Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

 

Nations have scoured the earth for gold in order to control others only to find that gold has controlled their own fate. The gold at the end of the rainbow is ultimate happiness, but the gold at the bottom of the mine emerges from hell. Gold has inspired some of humanity's greatest achievements and provoked some of its worst crimes. When we use gold to symbolize eternity, it elevates people to greater dignity—royalty, religion, formality; when gold is regarded as life everlasting, it drives people to death—Peter L. Bernstein 

In this issue

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

I. The Muted Signal

II. Two Gold Markets

III. The Clearing Infrastructure

IV. When Logistics Stress Becomes Financial Stress

V. The Collateral Squeeze

VI. The Dollar as Lightning Rod

VII. Fragmentation, Not Failure

VIII. What the Quiet Is Actually Saying

VIIIA. Post Script: "There is No Haven" 

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I) 

Oil is surging, the dollar is rising—and gold isn’t responding. The explanation lies in liquidity stress, collateral dynamics, and the plumbing of the global bullion system.

I. The Muted Signal 

Long regarded as a safe haven, gold is expected to shine in times of crisis—particularly amid geopolitical shocks such as the escalating tensions surrounding the U.S.–Israel–Iran conflict.

Yet as instability deepens in the Middle East, a curious divergence has emerged. Oil prices have surged, and the U.S. dollar has strengthened, but gold has remained conspicuously subdued. 

For many observers, this raises an uncomfortable question: has gold lost its safe-haven status? 

The answer is almost certainly no. What we are witnessing instead is a familiar—but often misunderstood—dynamic in times of financial stress. Gold does not operate within a single, unified market responding to a single force. Rather, it exists at the intersection of multiple systems—monetary, financial, and physical—each reacting differently under pressure. 

To understand gold’s apparent silence today, one must move beyond the simplistic safe-haven narrative and examine the underlying mechanics of how crises actually unfold. 

II. Two Gold Markets 

Gold is not a single market. It is two markets operating simultaneously. 

The financial layer consists of futures traded on COMEX, forward contracts cleared through the London bullion system, and gold ETFs. Prices here move primarily in response to macro variables: the dollar, real interest rates, and shifts in global risk sentiment.

Figure 1

The resurgence in global gold ETF flows early in the year highlights the responsiveness of this financial layer to momentum, liquidity, and broader macroeconomic signals. (Figure 1, upper chart)

Unlike physical markets, positioning here can expand rapidly and at scale, without the need for underlying physical settlement, largely unconstrained by the frictions of moving and storing metal. Yet this flexibility stands in contrast to the more constrained and regionally fragmented nature of physical gold markets—a divergence that becomes evident when comparing pricing across Shanghai and London. 

The physical layer operates very differently. It consists of doré bars produced by mines, bullion refined in Switzerland, jewelry demand across Asia, and steady accumulation by central banks. This layer depends on transportation networks, refinery throughput, vault logistics, and customs clearance. 

Even at the level of demand, gold is not unified. As shown by the World Gold Council, demand is structurally divided across investment, jewelry, and industrial uses—each driven by distinct economic forces and time horizons. (Figure 1, lower graph) 

Figure 2

Rather than moving in lockstep, Shanghai and LBMA pricing in early 2026 oscillated between premium and discount. This back-and-forth reflects a market where arbitrage is active but not seamless—revealing, in practice, the dual structure of gold as both a financial asset and a physical commodity. (Figure 2) 

Under normal conditions, arbitrage keeps these two layers aligned. When physical premiums emerge in Asia or the Middle East, traders move gold to capture the spread, transmitting local signals back into global benchmarks. But when logistics slow or uncertainty rises, that alignment weakens. Physical markets may tighten even as financial benchmarks remain anchored to macro forces. 

III. The Clearing Infrastructure 

The global bullion system relies on a relatively concentrated infrastructure. 

London dominates price discovery through the clearing system associated with the London bullion market, while Switzerland refines a large share of the world’s doré into internationally tradable bars. Logistics hubs in the Gulf, in turn, connect African supply with major consumer markets in Asia. 

