Powell's End?
“In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.”
– Warren Buffett
The price of gold securities – as with all other types of stocks – is at the mercy of investor fear and greed over the short term.
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That means that if we’re going to be successful long term gold stock investors, we basically have to figure out a way to arbitrage the difference between the market’s short term views on gold stocks and the long term value.
A big part of that calculation comes down to what people like Donald Trump have to say about the market. Trump has the ability (and he seems to be aware of it) to swing the market – and over the last day or so, he’s apparently (behind closed doors) discussed firing Fed Chairman Jerome Powell.
Bloomberg published a story this morning, saying: “Trump Likely to Fire Powell Soon, White House Official Says.”
Less than an hour later, Yahoo Finance published another headline: “Trump says 'not planning' fire Fed Chair Powell after reports suggest Powell ouster coming 'soon'.”
The discrepancy seems to be coming from Trump himself… And while it’s not exactly clear if Trump can actually fire Powell (there is debate among political scholars that it’s even in his power to do so) the path forward for the Federal Government is already pretty clear.
Powell is a clear impediment to Trump’s goals for the US dollar and interest rates. He wants both of them to move lower, something Powell has been reluctant to do.
At the same time, with the passage of the "Big Beautiful Bill", the idea that Trump is cutting government is simply untrue. As I wrote in my most recent issue of Golden Portfolio IV:
“Trump is pushing the pedal to the metal, piling on the debt and spending to drive growth. The US is pursuing the same policy that drove the US into this debt crisis. But the US is already $37 trillion in debt.
Each dollar of debt produces less and less growth. The spending needs to increase exponentially at this point in order to power the economy higher.
Trump’s new “Big Beautiful Bill” increases the US debt limit by $5 trillion. The bill should be called the BBB bill, because when it passes, that’s what the US credit rating will be, sub-par..”
In the short term, the market seems complacent about the price of gold and gold stocks. Firing Powell would signal a major turning point. I believe it would mark the full embrace of what’s called “Modern Monetary Theory” or MMT.
This type of monetary policy pulls out all of the stops for government spending and debt creation. It would mean the total monetization of US government debt and likely push the US into an inflationary spiral, the likes of which the dollar has never seen.
Again, from my latest issue of Golden Portfolio IV:
“With a Trump appointed Fed chair, the Fed reserve will be losing its independence. The Treasury and the Fed will be aligned to keep rates artificially low. The US is moving towards a Japan scenario where the US central banks will buy all US debt. This is straight up debt monetization, and it’s great for gold.”
We have already seen the Fed start to step in to buy up excess Treasury securities…
But we have not yet begun to see gold stocks valued by the long term weighing machine.
And the question is, what does it look like when the whole sector gets valued at closer to the moves we’ve already seen in gold?
I posted earlier this week that the long term average allocation of global investment into gold has been closer to 5% – and right now it’s about 1/10th of that allocation, sitting at around 0.5%.
I don’t think it’s unreasonable for the whole gold index to move 5X higher in the coming years. We’re coming out of a dreadful bear market in gold stocks after a relatively weak bull market that ended in 2012.
But gold stocks are still being “weighed” as if gold was $2,000/oz or lower. This market mismatch is why we’ve been seeing some of our top positions across GP being acquired by larger gold companies.
Gold majors are seeing the value even if the market hasn’t caught on yet.
You can now join in with some of the savviest gold investors in the world and buy the top gold companies in the market for a 50%+ discount to their net value.
But if Trump fires Powell… that could change almost overnight.
Don’t wait for the other shoe to drop…
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio