Gold, sentiment, and a fear-priced market
Over the next 10 years, the nominal gold price will be markedly higher than today. Things denominated in US dollars, gold included, will be soft in the near term, but buying high-quality companies at fair prices in a market that keeps getting inexorably better is attractive.
Gold has fallen from its highs, and sentiment across the mining space has dropped sharply over the past few months. Gold sat at roughly the same price last October, yet sentiment now is completely different. Why can sentiment differ so much at the same price point? People are emotional rather than rational creatures. A rational approach takes work; an emotional one takes only feelings, and it is easier to feel than to think, so most people default to the easy path.
The fear has done something useful. Going into December and January there was a real risk of assembling 68 great companies and having to admit from the podium that none of them were cheap. Then the junior resource market sold off 40%, and good and bad companies sold off in equal measure. That indiscriminate selling removed the problem: with 68 exhibitors, spectacular value now sits on the floor precisely because sector sentiment is bad. Institutions accumulate at exactly this kind of disconnect while retail abandons conviction.
A soft second half of 2026
How will the second half of 2026 hit portfolios differently from the first? Very soft, for two reasons. First, there is less pressure on the Fed to cut rates; cuts will come eventually, but the Fed likely won't have to move in calendar 2026, which means a relatively strong dollar and soft dollar-denominated prices like gold. Second, the recent Gulf conflict acted like a tax, and all taxes are bad. High oil prices pulled a lot of liquidity out of the economy, so the second-half economy will surprise people with its weakness. Expect the copper quote to flatten down, and expect the oil market to reflect demand that high prices killed.
That makes 2026 unkind to the impatient. Patient investors get the ability to buy high-quality names with enough time to study them before buying, setting up a boatload of money in the out years.
Financial stocks and the community-bank bargain
During rising rates and a flattening yield curve, do financial stocks do better or worse? Rising-rate environments are traditionally lousy for conventional financial services companies. It depends on where you sit in the ecosystem. Some US community banks, small institutions that know and serve their local markets with no loan-loss experience, trade at 60% of book while earning 10 to 12% on capital after tax. Buy at 60% of book and that is a 15% after-tax earnings yield. An absolute no-brainer. These banks are run by bankers who have served through good rates and bad. Most people find property-and-casualty insurers and community banks boring, which is why a stable 10 to 12% after-tax yield at 60% of book stays on offer. Those companies will do well.
The risk that scares him most: high-yield ETFs
The genuine fear is mom-and-pop-owned high-yield bond ETFs triggering a run on the bank with no FDIC backstop. If the Fed doesn't intervene, the interest rate wants to go higher, and higher rates do damage on several fronts. They hamper stressed creditors: trouble at 7% becomes far more trouble at 9%. They constrict credit. They devalue the long bond, which can be replaced at a different yield. Anyone already in credit difficulty finds higher rates painful.
The specific danger sits in high-yield, junk-bond, and subprime credit ETFs holding literally trillions of dollars in assets, much of it owned by people who don't understand the credit risk they're carrying. The ETF structure is highly liquid; the underlying assets are not. If holders develop credit concerns and sell, the manager must fund redemptions by selling assets he or she cannot easily sell. That is the run on the bank. Some high-yield bonds sold over the counter inside these ETFs trade once every six weeks. Push such a bond into the market overnight to fund a redemption and its sale price reflects your distress, not just the market's. Investors already worry about private credit markets.
Is this risk confined to high-yield bond investors, or could it go systemic? It could go systemic. If high-yield ETFs gate and stop funding redemptions, the nervousness spreads across the broad market and you revisit 2008, which was a real test of system failure and a character-building environment.
2008 versus now: less flex in the system
In 2008 the system didn't fully collapse because governments backstopped several large institutions. Can we expect the same rescue again? Yes, but the arithmetic has changed. In 2008 aggregate US federal debt was about 40% of GDP; now it's roughly 115 to 120%, before counting the net present value of unfunded entitlement liabilities. The Fed could say "we will do whatever it takes" in 2008. Now the market may look at the Fed and conclude it lacks that ability: you can't raise taxes, you can't increase the deficit, so bailing out the system means printing, and printing this time would be wildly inflationary, not merely inflationary. The Fed's ability to intervene relative to the size of the problem is much lower than in 2008. The damage to business confidence, credit confidence, and above all confidence in the sanctity of the US dollar is very risky.
Nothing stops the Fed from running unlimited QE like during COVID, so isn't inflation the only hard constraint? Correct. What changes is the ability to fund it, because debt-to-GDP has roughly tripled. Could they lend to banks without monetizing debt, so money supply doesn't really grow, and if so, what's the instrument? The only instrument that works in that circumstance is a lie. The market is fairly naive, but not that naive. When the government says it will kiss it and make it better, the market still asks: where's the money?
What the bond market is signaling
The bond market, the world's largest after real estate, says the interest rate wants to go up. The government is buying the long end of the yield curve and financing out of the short end to keep control of the curve, because people worry about the broad economy. Plenty of buyers, will take one-year paper, so the government finances with one-year paper to buy back 10-year paper and pull down the long-bond yield. Long-bond yields keep rising anyway. That tells you investors demand both a time premium and a risk premium.
Where to allocate
Which opportunities does a softer second half present? It depends on the scenario, and there's no yes-or-no answer. In a panic-engendered market you simply see what's cheaper. The most attractive opportunity, largely because it's the best-known, is the gold stock market. Gold stocks relative to the gold price are not cheap, but they are fairly priced, a condition that has occurred maybe four times in a career.
Right now the oil quote and oil stocks are in free fall, and the oil market is a better market than any other natural resource sector. The largest likely allocation over the next six months is oil and gas.
Canadian oil and gas specifically? Yes, because its valuations are well understood. American investors have to decide how much Carney risk they'll take. Carney is frankly hostile to the oil and gas business, but unlike the former prime minister he can add and subtract. His domestic spending program requires revenue, and oil and gas is what Canada does best, so he'll have to turn oil-and-gas friendly to fund his social program, and he understands that. His recent remarks, aimed at appeasing both sides, support that view.
Better to watch politicians than listen to them: you can tell they're lying when their lips move. What matters is the fiscal and arithmetic constraints they operate under, not what they say. Carney is bright and driven, and given how he got where he is, probably not very honest, so watch him rather than listen. Fiscal arithmetic can force policymakers to support the very industries they publicly criticize, because tax revenue becomes indispensable.