This network typically functions smoothly because gold flows continuously between these nodes. 

Figure 3

In effect, the bullion system operates as a hub-and-spoke network: Switzerland serves as a dominant refining center processing a substantial share of global supply, while London anchors pricing and clearing. This concentration enhances efficiency, but also creates critical points of vulnerability. 

When transport routes are disrupted or regional stability deteriorates, those vulnerabilities become visible. 

Geopolitical tensions in the Middle East have begun to complicate these flows. Even partial restrictions on cargo routes or airspace can slow the movement of metal between mining regions, refineries, and end markets. 

In a system where arbitrage depends on the physical movement of bullion, even modest friction does not simply delay flows—it weakens the transmission of price signals between markets. 

IV. When Logistics Stress Becomes Financial Stress 

Disruptions in the physical gold market rarely remain isolated. 

When the movement of metal becomes uncertain, arbitrage trades that normally link markets turn riskier. Traders who once relied on seamless transfer between regions suddenly face basis risk, as the cost and timing of moving bullion becomes unpredictable. 

Clearinghouses respond in the only way they can: by demanding additional collateral. Margin calls follow. 

To meet these calls, participants often liquidate the most liquid assets available—typically dollar-denominated instruments. 

What begins as a logistical friction in the physical market thus propagates into the financial system, triggering a collateral-driven tightening that can ripple across broader markets. 

Disruptions in the physical market do not remain isolated. 

V. The Collateral Squeeze 

Gold occupies a unique position in global finance. It is simultaneously a commodity, a reserve asset, and a form of high-quality collateral used across derivatives, repo agreements, and bullion banking. During periods of market stress, this collateral role can temporarily dominate its safe-haven function. 

Three mechanisms typically drive this dynamic: 

• Forced liquidation. Institutions facing margin calls sell the most liquid assets available. Gold is often among the first assets sold—not because confidence in it has vanished, but because it can quickly raise cash. 
• Haircut widening. When volatility rises, clearinghouses increase the discount applied to gold posted as collateral. Positions that were previously adequately margined can suddenly require additional coverage, forcing further liquidation 
• Tightening in the gold lending market. Bullion banks regularly lend gold through swaps and leases. Under stress, these channels can constrict as counterparties become more cautious. 

A current illustration of these dynamics comes from Dubai. Recent reports show that shipments of gold have been delayed due to regional logistical bottlenecks, rising insurance premiums, and higher financing costs amid Middle East tensions. 

Physical gold that is stuck or delayed can be sold locally—often at a discount—to meet liquidity needs even while global confidence in gold remains intact. This episode demonstrates how frictions in the physical market can amplify financial pressures, turning bullion into a source of immediate cash rather than a stable safe-haven. 

These collateral-driven dynamics are not unprecedented. Similar patterns emerged during the global financial crisis, the European sovereign debt crisis, and the market dislocations of 2020. In each case, gold initially weakened during the liquidity phase of the shock before later reasserting its safe-haven role. 

Financial instability theorist Hyman Minsky argued that crises often begin with a scramble for liquidity, forcing investors to sell even high-quality assets to meet obligations. Gold’s early weakness during crises—including today’s Dubai example—fits squarely within this pattern. 

VI. The Dollar as Lightning Rod 

A common explanation for gold’s weakness is that investors fled into U.S. Treasuries, strengthening the dollar.

Figure 4

The broader market picture suggests something different. Bond markets have not been rallying strongly. To the contrary, yields across many sovereign markets have risen as investors reassess inflation risk and fiscal sustainability following the oil shock. (Figure 4, upper image) 

The dollar’s strength reflects another mechanism. The global financial system is largely funded in dollars. (Figure 4, lower diagram) 

When volatility rises and leveraged positions unwind, institutions need dollars to meet margin calls and settle obligations. 

Capital flows into the dollar not necessarily because it is safe, but because it is required. The dollar therefore acts less like a haven and more like a lightning rod for global liquidity stress. 

