Why the Philippine Peso's Strength Masks Underlying Vulnerabilities

 

If the governments devalue the currency in order to betray all creditors, you politely call this procedure 'inflation'--George Bernard Shaw 

In this issue

Why the Philippine Peso's Strength Masks Underlying Vulnerabilities

I. Philippine Peso in the Face of a Weak Dollar

II. Is the Peso’s Strength Rooted in Fundamentals? Portfolio Flows: A Mixed Picture

III. Remittances: Diminishing Returns

IV. Tourism: Geopolitical Headwinds

V. Trade Data: Structural Deficiencies Revealed

VI. Balance of Payments and Gross International Reserves: A Fragile Façade (Boosted by Borrowings)

VII. BSP’s Tightening Grip on FX Markets and the Illusion of Stability

VIII. The Speculative Role of the BSP: Other Reserve Assets

IX. Rising External Debt: A Ticking Time Bomb

X. Conclusion: Transitory Strength, Structural Fragility 

Why the Philippine Peso's Strength Masks Underlying Vulnerabilities 

A strong Philippine peso hides the cracks of FX debt, deficits, and interventions.

I. Philippine Peso in the Face of a Weak Dollar 

Figure 1

Surprisingly, the Philippine peso has outperformed its regional peers. Year-to-date, the USD-Philippine peso USDPHP has declined by 2.73% as of April 25. (Figure 1, upper window) 

Despite a generally weak dollar environment, the greenback has risen against some ASEAN currencies: it has appreciated by 4.32% against the Indonesian rupiah (IDR) according to Bloomberg data, and by 2.2% against the Vietnamese dong (VND) based on TradingEconomics data, year-to-date. 

The USDPHP’s behavior has largely mirrored the oscillations of the USD-euro $USDEUR pair and the Dollar Index $DXY, both of which have declined by -9.5% and -9% YTD, respectively. The euro commands the largest weight in the DXY basket at 57.6%, amplifying its influence over the index's performance. (Figure 1, lower image) 

II. Is the Peso’s Strength Rooted in Fundamentals? Portfolio Flows: A Mixed Picture  

Figure 2

Foreign portfolio flows have been volatile. 

The first two months of 2025 recorded a modest net inflow of USD 176.6 million, following significant outflows of USD 283.7 million in January and inflows of USD 460.34 million in February. These inflows were mainly directed towards government securities (USD 366 million), while the Philippine Stock Exchange (PSE) suffered USD 189 million in outflows. (Figure 2 topmost graph) 

In 2024, Philippine capital markets saw foreign portfolio inflows of USD 2.1 billion—the largest since 2013—suggesting a temporary vote of confidence, albeit in a risk-on environment favoring emerging markets more broadly. 

Meanwhile, the Bangko Sentral ng Pilipinas (BSP) reported that foreign direct investment (FDI) flows fell 20% year-on-year to USD 731 million in January 2025 from USD 914 million the year prior. (Figure 2, middle chart) 

Still, 71% of January’s FDI consisted of debt inflows, rather than equity investments. 

Ironically, despite the administration's aggressive international junkets (2022-2024) aimed at wooing investors through geopolitical alliances, these efforts have borne little fruit. 

What happened? 

As previously noted, an overvalued peso—maintained by a de facto USDPHP soft peg—along with high "hurdle rates" stemming from bureaucratic red tape and regulatory barriers, and the implicit consequences of "trickle-down" easy money policies benefiting the government and their elites (i.e., crony capitalism), have collectively undermined Philippine competitiveness. 

III. Remittances: Diminishing Returns 

Overseas Filipino Worker (OFW) remittance flows continue to grow, but at a marginal and slowing pace. Personal remittances rose 2.6% in February, with cumulative year-to-date growth at 2.7%. (Figure 2, lowest visual) 

However, the long-term trend in remittance growth has been declining since its 2013 peak—a period that coincided with the secular bottoming of the USDPHP. 

This trend reflects the diminishing marginal impact of remittances on the peso’s valuation. 

In short, remittances are becoming less material in influencing the peso’s foreign exchange rate. 

A more sustainable strategy would be to foster structurally inclusive economic growth—creating more high-quality domestic jobs and raising incomes—to reduce the country’s dependence on labor exportation and mitigate brain drain. 

Sadly, the slowdown in remittance growth does not point toward such an outcome. 

IV. Tourism: Geopolitical Headwinds

Figure 3 

The Philippine tourism sector's recovery may have stumbled. 

