Gold, silver and copper are the answer to global turmoil – Richard Mills

2025.05.31

A crisis is unfolding in the bond market that equity investors may not be aware of. Long-term government bond yields are rising across major economies as governments struggle to contain mounting debt burdens.

Last week, Japan’s 30-year bond yield ran to an all-time high of 3.4%. The 40-year also hit a record 3.6%. The Financial Post reports the higher yields resulted from a weak bond auction that highlighted investors’ concerns over the country’s fiscal stability.

Germany’s 30-year “bund” yields jumped over 12 basis points, reflecting fears over its €500 billion rearmament plan.

Japan has long faced a mountainous debt problem. A 260% debt-to-GDP ratio is by far the highest among all major economies. (Reuters)

What happens in Japan reverberates beyond, given that Japan is the largest holder of US Treasuries at about USD$1.3 trillion. If Japan were to sell Treasuries en masse, it could impact the ability of the United States to finance its ever-expanding spending, that is increasing under the Trump administration’s so-called Big Beautiful Bill making its way through Congress. More on that below.

Japanese institutions sold $119.3 billion worth of US Treasuries in just one quarter, marking the steepest quarterly decline since 2012.

US Treasury auctions are also showing signs of strain. Last week, a $16-billion auction of 20-year bonds saw weak demand, forcing yields higher. In fact, the Federal Reserve had to step in to buy up nearly $2.2 billion of the $16 billion bond issue. Last Wednesday’s bond purchase came after the Fed bought up more than $40 billion in Treasuries.

The 30-year Treasury breached 5%, reflecting concerns over rising deficits and long-term borrowing capacity.

As a result, Moody’s downgraded its US debt rating from the top-level Aaa to Aa1.  As investor confidence in US debt declines, borrowing costs could rise (higher yields are needed to attract investors to what are now considered riskier assets), increasing the interest burden on the US government. As yields go up, the US government must spend more of its revenues just to keep up with interest payments.

The Financial Post notes the United States leads other mature economies in deficit spending, with the deficit equivalent to 6.4% of GDP in 2024. Compare this to 5.8% in France, 2.8% in Germany, 4.8% in the UK, and 2% in Canada.

There is growing concern that trade uncertainty, particularly in the wake of policy shifts by the Trump administration, could serve as an excuse for governments to maintain large deficits. The spectre of new tariffs, trade wars, and economic retaliation could add further pressure to already fragile bond markets.

Bond markets are applying increasing pressure on governments to confront their fiscal realities, but policymakers seem unwilling to rein in spending.

In an article titled ‘Bond Vigilantes Strike Back: How Soaring Yield Threaten the Global Economy — and Where to Hide’, AInvest says the bond vigilantes — those who punish governments for reckless policies by dumping debt — smell trouble: President Trump’s tax cuts, increased military spending, and a credit rating downgrade by Moody’s have eroded confidence that Washington can manage its finances.

This is a major change from the situation up to now, when investors considered US government bonds a safe haven even as the national debt ballooned to $36 trillion.

AInvest notes the US deficit, currently around $1 trillion, is projected to expand by $3-5 trillion over the next decade, courting disaster. This puts the Federal Reserve in a bind: It can’t cut interest rates to ease borrowing costs because inflation remains sticky.

This leaves the U.S. in a stagflationary trap: high rates, slow growth, and soaring bond yields.

Turning inward The Yen trade reverses

A key point: With foreign investors losing confidence in US Treasuries, they are turning inward, and what they are seeing is their own bonds are just as attractive, due to higher rates, and less risky than US Treasuries.

Barron’s notes Japanese investors have typically invested in higher-yielding foreign securities especially US Treasuries. That included both the Bank of Japan and Japanese life insurers. Now, a Japanese investor can earn more in long-term Japanese government bonds than in 30-year US bonds, whose yields have ticked up over 5%, after deducting the cost of hedging for exchange-rate risks.

So, the Japanese probably will repatriate funds that previously had pumped up other markets, especially the U.S., via the so-called yen-carry trade (borrowing at ultralow Japanese rates to buy higher-returning assets elsewhere, including Nasdaq stocks).

“If sharply higher JGB yields entice Japanese investors to return home, the unwinding of the carry trade could cause a loud sucking sound in U.S. financial assets,” writes Société Générale global strategist Albert Edwards.

