Sive Morten
Special Consultant to the FPA
- Messages
- 22,093
FUNDAMENTALS
Gold has become the victim of recent K. Warsh statement in Wyoming, as well as other markets. But this is only at the first glance. In fact, this is just surface reaction triggered by news and emotions. It doesn't change ongoing processes that stand undercover. And this explains why gold has turned up recently. It is something starts burning in the US finances. J. Powell attempt to keep rates below real inflation and real rates negative doesn't help to resolve the problem of debt and deficit. Despite that statistics on inflation is strongly distorted. This problem relates not only to the US but almost to all G7 countries - UK, Japan, France, Italy etc. Month by month statements from the Fed's Head and S. Bessent are just minor episodes that trigger short-term emotional speculative reactions. It's top of the iceberg. The real questions that markets are becoming concern with - how the US will resolve these problems now.
MARKET OVERVIEW
Gold slid the most since July as Federal Reserve Chairman Kevin Warsh’s pledge to fight inflation bolstered bets that the US central bank will raise interest rates this year, a headwind for the precious metal. In his first speech since becoming chairman of the central bank in May, Warsh reiterated that policymakers will return inflation to their 2% goal, which he said is a firm and fixed target. The dollar pushed higher on his comments, sending bullion lower by as much as 2.9%. The Fed chief also confirmed that “short-term interest rates are the predominant tool to achieve the dual mandate.”
Selling by trend-following commodity trading advisers helped accelerate gold’s tumble, according to traders. The Fed’s firm restatement of its commitment to price stability, and its belief that monetary policy remains the most effective tool for achieving that goal, means that debasement-trade narratives will likely be tuned out for now, according to Melek.
Bullion has staged a powerful comeback in recent weeks, with prices surging after the US Treasury’s surprise liquidity injection last week drove yields and the dollar lower. The intervention to curb borrowing costs also revived concerns that US policy could erode confidence in the dollar and drive investors toward alternatives. Melek expects gold to give up some of its recent gains, falling toward the lower end of the recent $4,200 to $4,700 trading range by the end of the year.
Traders added to bets on a September rate hike after Warsh said the Fed will "have work to do" if policymakers are not confident that underlying inflation is returning to its 2% target, marking the closest he has come to acknowledging interest rate hikes may be needed to ease price pressures. Traders now see a 58% chance of a U.S. rate hike in September, compared with 36% before Warsh's comments, and an 89% chance of a December increase, according to the CME FedWatch tool.
US economic data this week showed that inflation remained well above the Fed’s target, raising prospects for a rate hike, which is typically a headwind for the non-yielding precious metal. The U.S. Personal Consumption Expenditures Price Index, which the Fed uses to set its target, increased 3.7% in the 12 months through July, unchanged from June.
Investors are no longer choosing between gold and Bitcoin as hedges against fiscal anxiety. They’re buying both. Exchange-traded funds tracking the assets attracted a record $7 billion over the past five trading days, according to data compiled by Bloomberg, putting some of the biggest gold and Bitcoin vehicles alongside the stock-market giants at the top of the ETF flow rankings.
Nearly $3.4 billion poured into the State Street Investment Management’s SPDR Gold Shares, while BlackRock Inc.’s iShares Bitcoin Trust ETF took in $1.5 billion. Both cracked the top 10 US ETFs by inflows for the week, with GLD trailing only a handful of funds including the Vanguard S&P 500 ETF. Now the two versions of the scarcity trade are moving together again, propelled by renewed anxiety over US borrowing, the dollar and efforts to contain long-term yields. Highlighting the recent advance, hedge funds’ net-long position in gold for the week ended Aug. 18 was the highest this year, according to the latest data from the Commodity Futures Trading Commission.
Gold-backed ETFs also attracted inflows of 46.7 metric tons ($6.4 billion) last week, which was their largest weekly demand in 10 months, according to the World Gold Council, with North American and Europe-listed funds leading the inflows.
In a sign of renewed momentum, investors have rushed to bet on further price gains using call options. Total call open interest on SPDR Gold Shares, the largest gold-backed ETF, has surged in recent weeks to reach the highest level since March. The large volume of outstanding options will likely amplify volatility going forward, analysts at Goldman Sachs Group Inc wrote in a note Friday, as dealers are forced to respond to prices moves by buying or selling the underlying ETF in order to hedge their exposure.