Recent market behavior reinforces this dynamic. Episodes of rising dollar demand have coincided with sharp declines in gold prices and tightening cross-currency funding conditions—an indication that global markets are paying a premium to access dollars. 

These moves suggest that what appears to be gold weakness is in fact a symptom of a broader liquidity squeeze, in which institutions sell liquid assets to obtain dollars needed to meet obligations. 

Figure 5 

Historical patterns support this interpretation. Gold has often declined during the initial phase of major financial stress events, including the global financial crisis and the pandemic shock, before rallying as liquidity conditions stabilize. (Figure 5) 

Even gold can be temporarily liquidated in this environment, illustrating how financial liquidity dynamics can dominate its intrinsic safe-haven appeal. 

VII. Fragmentation, Not Failure

Figure 6 

Another structural trend may be shaping gold’s muted response. 

Central banks continue to accumulate gold, extending a multi-year pattern of reserve diversification, although the pace of purchases has moderated in recent months. (Figure 6) 

This suggests that while the strategic bid for gold remains intact, accumulation is becoming more measured—less urgent, more sensitive to price and liquidity conditions. 

At the same time, new trading corridors have gradually developed outside the traditional Western clearing system. Asian markets frequently trade at premiums to London, while regional demand and policy dynamics increasingly influence the movement and pricing of physical gold. 

Taken together, these developments point to a gradual shift toward a more multipolar bullion market. Disruptions to established logistics routes may accelerate this transition, encouraging alternative trading channels and settlement infrastructure. 

This signal that the architecture of the gold market is evolving—away from a single, tightly integrated system toward a more fragmented landscape, where multiple hubs and pathways shape pricing, flows, and accumulation decisions. 

While the trajectory of central bank gold policy remains uncertain under current conditions, a stronger dollar and rising fiscal demands—whether from defense spending or domestic support—may incentivize some central banks to mobilize gold reserves for liquidity. 

Yet these same conditions—intensifying geopolitical fragmentation and rising monetary risk—may reinforce the opposite impulse: to accumulate gold as insurance, as a hedge against currency volatility, or as part of a broader strategy of reserve diversification away from the dollar. 

This tension reflects a deeper uncertainty. Whether central banks become net sources of liquidity or continue as structural buyers will depend on how the current crisis evolves—whether it remains a liquidity event or transitions into a broader monetary regime shift. 

VIII. What the Quiet Is Actually Saying 

Gold’s muted reaction to current geopolitical tensions is not a failure of its safe-haven role. It is a signal—just not the one most investors are looking for. 

What we are observing is the early phase of a crisis in which liquidity demand, dollar funding pressures, and market microstructure dominate price formation. In this phase, assets are not repriced based on long-term risk, but on immediate funding needs. 

History suggests that these phases do not persist indefinitely. Energy shocks, financial stress, and monetary instability tend to unfold sequentially, not simultaneously. 

If current tensions deepen into broader economic and financial disruption, the forces suppressing gold today may reverse. The same mechanisms driving liquidity demand—margin calls, collateral tightening, and dollar scarcity—often give way to monetary easing and balance sheet expansion. 

It is typically at that point—not during the initial scramble for liquidity—that gold reasserts its role. 

The signal is not absent. It is delayed. 

Gold is not failing as a safe haven—it is being temporarily subordinated to the needs of a dollar-based financial system under stress 

VIIIA. Post Script: "There is No Haven" 

Recent market behavior reinforces this interpretation. In the past week, the dollar, gold, U.S. Treasuries, bitcoin, and oil have all weakened simultaneously. 

In normal circumstances, at least one of these assets would function as a refuge. When all of them decline together, the signal is different: markets are not seeking safety—they are seeking liquidity. 

In other words, the system is still in the scramble-for-cash phase of adjustment or at times like this, markets behave as if no haven exists at all.

 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series)

 

In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the 19th century, more and more governments deliberately turned toward the demonetization of silver. In all these cases what is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government—Ludwig von Mises 

This post is the second in a three-part series 

In this Issue 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order?

