The global gold market and the largest buildup of bullion are moving to China and Hong Kong. This matters more than any short-term price move, because it shows where the physical infrastructure for gold trading is being built.
Who is buying gold and why
Gold and silver have held firm and stayed stable over the past two months, even with back-and-forth over whether the Federal Reserve will raise rates. The price still carries a hangover from the very high levels seen early this year. As small amateur investors get shaken out, the professionals - central banks, sovereign wealth funds, and large investors - are buying up bullion. Interest is strongest in gold, less so in silver.
These big buyers understand a simple argument: currencies are a credit risk. You have to move out of them, at least in part, and into gold, which carries no counterparty risk. The buying is heaviest outside North America and Europe. Wealthy families in the Middle East see what is happening and have only one place to go - bullion. That gold holds firm while retail investors panic is a stronger signal than the price chart itself.
China building the alternative
China is acting sensibly. Its leaders expect fiat currencies to collapse. They plan to put their currency onto some form of gold exchange standard, though how fully they do it remains to be seen. They also see that when the dollar dies, the bullion market must move away from fiat currencies - and China is providing that alternative. Hong Kong has a new market meant to rival Western capital markets.
The US Treasury funding trap
The US Treasury must refinance rising amounts each year. Refinancing in the fiscal year starting October 1 is around 9 or 10 trillion, plus an extra 2 trillion or more, and that is before Trump's promise of $500 for each American citizen. A large amount of financing is needed over the next 12 months, at exactly the time foreigners no longer want to buy US Treasury debt.
China told its banks to sell excess US Treasuries back in January or February. Japan has effectively signaled the same: it told its pension funds, and sent the same message to its insurance companies, to buy Japanese government bonds (JGBs). To buy JGBs, they must sell foreign bonds, which are heavily loaded with US Treasuries. This is the setting Treasury Secretary Scott Bessant is working in, and he is not handling it well.
The yen carry trade squeeze
Bessant engineered a large bear squeeze in the Japanese yen, a serious mistake. The gap between yields on Japanese yen and US Treasuries has narrowed. The carry trade - borrowing in yen, selling yen, buying dollars, investing in US Treasuries - made most of its profit from a falling yen, not from the interest rate difference. Squeezing the yen higher (a lower price on the usual dollar charts) hands losses to these carry traders.
The so-called "foreign" buyers of US Treasuries are largely American hedge funds working out of offshore centers - the Caymans, London, Luxembourg, Belgium, Singapore, and to some extent Hong Kong. The buyer that shows up on paper as foreign may not be foreign at all. Policymakers assume it is. That means the real capital flow supporting Treasuries is far weaker than the ownership numbers suggest. Investors should separate the true end investors from the middlemen before assuming demand is stable.
Japan's oil shock and bond crisis
The carry-trade squeeze will keep going because JGB yields are set to rise sharply. During the 1973-74 oil crisis, Japanese consumer price inflation rose above 25%, and producer price inflation went over 30%. Japan faces the same situation now. It got 90 to 95% of its energy from the Middle East, and that supply is gone. Japan survived after the Strait of Hormuz closed only because America shipped huge amounts of its strategic reserve oil to Japan. That has now ended, because the strategic reserve has run out of capacity. This is why West Texas Intermediate crude rose above $100 recently; it eased back a little but will climb again.
So Japan will see high CPI inflation return. It is too early to call 25%, but that is the direction. Rising inflation pushes bond yields up. Pension funds then sell Treasuries and buy JGBs under strict orders from the finance ministry, because Japan is broke and its only rescue is to force its own institutions to support it. A foreign energy shock becomes a bond market problem before anyone connects the two. The real question is whether Japanese savings stay available for foreign debt. For Treasury holders, an overseas inflation problem turns into funding pressure at home.
The debt trap and feedback loop
This is a perfect storm for US Treasury funding, and Bessant walked right into it. The obvious way to avoid it was not trying to obliterate Iran, but the clock cannot be turned back. America could still say "hands up, we got it wrong," agree to the main points of a memorandum of understanding, and pull out - that would offer some rescue. Recovery would take a long time anyway, because oil derivatives - fertilizers, sulfuric acid, helium and other downstream products - depend on Gulf infrastructure that has been damaged, some of it beyond repair. At least backing out would give some hope, though that light at the end of the tunnel could be an oncoming train. Without even that, Japan is doomed. Its bond yields will soar, and its domestic institutions will be forced to sell every piece of US debt they hold - including US equities - while the government fund itself sells down its Treasury holdings.
Against this background, Bessant has an enormous deficit to fund and an enormous amount to roll over. America goes into a debt trap: higher bond yields beget still higher bond yields, because the higher a yield goes, the less attractive the investment becomes, so buyers demand an even higher yield. Rising yields do not mean safety for savers if prices and collateral are falling at the same time.
The equity bubble and forced selling
This looks exactly like the 1970s, but only in the very early stages. The US equity market is in a bubble that will pop spectacularly. There is 24.5 trillion of foreign investment money in US equities, and it will run for the door. Much of it sits on leverage from broker finance and bank finance, where broker finance is really intermediated bank finance. When prices fall, banks sell to protect their asset - the loan - whose collateral is rapidly losing value. Rising bond yields will trigger a massive crisis.
Central banks are stuck. Right now they hope inflation will not be as bad as feared. Some are starting to see that the fallout for private-sector business will be catastrophic, and that raising rates too far makes it worse. They are trapped whichever way they act. In these conditions, being a creditor is dangerous - which is the reason to get out and into gold.
A parallel system without a new currency
The move to a system independent of the dollar and US Treasuries is continuing. The Shanghai Cooperation Organization and BRICS held their annual meetings in the past month, with various potential new members. Everyone now sees what America really is, and they are no longer afraid of it. America is being pushed out of the Eurasian continent. Europeans do not want it. Iran is making sure nobody in the Middle East wants it. The only places with some respect for America are Japan, Korea, and maybe the Philippines. Everywhere else, it is out.
This is raising confidence among BRICS and SCO members. India is a clear example. Despite doing heavy trade with America, Modi is moving more into the SCO-BRICS camp and away from the American camp. The BRICS label itself matters less now, because these countries are becoming independent and will act on their own. Many earlier meetings, especially when Russia chaired the group a couple of years ago, ran almost every second day to educate member bureaucracies - that is now irrelevant.
The dollar is heading toward zero. China has set itself up to move onto a gold standard at a moment of its choosing. It will do so when it is clearly forced to defend itself, not to hurt America - because it must not be blamed for the collapse of the American currency. So China will act in its own time. Talk of a new single BRICS currency is rubbish and will not happen. The monetary shift can happen without any replacement currency being announced. Financial fragmentation can advance quietly through bilateral deals, reserves, and bullion buildup. Watch the infrastructure and settlement behavior rather than waiting for a dramatic currency launch.