Foreign tourist arrivals fell by 2.42% in Q1 2025, while total arrivals—including overseas Filipino visitors—dropped by 0.51%. This was largely driven by a staggering 28.8% collapse in Chinese tourist arrivals in March and a 33.7% year-on-year plunge in Q1. This slump mirrors the escalating geopolitical tensions between the Philippines and China, particularly as Manila increasingly aligns itself with U.S. strategic interests. (Figure 3, upper diagram) 

Interestingly, American tourist arrivals also fell by 0.7% in March, although they rose by 7.9% for Q1 overall. Nonetheless, the growth in American tourists has hardly offset the sharp loss of Chinese visitors. (Figure 3, lower chart) 

In effect, a ‘war economy’ reduces the Philippines’ attractiveness as a tourism and investment destination. 

V. Trade Data: Structural Deficiencies Revealed

Figure 4

The Philippines' trade deficit narrowed by 11.44% to USD 3.16 billion in February, owing to a 1.8% contraction in imports and a muted 3.94% increase in exports, year-on-year. (Figure 4, upper graph)

While many mainstream talking heads argue that tariff liberalization will eventually benefit the Philippines, external trade figures tell a different story—one marred by structural weaknesses: high energy costs, a persistent credit financed savings-investment gap (a byproduct of trickle-down policies), the USDPHP peg, human capital limitations, economic centralization, regulatory hurdles and more.

Since 2013, total external trade (imports + exports) has grown at a CAGR of 4.84%—driven by imports growing at 5.95%, compared to exports at only 3.42%. Adjusted for currency movement (with the USDPHP CAGR at 3.01%), this yields a real export CAGR of just 0.41% versus 2.85% for imports, implying a real external trade CAGR of only 1.77%. (Figure 4 lower image)

While rising imports may superficially suggest robust consumption, a deeper question emerges: Is consumption fueled by genuine productivity gains—or by unsustainable credit expansion?

Ultimately, the data show that import-driven consumption has widened the trade deficit, and that local manufacturing remains largely uncompetitive relative to regional peers.

Against this backdrop, how realistic is it to expect that Trump's proposed tariffs will magically turn the Philippines into an export hub?

VI. Balance of Payments and Gross International Reserves: A Fragile Façade (Boosted by Borrowings)

Figure 5

The BSP reported a Balance of Payments (BoP) deficit of USD 2 billion for March 2025, following a staggering USD 4.1 billion deficit in January—an 11-year high—and a temporary surplus of USD 3.1 billion in February. The Q1 2025 BoP deficit stood at USD 2.96 billion. (Figure 5, upper window)

The BSP attributed these outflows to "drawdowns on reserves to meet external debt obligations" and to fund foreign exchange operations—justifications previously offered for January’s record deficit.

Meanwhile, February’s surplus largely stemmed from net foreign currency deposits by the National Government, sourced from proceeds of ROP Global Bond issuances and income from BSP’s foreign investments—in other words, from external borrowings.

Notably, the BSP has admitted that the year-to-date BoP deficit mainly reflects the widening goods trade deficit. Either this conflicts with PSA trade data showing a narrowing February deficit, or it hints at a possible sharp deterioration in March's trade balance.

Regardless, the BoP reports clearly indicate heavy BSP intervention in the FX market, even though the USDPHP remains well below the 59-level psychological ceiling.

Consequently, the BSP’s gross international reserves (GIR) dropped from USD 107.4 billion in February to USD 106.7 billion in March—a USD 725 million decline. (Figure 5, lower diagram)

Importantly, much of the GIR’s support comes from the government’s external borrowings deposited with the BSP. Thus, the GIR has been padded up artificially.

Figure 6

Even more striking: gold’s record high prices have prevented a steeper GIR decline, despite the BSP selling small amounts of gold in February.  

Gold's share of GIR slipped marginally from 11.4% in February to 11.22% in March. (Figure 6, upper pane)

Had it not been for ATH (all-time high) gold prices, the GIR would have deteriorated more significantly. 

As previously explained, as with the 2020 episode, sharply falling gold inventories preceded the devaluation of the peso. (Figure 6, lower chart) 

Outside of gold, a large share of GIR now constitutes "borrowed reserves"—a growing vulnerability tied directly to the BSP’s soft peg strategy for the USDPHP. 

This suggests that the recent GIR stability could be masking underlying vulnerabilities.

VII. BSP’s Tightening Grip on FX Markets and the Illusion of Stability 

It is therefore almost amusing to encounter this news item, based on the BSP’s publication: 

Inquirer.net, April 24: "The Bangko Sentral ng Pilipinas (BSP) tightened regulations on foreign exchange (FX) derivatives involving the Philippine peso to ensure these are not used for currency speculation. Circular No. 1212, signed by Governor Eli Remolona Jr., mandates that banks authorized to transact in non-deliverable FX derivatives must ensure these are used for legitimate economic purposes." 

But who are the likely participants in FX swaps, non-deliverable forwards, and FX derivatives?

Not me. Not the general public. 

Given that PSE participation is only around 1% of the total population (as of 2023), the obvious answer is: banks and their elite clientele—the BSP’s own cartel members. 

Thus, what is the real message behind this announcement? 

First, banks and their elite clients may have been positioning against the peso, in ways inconsistent with BSP policy—prompting the BSP to tighten currency controls. 

Second, the BSP wants to show the public it is taking action, even as real risks accumulate. 

Third, something is amiss if the BSP feels compelled to impose tighter controls even with the USDPHP hovering at 56—well away from their upper band limit. 

Ultimately, who is truly engaged in currency speculation here? 

VIII. The Speculative Role of the BSP: Other Reserve Assets

Figure 7

Since 2018, the BSP has increasingly used Other Reserve Assets (ORA) to manage its GIR. (Figure 7) 

According to IMF IRFCL guidelines, ORA includes:

-Net, marked-to-market value of financial derivatives (forwards, futures, swaps, options)

-Short-term foreign currency loans

-Long-term loans to IMF trust accounts

-Other liquid foreign currency financial assets

-Repo assets 

The BSP’s ORA surged by 210.3% in February, lifting its share of GIR to 9.18%. Yet, even this rise was overshadowed by gold's role in preserving GIR totals. 

In truth, the BSP itself is a speculator—aggressively managing USDPHP levels against market forces. 

In pursuing short-term stability, it risks building imbalances that will eventually unwind with greater force. 

This has been evident in the widening BoP deficit, the rising share of "borrowed reserves," and the sustained gold sales. 

IX. Rising External Debt: A Ticking Time Bomb

Figure 8

Perhaps most revealing is this BSP announcement: 

BSP, April 25, 2025: "The Monetary Board approved USD 6.29 billion worth of proposed public sector foreign borrowings in Q1 2025, up by 118.91% from USD 2.87 billion during the same period last year." (bold mine) [figure 8, upper graph] 

Whatever the justification—whether for infrastructure, green (climate), defense, or welfare or others—debt is debt. 

Even though the BSP paid down nearly half its obligations (posting a Q1 BoP deficit of USD 2.96 billion), the residual balance should add to the swelling external debt stock. (Figure 8, lower chart) 

Recall that as of Q4 2024, government debt already accounted for 58% of total external debt. Banks and non-finance institutions are likely to add to this pile. 

Higher public debt implies higher future debt servicing costs, crowding out resources from productive investments, draining savings, increasing leverage, and deepening the Philippines’ dependence on foreign financing. 

X. Conclusion: Transitory Strength, Structural Fragility 

The Philippine peso’s strength in 2025, buoyed by a weak U.S. dollar, masks underlying vulnerabilities. Structural issues—overvalued currency, uncompetitive manufacturing, declining remittance growth, geopolitical strains, and reliance on borrowed reserves—undermine long-term stability. 

Through the USDPHP soft peg, the BSP’s interventions, while stabilizing the peso in the short term, foster imbalances that could unravel with a global tightening of monetary conditions. 

Without addressing these structural challenges through inclusive growth, deregulation, and reduced dependence on debt and remittances, the Philippines risks a rude awakening. The peso’s current resilience is less a reflection of economic strength and more a temporary reprieve, vulnerable to shifts in global financial tides. 

Nota bene: Although we discussed tourism and remittances, we did not cover business process outsourcing (BPO) and other export services in depth, largely due to limited data and the need to rely on GDP proxies. Regardless, surging debt levels are exposing widening FX liquidity vulnerabilities that services alone cannot offset. 

____

reference 

IMF INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE 2. OFFICIAL RESERVE ASSETS AND OTHER FOREIGN CURRENCY ASSETS (APPROXIMATE MARKET VALUE): SECTION I OF THE RESERVES DATA TEMPLATE, p.25 IMF.org

 

April 7: The Day Global Risk Assets Bottomed: A Synchronized Reversal Across Stocks, Crypto, and Commodities

 

The conventional view serves to protect us from the painful job of thinking—John Kenneth Galbraith 

April 7: The Day Global Risk Assets Bottomed: A Synchronized Reversal Across Stocks, Crypto, and Commodities 

Following the April 7-8 lows, a synchronized rally swept across US, Asian or global stocks, commodities, and Bitcoin. Forget domestic interventions—this was a liquidity-driven comeback, sparked by global catalysts and market dynamics. 

I. Introduction 

On April 7-8, 2025, global markets teetered on the edge: Hong Kong’s Hang Seng cratered 13%, U.S. stocks wobbled, copper plunged 8%, and Bitcoin hit a yearly low. Fear ruled, with the VIX spiking to 46.98. 

Then, everything reversed course and headed higher through the next few weeks. 

From Tokyo to New York, stocks soared. Gold, oil, copper, and even Bitcoin joined the party. 

What sparked this global comeback? 

It wasn’t Chinese state buying or local policies. It was a liquidity tsunami, fueled by a massive global short-covering and capital rushing back to oversold assets. 

II. The Panic and the Spark

Figure 1

Concerns over the festering trade war, all-time high uncertainties, mounting geopolitical tensions in the face of a weakening global economy, and high systemic leverage put pressure on risk assets.   

In charts, US-China bilateral tariffs soared in April.  (Figure 1)

Figure 2

The world’s government debt-to-GDP ratio remains high and is expected to rise further. (Figure 2, upper diagram) 

The IMF slashed its global GDP forecast from 3.3% to 2.8% in 2025 (Figure 2, lower image) 

Deflating prices, deleveraging, and liquidity tightening led to a risk aversion in global stocks, which culminated in April 7’s brutal selloffs. 

The Chinese yuan fell, or the US dollar-yuan USDCNY spiked, driven by China’s retaliatory tariffs. 

But late on April 7, rumors of a 90-day U.S. tariff pause (excluding China) surfaced, sparking a wild U.S. market swing (S&P 500 from -4.7% to +3.4%). 

Though denied, these rumors set the stage for April 8. 

III. April 8 Onwards: A Liquidity-Fueled Macro Short-Covering Rally 

On April 8, the selloff in some of the global markets had eased, and some had started a sharp recovery. 

Liquidity—fueled by institutional buying, short covering, and algorithmic trading—revived risk-ON sentiment.

Figure 3 

From the April 7-8 lows, the S&P Global Equity Index rebounded 11.2%, the US S&P 11.02%, and the Euro Stoxx 600 10.8% as of April 25th. (Figure 3, topmost pane) 

In Asia, China’s Shanghai Composite rallied 6.6%, while Hong Kong’s Hang Seng 50 surged 9.9%. (Figure 3, middle graph) 

Meanwhile, Southeast Asian bourses staged a massive recoil. Indonesia’s JCI surged 12.7%, Thailand’s SET 9.33%, and the Philippine PSEi 30 8.74%, over the same period. (Figure 3, lowest chart)

Figure 4

Strikingly, USD gold prices soared 12.1%, copper 20.2%, WTI crude 6.9%, and Brent crude 7.5% (Figure 4, upper window) 

The CRB Commodity Index advanced by 7.2%, while Bitcoin roared 28%. (Figure 4, lower visual) 

Risk-ON was suddenly back! 

The USDCNY spike U-turned and plunged, with China’s central bank selling dollars to slow the yuan’s fall, but this was secondary. (Figure 4, lower graph) 

I called this on my X.com post, "A macro short-covering rally." 

IV. Extreme Oversold Conditions 

Figure 5

The VIX nearly hitting 50 was a sign of extreme oversold conditions. Historically, this has proved to be a turning point. (Figure 5, upper chart) 

While past performance doesn’t guarantee future results, one thing is clear: liquidity re-emerged following oversold conditions, and the VIX metric may have been somehow validated. 

V. Why Liquidity, Not Local Policies 

Chinese state buying, PBOC intervention, and the BOJ’s yen-defense rhetoric were possibly too small to reinvigorate the world’s risk appetite. 

Yet, the rally’s timing, scale, and breadth—spanning stocks, commodities, crypto, and the yuan—points to a global liquidity flood, driven by tariff relief hopes, the Fed’s dovish narrative, and oversold conditions. 

VI. Takeaways: A Fragile Rally in a Fractured World 

Trump’s arbitrary and capricious policies (Tariffs or not) should sustain an ambiance of "regime uncertainty," which clouds economic calculation for the global economy. 

This is aside from geopolitical (e.g., latest India-Pakistan clash over Kashmir, the ongoing Israel-Palestine War, Russia-Ukraine War, US/Israel-Houthi War, frictions at South China Sea and Taiwan, et al.) and geoeconomic (US-China trade war) tensions. 

Trump’s backsliding against China has prompted Chinese media to make a mockery of his policies, which in the coming days could test his mercurial temperament. Rising markets may reanimate his belligerent trade and foreign policy stance. 

With Return on Investment (RoI) and "hurdle rates" indeterminate, investments will likely stall.  The financial world will likely chase short-term gains via the financial markets, which likely implies heightened volatility in the days to come. 

Easily, this ties to bear market rallies in stocks, which are often sharp and swift but fleeting. 

Furthermore, for a financial world increasingly dependent on central bank easy-money bailouts, mounting de-globalization dynamics, rising geopolitical and geoeconomic uncertainties, increasing risks of economic discoordination and disruptions, increasing leverage, volatile liquidity conditions, and escalating risks of stagflation will likely inhibit central banks from their traditional approach—all of which may reduce the likelihood of fuel for a financial market "blowoff." 