A portfolio manager at Fidelity International Ltd. has doubled his fund’s gold holdings over the past three weeks, citing increasing uncertainty over US Federal Reserve policy as a catalyst. After raising the proportion of bullion in the fund to a self-imposed limit of 5%, George Efstathopoulos said he would consider lifting this ceiling should the safe-haven status of the US dollar continue its decline. He began his recent accumulation after the investor retreat from long-dated Treasury bonds that followed the Fed’s July meeting.
The portfolio manager — who sold gold earlier this year, when the metal embarked on its biggest slide in four decades — funded his latest bullion purchases with high-yield bonds, including gilts, along with some cash. He said the underlying factors that drove gold to a record high in late January remained intact, including central bank purchases.
Elsewhere, China's net gold imports via Hong Kong in July rose about 11% from a month earlier, data showed on Tuesday, supported by an uptick in investment demand.
In December, when bullion prices sat close to where they are now, gold exchange-traded funds accounted for just 0.17% of private US financial portfolios, according to a Goldman Sachs Group Inc. analysis — six basis points lower than a peak in 2012. The bank estimated that each bout of buying that increases gold’s share of US portfolios by 0.01% would lift prices by about 1.4%.
Illustrating the market’s sensitivity to even a modest shift away from US assets, JPMorgan Chase & Co estimated in May 2025 that moving just 0.5% of foreign investors’ US asset holdings into gold — then equivalent to roughly $70 billion a year — could lift prices by about 18% annually under market conditions prevailing at the time.
MARKET COMMENTS
Just as an illustration to recent events - the difference between open interest in call options and put options on gold ETFs this week reached approximately 2.4 million contracts, the highest level since February. This gap has increased by one million contracts since Japan's intervention to support the yen three weeks ago, and the pace of growth has accelerated since the U.S. Treasury unexpectedly doubled its planned purchases of long-term government bonds last Wednesday. Today's figures are more than three times the average for 2021-2024, which is 0.8 million contracts.
Goldman analysts note that expectations of further interest rate hikes by the Federal Reserve have weakened following the July employment and inflation data. This supports inflows into speculative positions and ETFs. ️ As a result, the bank sees a "significant risk of growth" above its base forecast of $4,900/oz by the end of 2026. If current demand for options and inflows into ETFs continue, the price could rise significantly.
Goldman traders are seeing a strong influx of clients into gold: digital options with a 3-6 month term are being purchased with targets of $4,800–5,500. Positions are not yet overheated, and Chinese demand remains high. A separate surge in interest in silver is noted:** large clients are buying 3-month options with a strike price of $90/oz, anticipating a shift in retail demand from expensive gold.
Gold prices surged sharply after the U.S. Treasury announced a program to buy long-term bonds ("quasi-twist" by Bessen), but the actual breakthrough began earlier, driven by aggressive purchases from China, central banks, and ETFs. In June, China purchased over 40 tons of gold on the London over-the-counter (OTC) market, making it the second-largest monthly purchase since the beginning of 2025. This is 167% more than the 15 tons officially reported by the People's Bank of China for June.
This follows a purchase of 48 tons on the OTC market in May, which was 380% higher than the 10 tons officially reported by the central bank. Meanwhile, in July, the People's Bank of China officially added another 20 tons of gold, making it the largest monthly purchase since October 2023. Since the beginning of the year, China has officially increased its gold reserves by 60 tons, bringing the total to a record 2366 tons. ️Therefore, China purchased over 88 tons of gold on the OTC market in May and June alone, which exceeds the officially reported amount for the entire year.
Gold at $10,000 per ounce seems absurd, but only as long as we assume the market is buying the metal. In reality, it reflects an overvaluation of trust in government promises.
According to the latest available report from BofA/EPFR, gold funds received $6.3 billion in inflows last week – the highest since January. This is a broader indicator than just physically-backed ETFs. According to data from the World Gold Council, these ETFs received $3 billion in inflows in July, and their holdings increased to 4,068 tons. However, they are still below the February record of 4,176 tons.
