Hoarding gold (08 February 2025)

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• Trump has sparked the beginning of a new trade war by announcing. at the start of the week, the imposition of 25% tariffs on imports from Mexico and most of Canada, and 10% on Chinese products, aiming to curb illegal immigration and fentanyl trafficking. Mexico and Canada immediately announced retaliatory measures, while China planned to take the case to the WTO and prepare countermeasures. The package included a reduced 10% tariff on Canadian energy, following pressure from refineries and Midwestern states (remember that the U.S. refining sector is designed to process heavy crude, whereas American shale produces a lighter variety). However, key sectors such as the automotive industry would face significant disruptions, as supply chains rely on components that cross borders multiple times before final assembly.

  The economic impact is clear: EY’s model estimates that the tariffs would reduce U.S. growth by 1.5%, push Mexico and Canada into recession, and could trigger stagflation. Just a few hours later, Trump temporarily suspended the 25% tariffs on Mexico and Canada, granting a 30-day extension in exchange for concessions on border security and crime prevention. Canada will deploy new technology and step up efforts against fentanyl trafficking and money laundering, while Mexico will send 10,000 National Guard members to its northern border. The U.S., in turn, has committed to curbing arms trafficking into Mexico. The announcement, at least for now, halts a trade war that would have hit the economies of all three countries and driven inflation higher.

  However, the 10% tariffs on China remain in place and will take effect soon. Trump has threatened to raise them further if Beijing does not stop the flow of fentanyl into the U.S., though China has already warned that it will take the case to the WTO and retaliate. Specifically, they announced reciprocal tariffs on oil, natural gas, and coal. In the latter case, the impact is minimal due to the low trade volume (though the quality of imported coal is relevant, it can be replaced with Australian supply).

  

   

  At the same time, Trump is hinting that the EU could be his next tariff target, while the UK might be exempt. Economically, the original measures would have affected nearly half of U.S. imports—an unsustainable move without a massive expansion of domestic production. As a trade pressure tactic, it is highly effective, but the new Treasury Secretary, Scott Bessent, is well aware that it should not be fully implemented.

  Tariffs are inflationary and would strengthen the dollar—hardly a good starting point for a US industrial renaissance […] The tariff gun will always be loaded and on the table but rarely discharged.

  — Scott Bessent

• The ISM Manufacturing PMI in the U.S. surprised to the upside in January, reaching 50.9 from a revised 49.2 in December, marking the sector’s first expansion in over two years. A single data point does not make a trend, but the shift in the cycle is evident: since the elections, the manufacturing rebound has been remarkable. New orders surged (55.1 vs. 52.1), production exited contraction territory (52.5 vs. 49.9), and employment in the sector showed significant improvement (50.3 vs. 45.4), suggesting that the recovery is gaining traction. Meanwhile, supplier deliveries were slightly slower (50.9 vs. 50.1), a sign of increased activity, and inventories continued to decline (45.9 vs. 48.4), which could create pressure for a new restocking cycle. However, inflationary pressures remain on the rise (54.9 vs. 52.5), reflecting the impact of contractual adjustments for 2025. Steel, aluminum, copper, food products, and natural gas saw price increases, while plastic resins and diesel recorded declines. The manufacturing market is clearly moving in the opposite direction of the recession narrative, although the risk remains in cost inflation, which could be passed on to margins and final prices if the trend persists.

  

   

  In fact, 12-month inflation expectations in the U.S. have risen to 4.3%, the highest level since November 2023, marking a 1.7% increase over the past three months, the sharpest jump since February 2020. This figure significantly exceeds the 3.3% forecast, suggesting that consumers perceive more persistent inflationary pressures than previously anticipated.

  In the long term, the outlook does not improve either: 5-10 year inflation expectations have risen to 3.3%, the highest level since June 2008 and above the expected 3.2%. Inflation remains a key concern for both citizens and producers, once again placing the Federal Reserve in an uncomfortable position.

  

   

• The gold market closed 2024 with a new record in total demand, reaching 4,974 tons, driven by strong central bank accumulation and renewed investment appetite. For the third consecutive year, official purchases exceeded 1,000 tons, with a notable acceleration in the fourth quarter (333t). Private investment also showed strength, reaching a four-year high of 1,180t (+25%), largely due to the stabilization of flows into gold ETFs, something that had not happened since 2020 after three consecutive years of outflows. The bullion and coin market remained at levels similar to 2023 (1,186t), though with a shift in composition: greater investment in bullion and less in coins. Meanwhile, technological demand contributed to the global balance, growing 7% year-over-year (+21t), driven by the expansion of the artificial intelligence sector. Jewelry, however, was the weak spot in the market, with an 11% drop in volume (1,877t), reflecting consumers who could only purchase smaller quantities due to high prices.

  

   

  Central banks continue to buy large amounts of gold to supplement their reserves, particularly outside the OECD. After the freezing of Russian assets abroad in 2022, which served as a warning, a paradigm shift has occurred, providing strong support for gold demand.

  

   

  And for the first time in the past three years, we are beginning to see how investor interest in the West, which had so far remained on the sidelines (in fact, it had been a drag…), is returning to the market, resulting in positive inflows into gold ETFs.

  

   

  For this year, sustained strength in central bank purchases is expected, along with renewed investor interest (especially in the West), supported by negative real interest rates in many cases, and continued weakness in jewelry demand.

• The United States must refinance an immense amount of debt this year, with maturities it has poorly managed, over-relying on short-term issuance under Yellen’s leadership. The deficit remains out of control, reaching $1.8T in 2024 (6.4% of GDP), generating an annual cost of over $1T in interest payments alone. With $9.2T in government debt maturing in 2025, the market is preparing for a massive wave of refinancing. The problem is simple: the government keeps flooding the market with bonds. As supply increases, prices fall, and yields rise. This movement in real yields indicates that the rate hikes are not just a reflection of inflation but also a structural adjustment in debt markets.

  The major risk is that much of this debt was issued in a much lower interest rate environment. Now, with the cost of capital at much higher levels, the pressure on the federal budget will be immense. If the Treasury continues to rely on a less committed buyer base (such as banks and foreign investors), bond market volatility could increase even further.