Last Thursday I shared the first half of a letter I wrote to IMA clients. It was about narrative change: how a two-pound pocket watch with 33 complications marked the bottom of a decade-long depression in the Swiss watch industry, and why we may be living through a similar kind of moment for the US dollar.
This is the second half, and it is the part that was hardest for me to write, because it argues for an asset I spent most of my career politely ignoring.
If you missed the first half, you can read it here.
Depressing Reasons Why I Am Bullish On Gold
The fact that I am writing this is a bit shocking to me. I have been indifferent to gold for a long time, and for a simple reason: it falls outside my value framework. It has no cash flows. I have no idea what it is worth.
I can debate the value of Microsoft or Caterpillar with my value investor friends. We can stress test each other’s assumptions on revenue, margins, capital expenditures, and arrive at cash flows. Gold has none of that. It is perceived as currency, as a store of value. It is a story. It is worth what other people are willing to pay for it.
And yet here I am.
Here is what changed my mind. Not something about gold, but many things about the dollar.
The US dollar is the world’s reserve currency. It has had a well-deserved place since WWII, and that rested on three things: the largest, steadiest, most diverse economy; a politically stable democracy; the best military.
All three are cracking at once.
The Economy
The US is running a 6% budget deficit in peacetime. Peacetime is now over.
Deficits may climb from here with the $1.5 trillion proposed defense budget and if, more like when, we go into recession or the stock market declines or both. This is the good part of the cycle, and we are already borrowing like it is the bad part.
We carry our highest level of debt since WWII. And interest on that debt now costs more than defense. It crossed in 2024 and has stayed there. It is the second-largest line in the budget, only behind Social Security. We are paying more to service the past than to defend the future.
Political Stability
Our enemies are stronger and more united: China, Iran, Russia. And we have fewer friends.
Alliances built over three generations are being destroyed. We are an erratic, unreliable ally and friend. We are threatening to take Greenland, a NATO ally’s territory, because “we need it.” Denmark, Britain, France, and Germany have put troops on the island. Allies now defend against us. The moral high ground is lost.
At home: blatant kleptocratic corruption in the White House and self-dealing. Politically gridlocked, polarized. The least cohesive society in generations. The ruling party uses the government to attack the opposition: lawfare.
Fed independence is in question even more than usual. In the past, presidents privately told the Fed what to do. Sometimes it listened, sometimes it did not. This time the Justice Department was used to investigate the Fed chair and a sitting governor. The investigations went away; the precedent did not. Gold and silver jumped the day the probe became public.
We also see a rise in democratic socialists. One was elected mayor of New York City. He appointed a tenant director who wants homeowners to have “a different relationship to property than we currently have.” When that surfaced, he said he disagreed. He kept her anyway. This may or may not turn into a broader movement. But the perception alone moves capital.
And when governments run out of income, they start looking at the balance sheet. Wealth taxes, retroactive levies, exit taxes. California votes on one this November. Capital goes where it is most welcome. A tax on what you own rather than what you earn pushes people toward wealth that travels. Gold has no registrar, no jurisdiction, no counterparty.
Foreign governments have already learned this lesson. The dollar was weaponized after Russia invaded Ukraine. Russian reserves were frozen. The US dollar is not a safe storage of value if you are an enemy.
The Military
There is a perception that the war with Iran was lost: a bigger embarrassment than the exit from Afghanistan, which arguably gave Putin the confidence to invade Ukraine. This increases the risk of China invading Taiwan.
We built a military for the Cold War, and yet it is unable to beat a much weaker country using asymmetric warfare. We spend $4 million on a Patriot interceptor to shoot down a $20,000 drone. Our enemies build drones by the thousands a month. We build interceptors by the hundreds a year. Our magazines are near empty, and rebuilding them takes years, not months.
China has a much stronger manufacturing and energy base than we do. In a war of attrition, the side that can build wins. We also lack the rare earth minerals a modern military requires.
Corn Republic
I don’t do politics here. But one political development made my blood boil, and it has a direct impact on your portfolio, not today, but long-term.