The Economist writes, “Higher Japanese Yields Suck Money from World,” meaning that Japanese investors now do better owning their own bonds:

It is no wonder that investors are reassessing the risk of long-term lending to Uncle Sam. Even before the budget bill cuts tax revenues, America’s government has borrowed $2trn (or 6.9% of GDP) over the past year. Combined with the chaotic policymaking of recent months, and Mr Trump’s threats against America’s institutions, that has put the once-unquestionable haven status of Treasuries up for debate.

For more on how the jolt in Tokyo could point to more trouble ahead for global bond markets, read this Reuters story and see the following charts:

A Big Ugly Bill

But the real danger facing the US government is the massive and fast-growing interest being paid on the debt. The Committee for a Responsible Budget estimated that President Trump’s “Big Beautiful Bill” (BBB) will increase the US debt load by at least $3.3 trillion and boost the annual deficit to more than 7% of GDP by 2034. In 2023 it was already at 6.3% of GDP.

According to Politico, the bill includes a fresh round of tax cuts, plus hundreds of billions of dollars in new funding for the military and border security. Nonpartisan forecasts say it causes over 10 million people to lose health care coverage, while shifting resources away from low-income households to the wealthiest.

The Congressional Budget Office (CBO) said the bill would reduce spending on Medicaid and food aid by nearly a trillion dollars.

According to Barron’s, the BBB would put the U.S. on a continued path of budget deficits in excess of 6% of gross domestic product, while the nation’s overall debt would exceed the size of the U.S. economy… the budget deficit already is close to 6% of GDP while the economy is at full employment, and government debt is close to 100% of GDP and headed to nearly 120% in a decade’s time.

The Mises Institute agrees the bill does nothing to cut overall spending and will only add to the deficit, at least $3 trillion more in coming years.

This should be very worrying for the federal government since today’s auction suggests that there are indeed limits to just how much new debt investors are willing to absorb at the “usual” low-low interest rates. Rather, as it becomes increasingly clear that the Trump administration has no interest in cutting spending to slow the rising tide of federal debt, investors expect the federal government to only increase the amount of new Treasury bonds it dumps into the market. As markets see a rising supply of debt, there’s good reason to expect the price to drop—and thus drive yields higher. [bond prices move in the opposite direction of yields — Rick]

It looks like Donald Trump’s spending policies will drive enormous amounts of ongoing deficit spending, and this will probably hit $4 trillion per year within the next four years. This will require the US government to dump enormous amounts of new Treasurys into the market in coming years. Will there be enough demand from investors to prevent a sizable increase in yields (and, therefore, a sizable increase in interest costs)? If Wednesday’s auction is any indication, there is good reason for the Fed and the federal government to be worried. 

Debt spiral

The Congressional Budget Office has projected a federal budget deficit of $1.9 trillion this year, and federal debt rises to 118% of GDP in 2035, according to the CBO.

The national debt currently stands at $36.2 trillion.

While the size of these numbers is of concern, as long as the federal government can pay the interest on its debt — meaning it can cover the interest on the bonds it’s issued — the government is solvent. Failing to pay bondholders would mean the government has effectively defaulted on its debt, which would be a disaster for the US government and the American economy.

The United States has had a budget deficit every year except four since 1970. It isn’t going to stop with the Trump administration. According to the Joint Committee on Taxation, the House reconciliation bill/ BBB would increase deficits by $3.8 trillion through 2034.

The chances of the bill getting stopped in the Senate, where Republicans have a majority, are I think,nil. It will then proceed to the president for signing into law.

As the debt keeps climbing, it may never have to be paid off, but at minimum, the US government must pay the interest owed to its bondholders. Concern about Washington’s ability to make those payments, and the fact that Treasury buyers require a higher rate to take on what are now considered developing country bonds, are driving Treasury yields higher, making it even harder for the government to pay its bondholders due to the increased interest rates.

Apart from ever-increasing budget deficits and interest on the debt, arguably an even bigger problem is the damage to America’s reputation caused by the Trump administration, which affects the rest of the world’s willingness to sop up Treasury bonds and thus pay for US overspending.

End of US dollar supremacy

Donald Trump has boldly imposed a new era of US economic policy dominated by tariffs, trade wars, and threats to the sovereignty of nations it has long considered allies (Canada, Denmark, Panama), as the second-term president aims to rewrite the rules of international trade mostly by disregarding them as he pursues an America-first agenda.

The cost to the United States of Trump’s trade war and “country takeover” rhetoric has already cost America its reputation. 

Is the US dollar and its status as the world’s most important reserve currency also about to be tossed into the rubbish bin of world history? A de-dollarization movement that started a few years ago appears to be gathering pace. What’s going on with the dollar and if it recedes or, God forbid, collapses, what are the alternatives? 