The most interesting thing is not the inflow itself. Gold has returned to around $4,650 after falling below $4,000, even though real interest rates remain high. This means that the buyer is now hedging not only against a decline in the Fed's interest rate, but also against long-term government debt, budget deficits, sanctions, and the possibility that bonds will cease to function as a safe haven during a stock market crash.
Central banks bought 289 tons in the second quarter. In a recent survey, 89% of reserve managers expect further growth in global gold reserves, 45% expect growth in their own central bank's reserves, and 74% expect a decrease in the share of the dollar in global reserves over the next five years. Now let's calculate without alchemy. The World Gold Council estimates the global volume of financial assets at approximately $320 trillion. Private investors hold around $9 trillion in bars, coins, ETFs, and over-the-counter gold – only 3% of this pie. If the amount of investment gold and the overall size of the market do not change significantly, a price of $10,000 would increase gold's share to approximately 6-7%. A price of $15,000 would correspond to a share of around 9-10%. Forty years ago, this share was around 14%.
In other words, $10,000-$15,000 is not a baseline forecast or a magic number. This is a scenario in which gold returns from being a decorative element in a portfolio to becoming one of the main financial assets. For this to happen, several things must coincide. Long-term government bonds must cease to protect against crises because they themselves become a source of those crises. Governments must respond with financial repression, debt buybacks, or restrictions on yields. Central banks must continue to convert part of their foreign exchange reserves into physical metal. Private funds must increase their gold holdings from the current 3% to at least 6-10%.
Supply will not respond quickly. There are almost 220,000 tons of gold above ground, but new production only increases this supply by about 1.8% per year. A high price will increase the recycling of old gold and reduce some of the demand for jewelry. This is the main constraint. But a mine cannot be turned on with the press of a button, and the owner of a gold bar is not obligated to sell it just because the price has become attractive. And such a move does not require tens of trillions of dollars in liquid assets. The price is set by a marginal transaction, after which the entire existing supply is re-evaluated. We have discussed this last week - Gold has almost reached $5,600 without classic QE. Stocks have soared on the AI hype without classic QE. Financial assets do not necessarily need a printing press. They need a new buyer and a reason to believe that tomorrow the asset will be worth more than today's money.
The scenario will break down if the United States stabilizes its budget, the dollar strengthens, real interest rates remain high, and central banks and ETFs return to selling. In the second quarter, ETFs already showed how quickly demand can disappear when everyone suddenly needs dollar liquidity.
But if stocks and long-term bonds start to fall at the same time, gold will cease to be just a hedge against a crisis. It will become a hedge against the very entity that provides the hedge. Gold at $15,000 is not a story about how a bar has become more useful. It is a story about how much cheaper promises have become, for which it is being sold.
Gold can potentially replace the safe haven function. However, it's almost impossible to use gold bars to pay for oil, settle dollar-denominated debts, or conduct currency interventions. The trend is clear. Over the past four years, central banks have been buying an average of around 1,000 tons of gold per year, compared to 500 tons in the previous decade. In a recent survey, 74% of reserve managers expect a decline in the dollar's share in global reserves over the next five years.
Researchers at the Federal Reserve have already noted that the unique value of access to dollar liquidity remains. However, the previous advantage of holding long-term U.S. Treasury bonds has significantly diminished, and even after hedging against currency risk, it has become negative. In other words, the world still needs U.S. currency, but it is becoming increasingly reluctant to hold U.S. debt.
Trump is taking advantage of this temporary window. As long as the dollar remains the currency of trade, credit, and settlement, the White House and Congress continue to run large budget deficits. If a country issues debt faster than the world wants to accumulate it, yields rise. If the Federal Reserve tries to hold down yields, the currency is devalued. If the dollar weakens, imported inflation returns home. This privilege does not eliminate the need for accounting; it simply allows the bill to be passed on to others for a longer period. We have already written that the U.S. does not have a problem repaying its debt; the problem is repaying it in dollars of the same value.
