have to step in to support the Japanese yen. But the detail I keep coming back to is the energy board. The United States bombed Iran this week, shipping through the Strait of Hormuz is running well below pre-levels, war levels. And of course, crude fell anyway. Gasoline, heating oil fell harder. Meanwhile, copper and wheat rose. Whatever's happening, it is not one broad deflation. It's a specific and it is looking like it's energy. Now, it is the last trading day of the month. And on the monthly picture, it's different than the daily one. Crude fell on specific sessions this week. But for the for the month of July, West Texas crude is up roughly a fifth. Both of those are true. Now, the market has built a workaround. Tankers are shuttling cargoes out of the Gulf and transferring them to other ships outside the Strait. The US energy secretary said roughly 13 million barrels a day are getting out of the Gulf. So oil has adapted to the war. And if that workaround ever breaks, the price of everything in this conversation changes. And then after Thursday's close, we get the read that completes the argument. Apple and Amazon reported. Amazon boosted its forecast for full year capital expenditures to 220 billion dollars. Its cloud computing revenue accelerated and shares in Amazon soared as much as 16 percent on Friday, notching its biggest intraday gain since February of 2022. And Apple also beat expectations on overall revenue, climbing 16 percent to 109.4 billion dollars. But the stock dropped as much as 9.5 percent as the market opened on Friday. Apple guided lower for this quarter, pointing to a 100-year flood of memory costs and, of course, computer processor shortages. There isn't enough manufacturing capacity because the entire industry is buying the same chips for artificial intelligence. And Amazon announced more massive spending got rewarded. So Apple, the company that had stayed out of the spending race, got punished because everyone else's spending and took the supply it needed. Restraint did not protect Apple. It looks like it exposed it here. And that was also Tim Cook's last earnings report as chief executive. He moves to executive chairman on the 1st of September. John Turnus takes over. And that's the test that one of these companies is being put through. And it's the same question underneath the gold argument. Why and what is all of this money actually buying? Three experts, three different answers on gold. Here's what I want from you in the comments of the three views. Which are you positioned for? The reset already running lower before higher or the high is already in? Tell us. We read them and they shape what we ask next week. For all of us here at Kitco News, I'm Jeremy Safran. Have a good weekend.