Lastly, aside from gold, central banks and governments have lately been amassing Treasury Bills—a sign of a stampede for liquidity. The last time they hit this high was during the Great Recession (2007-2009). They surpassed the highs during the 2020 pandemic recession. (Figure 5, lower chart) 

All told, all-time high gold prices plus the second-highest official inflows to Treasury bills are likely signs of a coming global recession or a financial crisis.

 

 

Do Gold’s Historic Highs Predict a Coming Crisis?

Massive money printing and debt accumulation have gone on for something like 80 years, and the system has held together. Why should it end now? Maybe they can wring one more cycle out of the corrupt Keynesian system. That said, I think we have finally reached the actual crisis point. Although this certainly isn’t the first time the inevitable seemed imminent…—Doug Casey 

This three-part series sheds light on the multifaceted story of gold: 

Part one examines how gold price surges have predicted global crises, from the GFC to today. 

Part two analyzes the role of central banks in driving these record highs. 

Part three assesses how these highs could impact the shares of listed Philippine gold mining companies. 

In this issue

Do Gold’s Historic Highs Predict a Coming Crisis?

I. Gold at All-Time Highs: A Beacon of Crisis or Recession Ahead?

II. Gold, The Philippines and the Pandemic Recession:

III. The Bigger Picture: Gold as a Recession or Crisis Bellwether

IV. Gold Outshines the S&P 500: Gold’s Crisis Predictive Power in Focus

Do Gold’s Historic Highs Predict a Coming Crisis? 

First series on gold: Surging USD Gold Prices: A Predictor of Crises from GFC to Pandemic—What’s Next? 

I. Gold at All-Time Highs: A Beacon of Crisis or Recession Ahead?

Figure 1

Is the recent record-breaking streak of gold prices signaling an impending global recession or crisis? 

The relationship between gold and the US GDP has undergone a profound transformation. 

Ironically, gold’s multi-year climb began during the dotcom recession. It surged ahead of the Great Recession of 2007-2009—or 2008 Financial Crisis—and, while falling during its culmination, gained momentum once again before the climax of the Euro crisis. (Figure 1, upper and lower charts) 

Between May 2001 and September 2011, gold prices soared approximately 6.9 times, from $270 to $1,873. 

Thanks to interventions from central banks like the Federal Reserve (FED) and the European Central Bank (ECB), as well as their global counterparts, volatility subsided, and risk perception diminished, ushering in a “goldilocks” period. During this time, gold prices retraced roughly 43%, falling to $1,060 by December 2015. 

However, China’s unexpected currency devaluation in August 2015 triggered a stock market crash lasting until February 2016, further compounded by Donald Trump’s election, ignited the next leg of gold’s bull market, as investors once again sought refuge in the precious metal. 

Gold reached new heights during the US repo crisis of 2019, continuing its ascent prior to the onset of the global pandemic recession. 

It achieved an interim peak of $2,049 in August 2020, representing a remarkable 93.33% increase from its low in 2015. 

Despite the outbreak of the Russia-Ukraine war in February 2022 and peak inflation in mid-2022, gold prices slid by 20%, hitting a low of $1,628 in September 2022. 

The Bank of England’s bailout of UK pension funds during the Truss budget crisis in October 2022 provided support or put a floor under gold prices, stabilizing the market. 

More recently, geopolitical conflicts—including the Israel-Palestine war and its extension to the Israel-Hezbollah conflict—along with rising tensions in hotspots like the South China Sea, escalating global protectionism, and the increased weaponization of finance, have fueled uncertainty. 

Additionally, the re-election of Donald Trump in 2024 and his administration’s policies, including trade wars, demands for the annexation/acquisition of Greenland, and control over the Panama Canal, have added to global economic and geopolitical instability. 

The resumption of hostilities in the Middle East, particularly Israeli attacks in Gaza and Beirut following a broken ceasefire, has further destabilized the region. 

In the Russia-Ukraine conflict, the UK and France have threatened to send troops to support Kyiv, risking escalation as Trump pushes for a quick resolution with concessions to Russia.

On April 2, 2025, Trump’s administration imposed 25% tariffs on all imported cars and light trucks, effective April 3, with plans for broader “reciprocal tariffs” targeting countries like Canada, Mexico, and the EU, prompting threats of retaliation and fears of a global trade war.

Figure 2

The ongoing trade war, did not emerge in a vacuum; rather, it reflects a broader, underlying trend of deglobalization. The rising number of import curbs—spanning tariffs, antidumping duties, import quotas, and other restrictions—represents the cumulative anti-trade measures undertaken by global authorities. 