Trump Media is reportedly charging trading firms up to $1.2 million a year for early access to Trump’s Truth Social posts. I want you to understand how bad this is for the financial system. The Securities and Exchange Commission (SEC) and a lot of financial regulatory bodies regulate the markets, companies like IMA, and people like me to make sure that markets are fair. They want to make sure that the game is not rigged. That the little guy can outsmart the big guy, and the big guy cannot beat up the little guy just because he has access to better information. After the 2000 bubble popped, the government instituted Regulation FD, which stands for fair disclosure. Management has to disclose information to all investors at once, not just to the big ones in private meetings. And then our Commander in Chief is basically blatantly selling access to his market-moving “truths.”
His posts move markets. One post about Iran sent oil down 5% in a day. The product is literally called Truth API. API now stands for Access to President Interface. Understand what is for sale here. Not information. Time. A few milliseconds between when a hedge fund sees the president’s words and when you do. They trade against you in that gap. This product only has value because it virtually guarantees profits for a privileged few at the expense of the rest of the system.
The product only has value because you are the sucker on the other side. Trump owns 41% of the company. He writes the post, sells the head start, and pockets the fee. It did not used to be this way.
Why am I writing about this? Actions like this undermine investors’ belief in the US markets. The US has the best and most liquid markets. There is a belief that the markets are fair. This belief is being destroyed by our sitting president for personal gain. Will this action alone break the narrative? Probably not. I’ve spilled a few thousand words on how the world as we know it is changing. US stocks used to trade at a premium to the rest of the world, especially emerging markets, which we often called banana republics. Well, the US (outside of Hawaii) doesn’t grow bananas, but we grow a lot of corn. We are behaving like a corn republic and will get a corn (lower) multiple.
And yet, the other side of the coin
All these arguments notwithstanding, we still have the largest and best economy in the world, with little competition. That “and” is important.
Europe is in worse shape than we are, politically and economically. China is a contender by size and possibly by economic strength, but it is not a democracy. It has currency controls. Its currency is a roach motel: you can get in, you can’t get out. Its economy is a black box, and it has plenty of problems of its own. Switzerland is probably the best contender, but the country is too small.
The dollar has no successor. Which is exactly the point. Capital that wants out of the dollar has nowhere else to go, so it goes to the one reserve asset no government issues: gold.
Conclusion
I am not buying firearms or canned food, and I am not building a cabin in the mountains with an independent water supply.
Gold is one position among many. It is not 30% of the portfolio. It takes one or two slots that used to belong to stocks or cash. And here is the most important punch line: it is not a panacea for our portfolio; our stock selection is. So we continue to patiently build and improve your (and my) portfolio, one stock at a time.
Key takeaways
- I have been indifferent to gold for a long time, for a simple reason: it has no cash flows, so I have no idea what it is worth. I can stress test assumptions on Microsoft or Caterpillar and arrive at a number. Gold is a story — it is worth what other people are willing to pay for it. And yet here I am.
- The US is running a 6% deficit in peacetime, and peacetime is now over. We carry our highest debt since WWII, and interest on it costs more than defense. We are paying more to service the past than to defend the future — in what is supposed to be the good part of the cycle.
- We built a military for the Cold War. We spend $4 million on a Patriot interceptor to shoot down a $20,000 drone. Our enemies build drones by the thousands a month; we build interceptors by the hundreds a year. In a war of attrition, the side that can build wins.
- When governments run out of income, they start looking at the balance sheet: wealth taxes, retroactive levies, exit taxes. Capital goes where it is most welcome, and a tax on what you own rather than what you earn pushes people toward wealth that travels. Gold has no registrar, no jurisdiction, no counterparty.
- The dollar has no successor — and that is exactly the point. Europe is in worse shape, China’s currency is a roach motel, Switzerland is too small. Capital that wants out of the dollar has nowhere to go, so it goes to the one reserve asset no government issues. But gold is one or two slots, not 30% of the portfolio. It is not the panacea; our stock selection is.
comments
0