Tariffs, sanctions, energy pressure, and attempts to attract capital and factories to the U.S. are all part of a single strategy. If the benefits of the reserve currency status are gradually diminishing, it is necessary to ensure that competitors weaken faster. The U.S. may lose some of its absolute advantage while maintaining its relative advantage.
Therefore, countries are acting cautiously. They do not want to quarrel with Washington and cannot abandon the dollar while their trade, banks, and exchange rates depend on dollar liquidity. Instead of a dramatic exit, they are quietly diversifying their reserves. They keep some dollars for transactions and emergencies, while buying gold for the future.
Trump is not so much protecting the reserve status as taking advantage of it before it disappears. The dollar will likely remain the language of global trade for a long time. The question is whether U.S. Treasury bonds will continue to serve as its safe haven.
Meantime, problems are not disappeared showing that this window is narrowing. The debt has officially exceeded $40 trillion. $10 trillion needs to be refinanced annually, and another approximately $2 trillion needs to be borrowed to cover the deficit. The population has practically stopped generating savings: the savings rate is at its lowest level since the 2000s (0.65 trillion per year and 2.7%), while real cash savings are close to zero. Foreigners are also not particularly eager to buy long-term debt. At the same time, of the $2.43 trillion increase in debt over the past year, only $0.57 trillion is due to an increase in debt with a maturity of more than 5 years - less than 1/4. No matter how much Trump and Bessent talk about how they will reduce debt through economic growth, the chances of this happening are minimal.
If Bessent fails to push the yield on 30-year bonds below 5%, as they say, it will trigger a dollar slump and a shift towards short positions in risk, leverage in areas such as large AI companies and private lending [i.e. Shadow Banking], and cyclical assets such as the financial sector, ahead of the midterm elections. Risk is accumulating day by day. In the short term, a crash always looks like an accident. In the long term, it is almost inevitable.
The proportion of non-accrual loans among the 20 largest publicly traded BDCs (Business Development Companies) has risen to a median of 2.8% – the highest level since 2017. Analysts at Fitch Ratings warned last week that the number of private credit defaults reached a new record in July. David Golub, co-CEO of the private investment firm Golub Capital, told investors earlier this month about a "rise in credit stress," as the industry faces an increase in defaults and troubled loans.
Gold has become the victim of recent K. Warsh statement in Wyoming, as well as other markets. But this is only at the first glance. In fact, this is just surface reaction triggered by news and emotions. It doesn't change ongoing processes that stand undercover. And this explains why gold has turned up recently. It is something starts burning in the US finances. J. Powell attempt to keep rates below real inflation and real rates negative doesn't help to resolve the problem of debt and deficit. Despite that statistics on inflation is strongly distorted. This problem relates not only to the US but almost to all G7 countries - UK, Japan, France, Italy etc. Month by month statements from the Fed's Head and S. Bessent are just minor episodes that trigger short-term emotional speculative reactions. It's top of the iceberg. The real questions that markets are becoming concern with - how the US will resolve these problems now.
MARKET OVERVIEW
Gold slid the most since July as Federal Reserve Chairman Kevin Warsh’s pledge to fight inflation bolstered bets that the US central bank will raise interest rates this year, a headwind for the precious metal. In his first speech since becoming chairman of the central bank in May, Warsh reiterated that policymakers will return inflation to their 2% goal, which he said is a firm and fixed target. The dollar pushed higher on his comments, sending bullion lower by as much as 2.9%. The Fed chief also confirmed that “short-term interest rates are the predominant tool to achieve the dual mandate.”
Selling by trend-following commodity trading advisers helped accelerate gold’s tumble, according to traders. The Fed’s firm restatement of its commitment to price stability, and its belief that monetary policy remains the most effective tool for achieving that goal, means that debasement-trade narratives will likely be tuned out for now, according to Melek.
Bullion has staged a powerful comeback in recent weeks, with prices surging after the US Treasury’s surprise liquidity injection last week drove yields and the dollar lower. The intervention to curb borrowing costs also revived concerns that US policy could erode confidence in the dollar and drive investors toward alternatives. Melek expects gold to give up some of its recent gains, falling toward the lower end of the recent $4,200 to $4,700 trading range by the end of the year.