According to Global Trade Alert, the number of import curbs in force among major economies, including the U.S., EU, China, Canada, Mexico, and the rest of the G20, has surged from under 1,000 in 2008 to over 4,000 by 2024 (Biden era), with the U.S. and EU leading the increase. (Figure 2) 

This proliferation of trade barriers has not only strained economic ties but also influenced foreign relations, contributing to a slippery slope of deglobalization that has materially heightened geopolitical stress. 

For instance, the U.S.’s aggressive tariff policies have prompted retaliatory measures from trading partners, fracturing alliances and fostering and deepening a climate of mistrust, which in turn exacerbates conflicts in regions like the South China Sea and Ukraine. 

This deglobalization trend, coupled with geopolitical flashpoints, has driven investors to seek safe-haven assets like gold, pushing prices to new all-time highs, as shown in the earlier chart, where NYMEX gold futures prices have spiked since 2023 even as the U.S. nominal GDP share of global GDP remains flat. 

II. Gold, The Philippines and the Pandemic Recession

Back in February 2020, I warned: 

In an interview with Ms. Gillian Tett at Council of Foreign Relations (CFR) on October 2014, former Fed chief Alan Greenspan aptly remarked: 

Remember what we're looking at. Gold is a currency. It is still, by all evidence, a premier currency, where no fiat currency, including the dollar, can match it. And so that the issue is if you are looking at the question of turmoil, you’ll find as we always find in the past, it moves into the gold price. 

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! (Prudent Investor Newsletter)

It turned out that a global recession had already begun. 

In the Philippines, the first local COVID-19 case was reported in early March 2020, prompting the Duterte administration to impose a Luzon-wide lockdown, officially termed "Enhanced Community Quarantine." 

The Philippine economy subsequently plunged into a recession, with GDP contracting from Q1 2020 to Q1 2021.

Figure 3

Gold in the priced in the Philippine peso also soared ahead of the pandemic crisis. (Figure 3) 

III. The Bigger Picture: Gold as a Recession or Crisis Bellwether 

The charts illustrate a clear pattern: since the "Fed Put" during the dotcom bubble, gold’s record-breaking runs have consistently foreshadowed major recessions, economic crises, and geopolitical upheavals. 

These include the GFC, the Eurozone debt crisis, the U.S. repo crisis, the global pandemic recession, and the recent wave of conflicts and protectionist policies. Gold has also proven responsive to the serial interventions of central banks and governments, which have deployed easy money regimes and fiscal stimulus to mitigate these crises. 

For instance, the chart highlights how gold prices dipped during periods of perceived stability (e.g., post-2011 Euro crisis) but surged ahead of crises, reflecting its role as a leading indicator of economic distress. 

Is gold’s series of epic all-time highs yet another chapter in this unfolding saga of economic and geopolitical turmoil? The historical correlation between gold price surges and impending crises suggests that investors should remain vigilant 

IV. Gold Outshines the S&P 500: Gold’s Crisis Predictive Power in Focus

Figure 4

Finally, the mainstream financial narrative often compares gold’s performance to that of the stock market, framing gold as a speculative asset. In this context, gold has significantly outperformed the U.S. S&P 500 by a substantial margin over the past century, particularly since 2000.

However, this comparison is somewhat of an apples-to-oranges exercise. Gold, as a safe-haven asset, serves a fundamentally different role than equities, which are driven by corporate earnings, economic growth, and investor sentiment.

Gold’s value is tied to its scarcity, historical role as money, and its appeal during times of uncertainty, whereas the S&P 500 reflects the performance of the U.S. economy’s largest companies.

Despite this distinction, the comparison underscores gold’s resilience and appeal in an era marked by economic and geopolitical turbulence.

For a more nuanced perspective, the chart’s lower section presents the S&P 500-to-gold ratio, which measures how many ounces of gold are needed to buy the S&P 500 index. This ratio reveals a striking technical pattern: a massive head-and-shoulders formation, a bearish indicator in technical analysis that often signals a potential reversal. 

If this pattern completes, it could indicate a significant outperformance of gold over the S&P 500 in the coming years, potentially driven by a crisis that erodes confidence in equities while boosting demand for gold. 

Given gold’s historical predictive prowess for crises, as evidenced by its price surges before major economic and geopolitical upheavals, this head-and-shoulders pattern may well be fulfilled. 

____

References 

Prudent Investor Newsletter Oh, Gold!!!! February 23, 2020

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!

 

Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth— William Rees-Mogg 

 

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!  

 

Geopolitics is now a primary driver of the transitioning global economic structures.  Since commodities are one of its beneficiaries, the Philippine mining index should reflect this dynamic. 