The US dollar is the most important unit of account for international trade, the main medium of exchange for settling international transactions, and the store of value for central banks.

Because of the dollar’s position, the US can borrow money cheaply, American companies can conveniently transact business using their own currency, and when there is geopolitical tension, central banks and investors buy US Treasuries, keeping the dollar high and the United States insulated from the conflict. A government that borrows in a foreign currency can go bankrupt; not so when it borrows from abroad in its own currency i.e. through foreign purchases of US Treasury bills.

Lately though, the dollar is losing its “exorbitant privilege” and de-dollarization is being pursued by countries with agendas at odds with the US, including Russia, China and Iran.

A few years ago, China came up with a new crude oil futures contract, priced in yuan and convertible into gold. The Shanghai-based contract allows oil exporters like Russia and Iran to dodge US sanctions against them by trading oil in yuan rather than US dollars.

Russia and China have both made moves to de-dollarize and set up new platforms for banking transactions outside of SWIFT. The two nations share the same strategy of diversifying their foreign exchange reserves, encouraging more transactions in their own currencies, and reforming the global currency system through the IMF.

Most Russia-China trade is now conducted in Chinese yuan or Russian rubles, with the US dollar almost completely bypassed.

Since Trump has returned for a second term, his tariffs and trade war has accelerated the decline of the dominance of the dollar. (Geopolitical Economy)

GE says it’s not only governments that are seeking alternatives to the US dollar but also major financial institutions and investors.

The Financial Times of Britain published an analysis from the global head of FX research at Deutsche Bank, who warned, “We are witnessing a simultaneous collapse in the price of all US assets including equities, the dollar versus alternative reserve FX and the bond market. We are entering unchartered territory in the global financial system.”

Certain countries are diversifying away from the dollar, buying gold and other reserve currencies like the euro instead, or conducting trade in one another’s currencies, like yuan and rubles.

JP Morgan points to two scenarios that could erode the dollar’s status. The first includes adverse events that undermine the perceived safety and stability of the greenback. “Bad actors” like Donald Trump seem to fit this description perfectly. The second factor involves positive developments outside the US that boost the credibility of alternative currencies — economic and political reforms in China, for example.

The influential bank notes that signs of de-dollarization are evident in the commodities space, where energy transactions are increasingly priced in non-US dollar currencies. India, China and Turkey are all either using or seeking alternatives to the greenback, while emerging market central banks are increasing their gold holdings in a bid to diversify away from a USD-centric financial system.

Watcher.Guru’s De-Dollarization Tracker identifies 55 countries that are now using non-dollar currencies to conduct international transactions.

As mentioned above, new payments systems are facilitating cross-border transactions without the involvement of US banks, which could undermine the dollar’s clout.

Finally, the US dollar’s share of foreign-exchange reserves has decreased, mostly in emerging markets.

According to IMF data, at the end of 2024, the dollar accounted for 58% of global foreign exchange reserves, while 10 years earlier that share was 65%.

Equally, the share of the US Treasury market owned by foreigners has also fallen sharply, from 50% in 2014 to around a third today. 

At $36 trillion and counting, interest payments on the debt now surpass the entire US defense budget. Many countries are questioning the fiscal strength of the US economy and whether holding Treasuries is worth hitching their wagon to an economy that is so deep in the red.

The Council on Foreign Relations reminds us that during the Bretton Woods talks, British economist John Maynard Keynes proposed creating an international currency called the “bancor”. While the plan never materialized, there have been calls to use the IMF’s Special Drawing Rights as a global reserve currency. SDR is based on five currencies: the euro, pound sterling, renminbi, USD and yen. Proponents argue it would be more stable than one national currency.

Many experts agree that the dollar will not be overtaken by another currency anytime soon. More likely is a future in which it slowly comes to share influence with other currencies.

Renowned economist Stephen Roach believes that we are heading for a ‘Stagflation for the Ages’, writing in Project Syndicate that The supply-chain disruptions during the pandemic look almost quaint compared to the fundamental reordering of global trade currently underway. This

fracturing, when coupled with US President Donald Trump’s attacks on central-bank independence and preference for a weaker dollar, threatens a prolonged period of stagflation.

The US decoupling from global trade networks, especially from China-centric and US/Canada/Mexico-centric supply chains, will reverse supply-chain efficiencies that reduced inflation by at least half a percentage point a year over the past decade. The reversal is likely to be permanent.