Traders added to bets on a September rate hike after Warsh said the Fed will "have work to do" if policymakers are not confident that underlying inflation is returning to its 2% target, marking the closest he has come to acknowledging interest rate hikes may be needed to ease price pressures. Traders now see a 58% chance of a U.S. rate hike in September, compared with 36% before Warsh's comments, and an 89% chance of a December increase, according to the CME FedWatch tool.
US economic data this week showed that inflation remained well above the Fed’s target, raising prospects for a rate hike, which is typically a headwind for the non-yielding precious metal. The U.S. Personal Consumption Expenditures Price Index, which the Fed uses to set its target, increased 3.7% in the 12 months through July, unchanged from June.
Investors are no longer choosing between gold and Bitcoin as hedges against fiscal anxiety. They’re buying both. Exchange-traded funds tracking the assets attracted a record $7 billion over the past five trading days, according to data compiled by Bloomberg, putting some of the biggest gold and Bitcoin vehicles alongside the stock-market giants at the top of the ETF flow rankings.
Nearly $3.4 billion poured into the State Street Investment Management’s SPDR Gold Shares, while BlackRock Inc.’s iShares Bitcoin Trust ETF took in $1.5 billion. Both cracked the top 10 US ETFs by inflows for the week, with GLD trailing only a handful of funds including the Vanguard S&P 500 ETF. Now the two versions of the scarcity trade are moving together again, propelled by renewed anxiety over US borrowing, the dollar and efforts to contain long-term yields. Highlighting the recent advance, hedge funds’ net-long position in gold for the week ended Aug. 18 was the highest this year, according to the latest data from the Commodity Futures Trading Commission.
Gold-backed ETFs also attracted inflows of 46.7 metric tons ($6.4 billion) last week, which was their largest weekly demand in 10 months, according to the World Gold Council, with North American and Europe-listed funds leading the inflows.
In a sign of renewed momentum, investors have rushed to bet on further price gains using call options. Total call open interest on SPDR Gold Shares, the largest gold-backed ETF, has surged in recent weeks to reach the highest level since March. The large volume of outstanding options will likely amplify volatility going forward, analysts at Goldman Sachs Group Inc wrote in a note Friday, as dealers are forced to respond to prices moves by buying or selling the underlying ETF in order to hedge their exposure.
A portfolio manager at Fidelity International Ltd. has doubled his fund’s gold holdings over the past three weeks, citing increasing uncertainty over US Federal Reserve policy as a catalyst. After raising the proportion of bullion in the fund to a self-imposed limit of 5%, George Efstathopoulos said he would consider lifting this ceiling should the safe-haven status of the US dollar continue its decline. He began his recent accumulation after the investor retreat from long-dated Treasury bonds that followed the Fed’s July meeting.
The portfolio manager — who sold gold earlier this year, when the metal embarked on its biggest slide in four decades — funded his latest bullion purchases with high-yield bonds, including gilts, along with some cash. He said the underlying factors that drove gold to a record high in late January remained intact, including central bank purchases.
Elsewhere, China's net gold imports via Hong Kong in July rose about 11% from a month earlier, data showed on Tuesday, supported by an uptick in investment demand.
In December, when bullion prices sat close to where they are now, gold exchange-traded funds accounted for just 0.17% of private US financial portfolios, according to a Goldman Sachs Group Inc. analysis — six basis points lower than a peak in 2012. The bank estimated that each bout of buying that increases gold’s share of US portfolios by 0.01% would lift prices by about 1.4%.
Illustrating the market’s sensitivity to even a modest shift away from US assets, JPMorgan Chase & Co estimated in May 2025 that moving just 0.5% of foreign investors’ US asset holdings into gold — then equivalent to roughly $70 billion a year — could lift prices by about 18% annually under market conditions prevailing at the time.
MARKET COMMENTS
Just as an illustration to recent events - the difference between open interest in call options and put options on gold ETFs this week reached approximately 2.4 million contracts, the highest level since February. This gap has increased by one million contracts since Japan's intervention to support the yen three weeks ago, and the pace of growth has accelerated since the U.S. Treasury unexpectedly doubled its planned purchases of long-term government bonds last Wednesday. Today's figures are more than three times the average for 2021-2024, which is 0.8 million contracts.