 

Geopolitics is the Name of the Game: Philippine Enters the Geopolitical Hegemonic Contest via the Reinforcement of the VFA-EDCA Agreement with the US 

 

Unless one lives under a rock, geopolitics is the name of the game! 

 

And commodities are one of the primary elements of geopolitics. 

 

Signed in 2014, the Enhanced Defence Cooperation Agreement (EDCA) represents an agreement between the US and the Philippine governments to expand their defense alliance by allowing the United States government "to build and operate facilities on Philippine bases for both American and Philippine forces." (Wikipedia) 

 

From the original five (non-permanent) bases (Palawan, Cebu, Pampanga, Nueva Ecija, and Cagayan de Oro), the incumbent administration has added four more facilities for US military access (Palawan, Isabela, Lal-lo Cagayan, and Santa Ana Cagayan) early April. 

 

And it is no coincidence that the expanded "pivot" by the Philippine government towards the US occurred as the Chinese military's partial intrusions on Taiwan's border to test Taiwan's defense capability has grown with frequency and scale.   

 

China's military has also been aggressively encroaching on the maritime boundaries of different neighbors as the Philippines in the South China Sea. 

 

The Xi regime has accused the Philippine government of interfering with the China-Taiwan conflict. 

 

The broader picture is that these territorial disputes are an extension of the hegemonic contest between the reigning superpower, the US, and her (NATO) allies against her emerging challengers (the Global South/BRICs).  The Russo-Ukraine War is a ripe example of the manifestations of the unfurling power struggle via kinetic warfare.  

 

But this increasingly confrontational hegemonic conflict has stretched to cover many other areas, including but not limited to trade, investments, financing, money, commodities, social mobility, space, deep-sea, technology and information, and more.  

 

And this expanded friction will unlikely diminish even if contending parties miraculously find a settlement to the Russo-Ukraine War—the other areas of dispute will persist. 

 

That said, commodities will be a principal element in a fragmented world. 

 

And NO economic analysis will be complete WITHOUT the role of geopolitics. 

 

Why Commodities Will Play a Principal Role in the Era of Fragmentation/Inflation 

 

One crucial evidence of malinvestments from the easy money policies of central banks is the severe underinvestment in the commodity sector that has led to a shortfall in supplies. 

 

The liquidity bailouts of global central banks during the pandemic exposed this accrued imbalance. 

 

Figure 1 

 

For instance, the stockpiles of industrial metals, like copper, are at their lowest in history. (Figure 1, top and middle charts)  

 

Yet it requires massive amounts of capital and time to increase exploration activities to generate expanded output.  And this isn't happening anytime soon. 

 

Further, with the world standing on the precipice of an expanded kinetic war, global public spending on defense will likely take a lead role, reshaping subtlely the global economic backdrop to a quasi-war economy. (Figure 1, lowest window) 

 

In nominal terms, global defence spending has been on a strong upward trajectory over the last five years, increasing from a nominal USD1.7 trillion in 2017 to USD2.0tr in 2022. Until recently, the same could be said of defence spending in real terms, but this upward trend stalled in 2021 and 2022 owing to escalating inflation, leading to a widening delta between nominal and real spending. Using 2015 as the base year for real terms calculations, the difference came to USD101bn in 2020. This more than doubled to USD222bn in 2021 and increased again to USD312bn in 2022. (McGerty, 2023)  

 

More public spending to develop an end-to-end military system diverts resources and finances from the private sector, which leads to production inefficiencies and relative shortages of consumer goods—which means structural supply-side imbalances, ergo contributor to inflation. 

 

In this case, the build-up of armaments requires massive amounts of different commodities/metals, like copper, nickel, silver, and more.   

 

The increasingly fragmented world should aggravate such supply constraints through the various restrictive and protectionist policies anchored on nationalism and geopolitical alliances. 

 

Again, the multi-faceted aspects of this power struggle won't be limited to military and trade but will involve the currency and financial system.  

 

Ergo, a potential challenger to the de facto USD standard--should emerge with this transition to a multipolar world. 

 

As evidence, several countries have been realigning their geopolitical relationships in favor of the Global South/BRIC. 

 

In the past few weeks, earth-shaking announcements from several countries with the intent to join the bandwagon of the establishment of an emerging rival currency system. 

 

Here are some events as compiled by the Kobeissi Letter (Twitter) 

 

-Iran said they are reducing their dependence on the US Dollar for regional and international trade.  

-France said Europe should reduce dependence on the US.  

-Meanwhile, Russia, Saudi Arabia and China are now trading with Chinese Yuan. 