Also, the reshoring of manufacturing to the US will not be seamless, nor accomplished in the short time, with projects taking years to plan and construct. Finding workers for mostly low-paying jobs seems to be an issue.

Frank Holmes of U.S. Global Investors believes investors think gold is a classic fear trade that retail investors are still sorely underexposed to. I believe they should be scared; economic signs point to a coming bout of stagflation.

A stagflationary environment is one where economic growth is decelerating, and inflation remains high.

Is the US on a road leading to possible stagflation and recession?

Tariffs are thought by most to be inflationary. Decelerating growth should mean more job losses on top of federal job loss programs underway, through DOGE. The US, and perhaps large parts of the global economy are on the road to stagflation.

The Federal Reserve agrees, The Hill reports:

Minutes from the May meeting of the Federal Reserve’s interest rate-setting committee show stagflationary risk to the economy as a result of new White House trade policies and higher projections for unemployment through the next couple of years…

Officials felt that “the labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff’s estimate of its natural rate by the end of this year and remaining above the natural rate through 2027.”

The Fed projected in March an unemployment rate of 4.4 percent for 2025 and of 4.3 percent for 2026 and 2027. The May minutes suggest those numbers will be higher.

With the dollar in retreat and the bond market in chaos, where should an investor go for protection, other than cash, which seems like a bad idea with stagflation right around the corner.

Commodities

The answer is commodities.

The Financial Post agrees that “investors should consider having some exposure to real assets such as commodities to protect purchasing power.”

Gold

Gold does well in stagflationary periods and outperforms equities during recessions.

In fact, gold outperforms other asset classes during times of economic stagnation and higher prices. The table below shows that, of the four business cycle phases since 1973, stagflation is the most supportive of gold, and the worst for stocks, whose investors get squeezed by rising costs and falling revenues. Gold returned 32.2% during stagflation compared to 9.6% for US Treasury bonds and -11.6% for equities.

When inflation started rising in March 2021 gold was trading around $1,700/oz. Over subsequent months, both gold and inflation headed higher, with the CPI topping out at 9% in July 2022 and gold reaching $2,050 in March 2022.

Forbes notes “Stagflation creates economic uncertainty because it challenges the traditional relationship between inflation and unemployment. Historically, gold benefits in economic uncertainty.”

Silver

Silver, like gold, is a precious metal that offers investors protection during times of economic and political uncertainty.

However, much of silver’s value is derived from its industrial demand. It’s estimated around 60% of silver is utilized in industrial applications, like solar and electronics, leaving only 40% for investing.

The lustrous metal has a multitude of industrial applications. This includes solar power, the automotive industry, brazing and soldering, 5G, and printed and flexible electronics.

What makes the current silver market particularly compelling is the persistent supply-demand imbalance. If projections hold true, 2025 will mark the fifth consecutive year of silver deficit. The market is exceptionally tight, with industrial demand steadily climbing while supply from mining and recycling has remained relatively flat. (Economic Times)

But silver hasn’t kept up to gold’s impressive gains of late. While gold reached a record $3,500 in April, silver has remained subdued, struggling to breach even the $35 mark. 

Ahead of the Herd thinks that the gold-silver ratio, currently at 99.5 (meaning it takes 99 oz of silver to buy one oz of gold, the ratio has averaged 60:1 since early 1970’s), shows silver may be undervalued compared to gold, indicating a potential for upward price movement.

Copper

S&P Global produced a report in 2022 projecting that copper demand will double from about 25 million tonnes in 2022 to 50Mt by 2035. The doubling of the global demand for copper in just 10 years is expected to result in large shortfalls — something we at AOTH have been warning about for years.

Huge copper deficit looming — Richard Mills

Copper smashed a record on Wednesday, March 27, with the most traded contract on the COMEX reaching $5.37 a pound or $11,840 a tonne. Traders predicted at a Financial Times commodities summit in Switzerland that the metal could reach at least $12,000 a tonne this year as supply concerns flare up globally. (Mining.com)

Global copper consumption has increased steadily in recent years and currently sits at around 26 million tonnes. 2023’s 26.5 million tonnes broke a record going back to 2010, according to Statista. From 2010 to 2023, refined copper usage increased by 7 million tonnes.

Wall Street commodities investment firm Goehring & Rozencwajg quoted data from the World Bureau of Metal Statistics confirming that global copper demand remains robust, outpacing supply. 

The shift to renewable energy and electric transportation, accelerated by AI and decarbonization policies, is fueling a massive surge in global copper demand, states a recent report by Sprott.