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise

II. A Brief Recap on Gold’s Role as Money

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard)

IV. The Age of Fiat Money and the Explosion of Debt

V. Central Banks: The Marginal Price Setters of Gold

VI. Is a U.S. Gold Audit Fueling Record Prices? 

Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? 

The second part of our series examines the foundation of the global economy—the 54-year-old U.S. dollar standard—and its deep connection to gold’s historic rally. 

I. Global Central Banks Have Driven Gold’s Record-Breaking Rise 

Global central banks have played a pivotal role in driving gold’s record-breaking rise, reflecting deeper tensions in the global financial system. 

Since the Great Financial Crisis (GFC) of 2008, central banks—predominantly those in emerging markets—have significantly increased their gold reserves, pushing levels back to those last seen in 1975, a period just after the U.S. government severed the dollar’s link to gold on August 15, 1971, in what became known as the Nixon Shock. 

This milestone reminds us that the U.S. dollar standard, backed by the Federal Reserve, will mark its 54th anniversary by August 2025.

Figure 1

The accumulation of gold by central banks, particularly in the BRICS nations, reflects a strategic move to diversify away from dollar-dominated reserves, a trend that has intensified amid trade wars, sanctions, and the weaponization of finance, as seen in the freezing of Russian assets following the 2022 Ukraine invasion.  (Figure 1, upper window)

The fact that emerging markets, particularly members of the BRICS bloc, have led this accumulation—India, China, and war-weary Russia have notably increased their gold reserves, though they still lag behind advanced economies—reveals a growing fracture in the relationship between emerging and advanced economies.  (Figure 1, lower graph and Figure 2, upper image)  

Figure 2

Additionally, their significant underweighting in gold reserves suggests that BRIC and other emerging market central banks may be in the early stages of a structural shift. If their goal is to reduce reliance on the U.S. dollar and close the gap with advanced economies, the pace and scale of their gold accumulation could accelerate (Figure 2, lower chart)

Figure 3

As evidence, China’s central bank, the People’s Bank of China (PBOC), continued its gold stockpiling for a fourth consecutive month in February 2025. (Figure 3, upper diagram)

Furthermore, last February, the Chinese government encouraged domestic insurance companies to invest in gold, signaling a broader commitment to gold as a financial hedge. 

This divergence underscores a deepening skepticism toward the U.S.-led financial system, as emerging markets seek to hedge against geopolitical and economic uncertainties by strengthening their gold reserves 

In essence, gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, fissures that are being expressed through escalating geopolitical and geoeconomic stress. 

II. A Brief Recap on Gold’s Role as Money 

To understand gold’s evolving role, a brief historical summary is necessary. 

Alongside silver, gold has spontaneously emerged and functioned as money for thousands of years. Its finest moment as a monetary standard came during the classical gold standard (1815–1914), a decentralized, laissez-faire regime in Europe that facilitated global trade and economic stability. 

As the great dean of the Austrian School of Economics, Murray Rothbard, explained, "It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government." (Rothbard, 1963) 

However, this system was not destined to endure. The rise of the welfare and warfare state, supported by the emergence of central banks, led to the abandonment of the classical gold standard. 

As Mises Institute’s Ryan McMaken elaborated, "This system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: ‘[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.’" (McMaken, March 2025) 

The uniformity, homogeneity, and growing dependency on the state in managing monetary affairs ultimately contributed to the classical gold standard’s demise. 

III. The Fall of Gold Convertibility: The Transition to Fiat Money (US Dollar Standard) 

World War I forced governments to abandon gold convertibility, leading to the adoption of the Gold Exchange Standard—where only a select few currencies, such as the British pound (until 1931) and the U.S. dollar (until 1933), remained convertible into gold. 

Later, the Bretton Woods System attempted to reinstate a form of gold backing by pegging global currencies to the U.S. dollar, which in turn was tied to gold at $35 per ounce. 

However, rising U.S. inflation, fueled by fiscal spending on the Vietnam War and social welfare programs, combined with the Triffin dilemma, led to a widening Balance of Payments (BoP) deficit. Foreign-held U.S. dollars exceeded U.S. gold reserves, threatening the system’s stability. 

