Gold/Silver Plunge, Update on US/China Trade War | Doomberg

Key Concepts

• Market Volatility: Significant price swings in financial markets, particularly in precious metals.
• Stairs Up, Elevator Down: A common market adage describing gradual upward movement followed by rapid declines.
• Icarus Print: A period of rapid, unsustainable price increase, often leading to a sharp fall.
• Double Top: A bearish technical chart pattern indicating a potential reversal.
• Backwardation: A market condition where futures prices are lower than spot prices, often indicating strong immediate demand.
• Short Squeeze: A rapid increase in an asset's price that occurs when a short seller is forced to buy to cover their positions.
• Escalation Dominance: The ability of one party in a conflict or negotiation to increase the stakes or intensity of actions, forcing the other party to respond or concede.
• Pain Tolerance Dominance: The ability of one party to withstand more hardship or suffering than another.
• World War II (as a geopolitical framework): A conceptualization of current global conflicts as a multi-faceted struggle between the US-led Western financial system and the BRICS nations.
• BRICS: Brazil, Russia, India, China, and South Africa, representing a bloc of emerging economies.
• Global Reserve Asset/Currency: An asset or currency widely held by central banks and used in international trade and finance.
• Bifurcation: The division of something into two branches or parts.
• Monetary Metal: A metal, like gold, that functions as a store of value and medium of exchange.
• Deflationary Technologies: Technologies that reduce the cost of goods and services over time.
• War of Attrition: A prolonged military conflict where one side attempts to win by wearing down the enemy's resources and will to fight.
• Special Military Operation: Russia's official designation for its invasion of Ukraine.
• Classics Read Aloud: A new Substack project featuring readings of classic literature.

Market Volatility in Precious Metals

The discussion begins by addressing the significant market volatility observed, particularly in precious metals like gold and silver. The speaker notes a sharp decline in metals prices, following a similar drop on the previous Friday. This is characterized by the adage "stairs up and elevator down," implying that rapid upward trends are often followed by swift corrections.

Gold:

• Gold is described as having experienced an "Icarus print," a period of rapid ascent that proved unsustainable.
• The speaker personally sold 20% of their gold holdings at the market open on Friday due to the market appearing "extended" and forming a "classic double top" on a one-month chart.
• Despite the recent sell-off, the core gold position remains unchanged. The speaker humorously notes that prices have fallen back to levels seen just the previous week, indicating the intensity of the recent rally.
• The speaker is looking to reinvest the sold portion, potentially by "catching a falling knife."
• While some technical analysts predict further price declines, the speaker, not being a trader, is content to hold their existing gold. They mention a potential price point around $4,000 where they might re-enter, accepting the risk of being wrong.

Silver:

• The conversation touches upon the backwardation observed in the silver market, with futures prices significantly lower than spot prices.
• This phenomenon is attributed to a short squeeze and reports of countries running out of silver, coupled with delivery issues in London.
• These issues were reportedly resolved by Friday, leading to a "post crisis air come out of the balloon."
• Silver is characterized as a "wild market" and a "quasi mostly industrial metal," unlike gold. Due to its different market dynamics, the speaker admits to not following silver closely and is uncomfortable offering expert opinions on it.

Geopolitical Tensions and Financial Impacts

A significant portion of the discussion focuses on the trade tensions between China and the US and their potential financial ramifications.

China's Leverage:

• The US administration is perceived as "wildly underestimating China's leverage" in the trade war.
• China possesses "escalation dominance," meaning it can increase the intensity of actions, forcing the US to respond.
• The US needs to invest $300-400 billion to counter China's escalation dominance.
• The expansion of sanctions to subsidiaries of companies on the entity list is identified as a proximate cause.
• China's ability to withstand pain ("pain tolerance dominance") is greater than that of the US, especially given President Trump's focus on the stock market.

China's Escalation Dominance Examples:

• Rare Earths: China's ability to cut off access to rare earths could shut down every automotive assembly line in the Western world within six weeks.
• Exports: While China exports significantly to the US, it exports even more to other countries, giving it broader leverage.

Outcome of Trade War:

• The speaker predicts that the US bluff will be called, and a "reasonable deal" will be achieved, which will be viewed as a "substantial not just symbolic but a real victory by China."
• This outcome is framed as a win for China in the "next phase of what we describe as World War II."

The Concept of "World War II" as a Geopolitical Framework

The speaker elaborates on their view that current global conflicts represent a new phase of "World War II."

Origins:

• This "World War II" is seen as having started around 2014, following the Crimea affair and US sanctions on Russia.
• This event prompted Russia to dump US Treasuries and begin buying gold.

The Conflict:

• The war is characterized as a battle between the US and its allies, supporting the Western-based US dollar financial system, against the BRICS countries and their allies.
• China has been preparing for this conflict for decades and believes it is now in a position to win.

US Weaknesses:

• The US lacks escalation dominance in a conventional war against Russia and in a trade war against China.
• President Trump, despite his bluster, assumes escalation dominance, which he does not possess against China and Russia.
• Unless the US is willing to use nuclear weapons (which is not anticipated), Russia will continue to grind away in Ukraine, and China will win the trade war.