Increasing investments in clean technologies like electric vehicles, renewable energy and battery storage should cause copper demand to climb steadily, and challenge global supply chains to meet this demand.

The report cites figures from the International Energy Agency (IEA), such as global copper consumption growing from 25.9 million tonnes in 2023 to 32.6Mt by 2035, a 26% increase. Clean tech copper usage is expected to rise by 81%, from 6.4Mt in 2023 to 11.5Mt in 2035.

On the supply side, BHP points to the average copper mine grade decreasing by around 40% since 1991. The next decade should see between one-third and one-half of the global copper supply facing grade decline and aging challenges. Existing mines will produce around 15% less copper in 2035 than in 2024, states the company.

“Most of the high-grade stuff’s already been mined,” says Mike McKibben, an associate professor emeritus of geology at University of California, Riverside, quoted recently by NPR. “So, we have to go after increasingly lower grade material” that costs more to mine and process, he says.

Shon Hiatt, a business professor at the University of Southern California, said, “It’s projected that in the next 20 years, we will need as much copper as all the copper that has ever been produced up to this date.”

Conclusion

The number of tense geopolitical hot spots around the world (Syria, North Korea, Taiwan, Iran, Israel, Ukraine) is reason enough to consider investing at least part of your portfolio in gold and silver — either the physical metals or mining stocks which leverage higher prices.

With Ukraine now free to use long-range missiles that can strike deep into Russia, I believe the Russia-Ukraine war is extremely dangerous. Especially considering that Russia is a nuclear-armed nation with a paranoid leader in Vladimir Putin. On the other hand, Russia is a middle economic power without the resources to support a strong war effort. A nuclear strike is unlikely considering that France and England alone could destroy Russia with their nuclear arsenals. Sooner or later Putin will realize that he’s pushed the EU and NATO as far as they will go, and now with 80 senators pushing Trump to increase sanctions, there should soon be light at the end of the dark tunnel in Ukraine.

With respect to Iran, I believe a nuclear deal will be signed. It won’t be much different from the agreement Tehran signed with Obama but it’ll have Trump’s name on it. The wild card is Israel, but my thinking is that Israel is letting the US negotiate a deal with Iran in return for giving Israel a free hand in Gaza and the West Bank.

The bottom line is that cooler heads are prevailing globally, perhaps with the exception of Ukraine.

Still, we have to recognize that with Trump at the helm, any sudden announcement could result in a market correction, which could affect metals including gold, silver and copper.

Do I believe we’ll return to the United States being the world superpower? No, I don’t. I think that horse has left the barn. A lot of people — think China, Russia, Iran — are taking advantage of the shift to US isolationism and its chaotic way of handling foreign policy.

Amongst US allies, trust has been broken and faith in the US government has been shaken to the core; countries are starting to realize that in trade they can’t rely on the United States anymore.

Countries are soon going to realize that they’ve depended on the United States for far too long and that they would be better off talking and trading amongst themselves. Canada is a good example, with Prime Minister Carney making overtures towards Mexico, the UK and the EU. Despite some talk of Alberta separating, the country has never been more united, with the premiers discussing ways to lessen or eliminate inter-provincial trade barriers. The Buy Canada movement is in full swing.

However, I do see a multi-year period of adjustment during which supply chains shift and countries that used to deal primarily with the US become more self-sufficient and wary. This, along with US tariffs, are what’s behind my stagflation thesis. Stagflation may be bad for growth and a bummer for consumers due to continuing inflation, but stagflation is also good for commodities, especially when the dollar is weak.

In this environment I don’t see the prices of gold, silver and copper going back to where they were before. Gold, I believe will continue to trade anywhere between $3,000 and $3,500 an ounce, the gold-silver ratio should decline and lift silver, especially given a fifth straight year of supply deficits, and copper could reach $5 a pound this year.

With country groupings like the BRICS and ASEAN becoming more important, and de-dollarizing continuing, we could be moving towards a basket of currencies that exists alongside slowly declining US dollar usage.

Also, with more central banks and large institutional investors buying their own bonds rather than US Treasuries, we could see investments becoming more localized. We could even see a worldwide spend on infrastructure as supply chains shift, which would be great for copper, iron ore, nickel, steel, and a host of other commodities.

Canada again is a good example with a proposed energy corridor.

The bottom line? In an unstable world, commodities — real, tangible assets — are the last safe haven standing. And the greatest leverage to rising commodity prices are junior resource companies.

Richard (Rick) Mills
aheadoftheherd.com

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