As economic historian Michael Bordo explained: "Robert Triffin (1960) captured the problems in his famous dilemma. Because the Bretton Woods parities, which were declared in the 1940s, had undervalued the price of gold, gold production would be insufficient to provide the resources to finance the growth of global trade. The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin, when the tipping point occurred, the US monetary authorities would tighten monetary policy, leading to global deflationary pressure." (Bordo, 2017)

Bretton Woods required a permanently loose monetary policy, which ultimately led to a mismatch between U.S. gold reserves and foreign held dollar liabilities. 

To prevent a run on U.S. gold reserves, President Richard Nixon formally ended the dollar’s convertibility into gold on August 15, 1971, ushering in a fiat money system based on floating exchange rates anchored to the U.S. dollar. 

IV. The Age of Fiat Money and the Explosion of Debt 

With the shackles of gold removed, central banks gained full control over monetary policy, leading to unprecedented levels of inflation and political spending. Governments expanded their fiscal policies to fund not only the Welfare and Warfare State, but also the Administrative/Bureaucratic State, Surveillance State, National Security State, Deep State, Wall Street Crony State, and more. 

The most obvious consequence of this system has been the historic explosion of global debt. The OECD has warned that government and bond market debt levels are at record highs, posing a serious threat to economic stability. (Figure 3, lower chart) 

V. Central Banks: The Marginal Price Setters of Gold 

Ironically, in this 54-year-old fiat system, so far, it is politically driven, non-profit central banks—rather than market forces—that have become the marginal price setters for gold. 

Unlike traditional investors, central banks DON’T buy gold for profit, but for political and economic security reasons. 

The World Gold Council’s 2024 survey provides insight into why central banks continue to accumulate gold: "The survey also highlights the top reasons for central banks to hold gold, among which safety seems to be a primary motivation. Respondents indicated that its role as a long-term store of value/inflation hedge, performance during times of crisis, effectiveness as a portfolio diversifier, and lack of default risk remain key to gold’s allure." (WGC, 2024) 

This strategic accumulation reflects a broader trend of central banks seeking to insulate their economies from the vulnerabilities of the fiat system, particularly in an era of heightened geopolitical risks and dollar weaponization.

Figure 4 

The Bangko Sentral ng Pilipinas (BSP) has historically shared this view. (Figure 4, upper graph) 

In a 2008 London Bullion Management Association (LBMA) paper, a BSP representative outlined gold’s importance in Philippine foreign reserves—a stance that remains reflected in BSP infographics today. 

Alas, in 2024, following criticism for being the largest central bank gold seller, BSP reversed its stance. Once describing gold reserves as "insurance and safety," it now dismisses gold as a "dead asset"—stating that: "Gold prices can be volatile, earns little interest, and has storage costs, so central banks don’t want to hold too much." 

This shift in narrative conveniently justified BSP’s recent gold liquidations. 

Yet, as previously noted, history suggests that BSP gold sales often precede peso devaluations—a warning sign for the Philippine currency. (Figure 4, lower window)

VI. Is the Propose U.S. Gold Audit Help Fueling Record Prices? 

Finally, could the Trump-Musk push to audit U.S. gold reserves at Fort Knox be another factor behind gold’s rally? 

There has long been speculation that U.S. Treasury gold reserves, potentially including gold stored for foreign nations, have been leased out to suppress prices.

Figure 5

Notably, Comex gold and silver holdings have spiked since these audit discussions began. Gold lease rates rocketed to the highest level in decades last January. (Figure 5, top and bottom charts) 

With geopolitical uncertainty rising, central bank gold buying accelerating, and doubts growing over fiat stability, gold’s record-breaking ascent may be far from over. 

Yet, it’s important to remember that no trend goes in a straight line.