Goldman analysts note that expectations of further interest rate hikes by the Federal Reserve have weakened following the July employment and inflation data. This supports inflows into speculative positions and ETFs. ️ As a result, the bank sees a "significant risk of growth" above its base forecast of $4,900/oz by the end of 2026. If current demand for options and inflows into ETFs continue, the price could rise significantly.
Goldman traders are seeing a strong influx of clients into gold: digital options with a 3-6 month term are being purchased with targets of $4,800–5,500. Positions are not yet overheated, and Chinese demand remains high. A separate surge in interest in silver is noted:** large clients are buying 3-month options with a strike price of $90/oz, anticipating a shift in retail demand from expensive gold.
Gold prices surged sharply after the U.S. Treasury announced a program to buy long-term bonds ("quasi-twist" by Bessen), but the actual breakthrough began earlier, driven by aggressive purchases from China, central banks, and ETFs. In June, China purchased over 40 tons of gold on the London over-the-counter (OTC) market, making it the second-largest monthly purchase since the beginning of 2025. This is 167% more than the 15 tons officially reported by the People's Bank of China for June.
This follows a purchase of 48 tons on the OTC market in May, which was 380% higher than the 10 tons officially reported by the central bank. Meanwhile, in July, the People's Bank of China officially added another 20 tons of gold, making it the largest monthly purchase since October 2023. Since the beginning of the year, China has officially increased its gold reserves by 60 tons, bringing the total to a record 2366 tons. ️Therefore, China purchased over 88 tons of gold on the OTC market in May and June alone, which exceeds the officially reported amount for the entire year.
Gold at $10,000 per ounce seems absurd, but only as long as we assume the market is buying the metal. In reality, it reflects an overvaluation of trust in government promises.
According to the latest available report from BofA/EPFR, gold funds received $6.3 billion in inflows last week – the highest since January. This is a broader indicator than just physically-backed ETFs. According to data from the World Gold Council, these ETFs received $3 billion in inflows in July, and their holdings increased to 4,068 tons. However, they are still below the February record of 4,176 tons.
The most interesting thing is not the inflow itself. Gold has returned to around $4,650 after falling below $4,000, even though real interest rates remain high. This means that the buyer is now hedging not only against a decline in the Fed's interest rate, but also against long-term government debt, budget deficits, sanctions, and the possibility that bonds will cease to function as a safe haven during a stock market crash.
Central banks bought 289 tons in the second quarter. In a recent survey, 89% of reserve managers expect further growth in global gold reserves, 45% expect growth in their own central bank's reserves, and 74% expect a decrease in the share of the dollar in global reserves over the next five years. Now let's calculate without alchemy. The World Gold Council estimates the global volume of financial assets at approximately $320 trillion. Private investors hold around $9 trillion in bars, coins, ETFs, and over-the-counter gold – only 3% of this pie. If the amount of investment gold and the overall size of the market do not change significantly, a price of $10,000 would increase gold's share to approximately 6-7%. A price of $15,000 would correspond to a share of around 9-10%. Forty years ago, this share was around 14%.
In other words, $10,000-$15,000 is not a baseline forecast or a magic number. This is a scenario in which gold returns from being a decorative element in a portfolio to becoming one of the main financial assets. For this to happen, several things must coincide. Long-term government bonds must cease to protect against crises because they themselves become a source of those crises. Governments must respond with financial repression, debt buybacks, or restrictions on yields. Central banks must continue to convert part of their foreign exchange reserves into physical metal. Private funds must increase their gold holdings from the current 3% to at least 6-10%.
Supply will not respond quickly. There are almost 220,000 tons of gold above ground, but new production only increases this supply by about 1.8% per year. A high price will increase the recycling of old gold and reduce some of the demand for jewelry. This is the main constraint. But a mine cannot be turned on with the press of a button, and the owner of a gold bar is not obligated to sell it just because the price has become attractive. And such a move does not require tens of trillions of dollars in liquid assets. The price is set by a marginal transaction, after which the entire existing supply is re-evaluated. We have discussed this last week - Gold has almost reached $5,600 without classic QE. Stocks have soared on the AI hype without classic QE. Financial assets do not necessarily need a printing press. They need a new buyer and a reason to believe that tomorrow the asset will be worth more than today's money.