 

Figure 2 

 

In any event, in conjunction with the drawing of the financial and monetary divide, global central banks amassed a record amount of gold in 2022. (Figure 2, topmost window) 

 

And instead of mimicking the current USD system, structured on a Triffin dilemma of debt and inflation-financed twin deficits, the competing currency standard will likely be backed by a basket of commodities.  A Bretton Woods 3 template as proposed by Credit Suisse's Zoltan Pozsar, perhaps? 

 

Commodity reserves will be an essential part of Bretton Woods III, and historically wars are won by those who have more food and energy supplies – food to fuel horses and soldiers back in the day, and food to fuel soldiers and fuel to fuel tanks and planes today.  

 

… 

 

This is serious: Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left). (Pozsar, 2023) 

 

Central banks will also play a significant role in financing public spending.  And in the backdrop of supply tightness, such monetary expansion should extrapolate to higher inflation, which also implies rising rates. 

 

And though the demand for metals in the electric vehicle industry may also be a part of the narrative, the focal point of the economics of commodities is the increasing fragmentation of the global economy. 

 

So decades of underinvestments that led to shortfalls in supply, the fracturing of the international division of labor and its geopolitical realignment, the quasi-militarization of the global economy, principally through central bank finance and partly via private sector participation, and finally, the emergence of competition to the US standard, heralds to higher demand and increased prices of commodities.  

 

The era of globalization, financed by easy money, will likely usher in the eon of fragmentation, marked by a milieu of high inflation and elevated rates. 

 

The Philippines will not be exempt from this seismic global transformation.   

 

The complementary bases under the VFA-EDCA, the Balikatan exercises, and other related participations constitute crucial economic and geopolitical drifts, which along with their corresponding risks, will likely come with consequences—as history has shown. 

 

The Philippine Mining Index in the Era of Fragmentation/Inflation 

To an observant eye, the subtle shifts have already been happening.  The unspoken changes in the performance of the share prices of listed commodity producers illustrate such developments. 

 

While USD coal prices rocketed from 2020 through September 2022, it had given up most of its gains.  But it is still above the highest level since at least 2010. (Figure 2, middle chart) 

 

As in the case of Europe, Japan, and elsewhere, the ESG thrust to replace coal with renewables as baseload supply will likely backfire.  Natural gas and nuclear power could be the future of Philippine energy.  The Philippines saw its first LNG import this month. 

 

Despite the short-term oscillations, USD prices of copper and nickel are in a long-term uptrend but below their recent highs. (Figure 2, copper-lowest diagram) (Figure 3, nickel topmost chart) 

Figure 3 

 

On the other hand, while USD gold prices have also been on a structural uptrend, it has yet to show a convincing breakout. (Figure 3, middle pane) 

 

But it did so against 5 ASEAN currencies (Philippine peso, Thai baht, Malaysian ringgit, Indonesian rupiah, and Vietnam dong) last April 6th. 

 

In any case, coal (Semirara SCC), Nickel (Nickel Asia NIKL, Global Ferronickel FNI, and Marcventures MARC), and Gold-Copper (Atlas AT, Philex PX, and Lepanto LC and LCB) comprise 96.32% of the Philippine Mining index as of April 14th.  Oil exploration firm PXP completes the 9-member roster.  (Figure 3, pie chart) 

 

The Philippine mining index is the most unpopular and possibly the "least owned" sector.   The institutional punters have likely ignored the industry.  

 

Figure 4 

 

As proof, the industry has had the smallest share of the monthly trading volume since 2013. (Figure 4, upper window) 

 

Local participants perceived this as highly speculative (higher beta), thus subject to intense ebbs and flows.   

 

Nota bene: Though several other mining and oil issues have not been part of the index—a rising tide usually lifts all—if not—most boats. 

 

More, its lack of correlation with the PSEi 30 should make it a worthy diversifier.  

 

But with the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon. 

 

In the 70s, mines constituted many members of the Philippine Phisix, presently PSEi 30.   

 

That 70s show, marked by the age of inflation, may yet stage a comeback. (Figure 4, lowest pane)  

Figure 5 

Despite the low volume and a depressed sentiment in the general market, a divergence has emerged between the Mining index and the headline index. (Figure 5, upper chart) 

 

In fact, as a ratio of the PSEi 30, the mines have been reservedly outperforming since March 2020. (Figure 5, lowest diagram) 

 

If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble? 

 

Disclosure: This author holds exposure to some of the mining & oil issues. 

 

____ 

References 

 

McGerty Fenella Global defence spending – strategic vs economic drivers; Military Balance Blog, February 15, 2013, International Institute for Strategic Studies 

 

Pozsar, Zoltan: Money, Commodities, and Bretton Woods III; March 31, Credit Suisse Economics 

 

Nota Bene: The newsletter intends to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice.   Solicitation to trade is neither intended by the contents. In the meantime, the discussion of occasional positioning on particular issues are opinions of this author.