Consequences for the US:

• This situation is described as a "sobering reality" that should prompt a "serious wakeup call."
• Hundreds of billions of dollars are expected to flow into diversifying away from China, impacting countries like Australia, Argentina, and Colombia.
• The potential US attack on Venezuela is mentioned as a new conflict that could satiate the "forever war party" in Washington, offering oil riches as a reward.

Impact on the US Dollar and Global Reserve Status

The discussion highlights the potential negative impact on the US dollar's status as the world's reserve currency.

• The US cannot simultaneously maintain its global reserve asset status and re-industrialize as needed.
• "Seismic shifts" on the scale of the US leaving the gold window in the 1970s are occurring in real time.
• Investors are advised to ignore mainstream media and recognize the reality of these shifts.
• This situation is seen as "very bullish for gold" and "bearish for the dollar against gold."
• The world is "bifocating" into multipolar spheres of influence.
• The US dollar-based Western financial system is ending, and a return to multipolar spheres of influence is expected.

Dollar's Role in a Bifurcated World:

• In a bifurcated world, the dollar will remain important, and US Treasuries will continue to be core reserve assets, though they are no longer neutral.
• Gold is presented as a neutral asset, "nobody's credit."
• The dollar value of global reserves held in gold versus Treasuries is rapidly converging.

Energy Markets and Geopolitical Shifts

The impact of geopolitical changes on energy markets is explored.

• Physical energy markets are described as "extraordinarily well supplied."
• The speaker has consistently argued against the "peak cheap oil" narrative, stating that the world is well-supplied with oil due to factors like engine switching, China's use of coal for liquids, and continued production from Guyana, Argentina, and the US shale patch.
• The gold-to-oil ratio has significantly increased, with oil remaining flat.
• Investing in oil or any commodity other than gold is likened to "buying volatility," with long-term real prices expected to be lower.
• Gold is distinguished as a "monetary metal," not a commodity.

Inflation and Energy:

• During inflationary periods, not all assets rise simultaneously.
• Highly deflationary technologies, including oil and gas companies, can lead to a decrease in the real price of energy.
• The inflation-adjusted oil price is noted to be very low.
• The abundance of natural gas is emphasized, with potential for production to double if a floor price were implemented.
• The deflationary power of technology companies (including oil and gas) can outweigh inflation rates, leading to nominal price decreases.
• While some prices may rise, commodities like food and oil, due to their inflation-adjusted prices being consistently lower, may not follow suit.
• The US, as an "energy gigapower," has advantages in fighting trade wars due to its access to energy.

Investor Considerations During Inflationary Times

The speaker offers advice for investors navigating inflationary periods.

• Identify subsectors that grow faster than the rate of currency debasement.
• Park money in these areas.
• Gold is not primarily an inflation story but a replacement for US Treasuries as a neutral reserve asset for international trade settlement.

Long-Term Disposition for Precious Metals

In times of market downturns, a long-term perspective on precious metals is recommended.

• Savings vs. Investment: The distinction between earning money in fiat, living in the fiat system, and saving by buying gold, land, and real assets is crucial. Private investments are where individuals can affect outcomes.
• Portfolio Allocation: If an 8% drop in gold significantly impacts an investor, they have too much gold. Gold should be one part of a savings portfolio, which is one part of net worth.
• Trading Around a Core Position: The speaker is comfortable trading around a core savings position like gold, buying more on dips and selling on significant rallies.
• Unnatural Price Movements: The rapid doubling of gold's price in 15 months was an "unnatural move" that often foretells war or major financial change.
• Historical Perspective: During the Weimar hyperinflation, gold experienced significant drawdowns, but holding it through those periods proved beneficial.
• Bullish for the Portfolio: A price drop in gold can be bullish for the rest of a portfolio, as it indicates the US dollar is not collapsing and hyperinflation is not occurring.

The War in Ukraine

The speaker provides their perspective on the conflict in Ukraine.

• US/Ukraine Loss: The war is predicted to be lost on the US-Ukraine side.
• Military Outcome: The war can only end militarily with Russia dictating terms, unless Zelenskyy is removed from power.
• Russian Strategy: Russia is characterized as knowing "how to win wars of attrition." The conflict is not measured in acres but in the wearing down of resources.
• Russian Capabilities: Russia is a larger country with a bigger and more sophisticated military-industrial complex. They have not declared full war, referring to it as a "special military operation," and are capable of escalation.
• Ukraine's Situation: Ukraine is running out of air defense weapons, and Russia is expected to launch a significant number of drones, systematically targeting Ukraine's energy grid.
• Media Discrepancies: The speaker claims that legacy media outlets (The Economist, Financial Times, New York Times) "lie to you routinely" about the state of the war, contrasting this with their own authentic and subscriber-dependent approach.
• Zelenskyy's Position: Zelenskyy is in a position where he cannot concede anything.
• Putin's Position: Putin does not need to concede anything because he is winning militarily.

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