___

References 

Murray N. Rothbard, 1. Phase I: The Classical Gold Standard, 1815-1914, What Has Government Done to Our Money? Mises.org 

Ryan McMaken, The Rise of the State and the End of Private Money March 25,2025, Mises.org 

Michael Bordo The operation and demise of the Bretton Woods system: 1958 to 1971 CEPR, Vox EU, April 23, 2017 cepr.org 

World Gold Council, Gold Demand Trends Q2 2024, July 30,2024, gold.org

The Historic Gold and Bond Bull-Market Tango

Under the Gold Standard, or any other metallic standard, the value of money is not really derived from gold. The fact is, that the necessity of redeeming the money they issue in gold, places upon the issuers a discipline which forces them to control the quantity of money in an appropriate manner; I think it is quite as legitimate to say that under a gold standard it is the demand of gold for monetary purposes which determines that value of gold, as the common belief that the value which gold has in other uses determines the value of money. The gold standard is the only method we have yet found to place a discipline on government, and government will behave reasonably only if it is forced to do so--Friedrich A. Hayek 

The Historic Gold and Bond Bull-Market Tango 

Remember my outlook on Gold last February? 

What you are about to see is a defining monumental process in financial history!  

Lo and Behold, Gold’s phenomenal rise against central banking’s Fiat Money standard! 

Aside from all other (fiat) currencies, gold prices broke to record highs this week against the last holdover, the USD.  

Oh, Gold!!!! February 23, 2020  

 

From the US perspective, record USD gold prices have been attained as USTs hit record low yields amidst a flattening curve. Furthermore, gold prices have surged along with a resurgent buildup of global negative-yielding bonds, even as personal savings rate hit record highs.  

There are those who want to excoriate Nobel Laureate Milton Friedman for saying that inflation was everywhere and always a monetary phenomenon. But he also proposed the Permanent Income Hypothesis. The Permanent Income Hypothesis, according to the Wikipedia, supposes that a person's consumption at a point in time is determined not just by their current income but also by their expected income in future years—their "permanent income". In its simplest form, the hypothesis states that changes in permanent income, rather than changes in temporary income, are what drive the changes in a consumer's consumption patterns. Its predictions of consumption smoothing, where people spread out transitory changes in income over time, depart from the traditional Keynesian emphasis on the marginal propensity to consume. It has had a profound effect on the study of consumer behavior, and provides an explanation for some of the failures of Keynesian demand management techniques. 

Though the monetary mechanism is necessary for inflation to occur, it is insufficient. Other real factors are material to its existence. 

The surge in personal savings appears to reinforce Friedman’s PIH theory.   

The deflationary impact of a recession must be remedied by an increase in savings.  

Wrote the dean of the Austrian school Murray N. Rothbard*,  

Furthermore, deflation will hasten adjustment in yet another way: for the accounting error of inflation is here reversed, and businessmen will think their losses are more, and profits less, than they really are. Hence, they will save more than they would have with correct accounting, and the increased saving will speed adjustment by supplying some of the needed deficiency of savings. 

*C. Secondary Developments of the Business Cycle; Man, Economy, and State, with Power and Market 

Even in the Philippines, the same process is in motion. This excerpt showcases how businesses are likely to react to the disruptions caused by work stoppage policies to contain the virus. 

From Philstar (August 2): Enterprises hit by the pandemic may have to pause operations temporarily once their cash flow turns negative and consider other opportunities in agriculture and digital space, Presidential Adviser on Entrepreneurship and Go Negosyo founder Joey Concepcion said. “My advice to many of our MSMEs (micro, small and medium enterprises) and I always share this with them: You have to have a plan. You have to remain cash flow positive and if you turn cash flow negative, at a certain point in time, don’t wait until it depletes your entire working capital or even your family’s savings.” “Close the business for the time being because it’s not going to be worth wasting all your family’s savings and it will create more problems for you. That’s my advice to many of our entrepreneurs,” he said in an interview on the The Chiefs aired on One News.” This counsel goes against the mainstream ivory tower based ludicrous prescription that one should take advantage of low rates and borrow to spend. 

Furthermore, based on the analysis of sectoral balances, fiscal deficit equates to net private saving or private sector surplus. So the financing of the US record deficit would translate to massive increases in domestic and or foreign private savings. 