The scenario will break down if the United States stabilizes its budget, the dollar strengthens, real interest rates remain high, and central banks and ETFs return to selling. In the second quarter, ETFs already showed how quickly demand can disappear when everyone suddenly needs dollar liquidity.
But if stocks and long-term bonds start to fall at the same time, gold will cease to be just a hedge against a crisis. It will become a hedge against the very entity that provides the hedge. Gold at $15,000 is not a story about how a bar has become more useful. It is a story about how much cheaper promises have become, for which it is being sold.
Gold can potentially replace the safe haven function. However, it's almost impossible to use gold bars to pay for oil, settle dollar-denominated debts, or conduct currency interventions. The trend is clear. Over the past four years, central banks have been buying an average of around 1,000 tons of gold per year, compared to 500 tons in the previous decade. In a recent survey, 74% of reserve managers expect a decline in the dollar's share in global reserves over the next five years.
Researchers at the Federal Reserve have already noted that the unique value of access to dollar liquidity remains. However, the previous advantage of holding long-term U.S. Treasury bonds has significantly diminished, and even after hedging against currency risk, it has become negative. In other words, the world still needs U.S. currency, but it is becoming increasingly reluctant to hold U.S. debt.
Trump is taking advantage of this temporary window. As long as the dollar remains the currency of trade, credit, and settlement, the White House and Congress continue to run large budget deficits. If a country issues debt faster than the world wants to accumulate it, yields rise. If the Federal Reserve tries to hold down yields, the currency is devalued. If the dollar weakens, imported inflation returns home. This privilege does not eliminate the need for accounting; it simply allows the bill to be passed on to others for a longer period. We have already written that the U.S. does not have a problem repaying its debt; the problem is repaying it in dollars of the same value.
Tariffs, sanctions, energy pressure, and attempts to attract capital and factories to the U.S. are all part of a single strategy. If the benefits of the reserve currency status are gradually diminishing, it is necessary to ensure that competitors weaken faster. The U.S. may lose some of its absolute advantage while maintaining its relative advantage.
Therefore, countries are acting cautiously. They do not want to quarrel with Washington and cannot abandon the dollar while their trade, banks, and exchange rates depend on dollar liquidity. Instead of a dramatic exit, they are quietly diversifying their reserves. They keep some dollars for transactions and emergencies, while buying gold for the future.
Trump is not so much protecting the reserve status as taking advantage of it before it disappears. The dollar will likely remain the language of global trade for a long time. The question is whether U.S. Treasury bonds will continue to serve as its safe haven.
Meantime, problems are not disappeared showing that this window is narrowing. The debt has officially exceeded $40 trillion. $10 trillion needs to be refinanced annually, and another approximately $2 trillion needs to be borrowed to cover the deficit. The population has practically stopped generating savings: the savings rate is at its lowest level since the 2000s (0.65 trillion per year and 2.7%), while real cash savings are close to zero. Foreigners are also not particularly eager to buy long-term debt. At the same time, of the $2.43 trillion increase in debt over the past year, only $0.57 trillion is due to an increase in debt with a maturity of more than 5 years - less than 1/4. No matter how much Trump and Bessent talk about how they will reduce debt through economic growth, the chances of this happening are minimal.
If Bessent fails to push the yield on 30-year bonds below 5%, as they say, it will trigger a dollar slump and a shift towards short positions in risk, leverage in areas such as large AI companies and private lending [i.e. Shadow Banking], and cyclical assets such as the financial sector, ahead of the midterm elections. Risk is accumulating day by day. In the short term, a crash always looks like an accident. In the long term, it is almost inevitable.
The proportion of non-accrual loans among the 20 largest publicly traded BDCs (Business Development Companies) has risen to a median of 2.8% – the highest level since 2017. Analysts at Fitch Ratings warned last week that the number of private credit defaults reached a new record in July. David Golub, co-CEO of the private investment firm Golub Capital, told investors earlier this month about a "rise in credit stress," as the industry faces an increase in defaults and troubled loans.