That buildup of savings appears to be consistent with the recent spike in deficits. 

However, the US isn’t the only nation experiencing unprecedented deficits. Most of the world have ramped up public spending such that McKinsey and the IMF expect the global deficit to reach a historic $11 trillion in 2020! That’s about 12% of the $90 trillion global GDP. 

So if sopping up of savings wouldn’t be sufficient, global central banks are likely to be filling in the vacuum through debt monetization. Global debt hit a record of $258 trillion or 331% of the Global GDP in the 1Q. But debt issuance picked up speed in the 2Q, according to the Reuters, "Overall gross debt issuance hit an “eye-watering” record of $12.5 trillion in the second quarter, compared with a quarterly average of $5.5 trillion in 2019, the IIF said. It noted that 60% of those issues came from governments". 

Nevertheless, the current amount of money printing may be inadequate to offset structural deflationary forces embedded in the system, such as excessive debt, overcapacity in several significant sectors, and zombie financing, as well as, recent policies used to constrict the spread of the pandemic.   

For instance, even after the $2.2 trillion bailout package called the Cares Act and the $3 trillion expansion of the Federal Reserve’s assets, the US GDP suffered a 9.5% YoY (32.9% quarter annualized)! But their stock markets rocketed instead. 

For a broader purview of the economic damage caused by recent policies to contain Covid-19:  Singapore suffered a 41.2% contraction quarter on quarter and 12.6% year on year. Hong Kong shrank by 9% YoY. The Euro-zone area declined by 12.1% YoY while the US suffered a 9.5% YoY (32.9% quarter annualized) even after the $2.2 trillion Cares Act and the $3 trillion expansion of the Federal Reserve’s assets. China escaped a recession by posting a positive 3.2%. 

As an aside, the Philippines will be reporting its 2Q GDP on August 6th. Based on the PSA’s data on Gross Regional Domestic Product, the NCR and CALABARZON area contributes about 52% of the total statistical economy (2018).  Along with the rest of Luzon, during the ECQ or MECQ period, economic activities were mostly suspended within these areas.  And strict quarantine policies were also implemented in parts of Visaya and the Mindanao region.  If only 30% of the capacity of the CALABARZON and NCR had been in operations in 2Q, not counting other parts of the nation, how much loss of output will these translate to?    

Lastly, inflation is not set on the stone by Federal Reserve asset purchases or QE as exhibited by the immediate post World War II era. Though monetary actions matter, again, many other factors will determine inflation’s appearance.   

 

As the Eurodollar wiz Alhambra Partner’s Jeffrey Snider wrote of the Fed’s inflationary panic episodes post-World War II:  

Like the 1947-48 bond buying episode (the Fed’s inflation panic), we’re supposed to believe that the central bank played the pivotal role in keeping the financial situation orderly, trading off that priority by risking an inflationary breakout. Bullshit. That’s the myth that has been conjured, hardly in keeping with the reality of the situation. 

Sure, the Fed monetized the bills during WWII, but so what? The depressionary conditions rampant throughout the markets and economy led the private system to easily monetize everything else, the vast majority. Even the Fed’s inflation panic in bond buying was a tiny drop in the bucket. 

Yields said so. 

Furthermore, record money supply’s transmission into street inflation represents a time-consuming complex process that will have to confront opposing forces that may offset its impact. And there will be action-reaction feedback loops that contribute to the process.   For instance, if money creation adds to the money supply, debt defaults subtract to it. 

That is, should global central banks succeed in the re-combusting of inflation, this would only happen when inflationary monetary forces overwhelm deflationary structures, which would take time. 

As I concluded last February, 

Whether street inflation surges or not, in reaction to the massive supply-side disruptions from a crucible of real adverse forces in the face of central bank actions, the escalating uncharted experiments on monetary inflation have pointed to the magnification of uncertainty on a global scale. 

The bottom line: Gold's uprising against central banking fiat currencies warn that the world is in the transition of entering the eye of the financial-economic hurricane!