Gold's Strength Amid a Crisis of Confidence

Theme & Background

This chapter discusses how stagflation risk drove gold to a record-breaking rally in Q1 2025. The report argues that aggressive U.S. tariff policies, government layoffs, and policy uncertainty are simultaneously pushing inflation higher and suppressing economic growth, recreating a 1970s-style stagflationary environment. Gold is evolving from a cyclical inflation hedge into a structural allocation asset.

Core Thesis

The author’s central judgment is that stagflation is taking root in the U.S., and gold has become the only liquid safe-haven asset. Counterintuitive views include:

• Tariffs are not a "one-time price shock" but persistently fuel inflation through multiple feedback loops
• Traditional safe-haven assets (U.S. dollar, Treasuries) have failed; the dollar index fell 3.94% in Q1, while Treasury yields declined
• Gold’s rally is primarily driven by central banks and sovereign institutions, not investment flows, implying deeper systemic concerns

Key Arguments & Data

1. Stagflation signals are clearly visible

• Consumer inflation expectations surged to a 30-year high
• Layoffs by the Department of Government Efficiency (DOGE) further dented consumer confidence
• The deterioration in economic data is expected to persist

2. Tariff transmission mechanism for inflation (multiple feedback loops)

Mechanism	Description
Supply chain disruption	Sudden or unpredictable tariff hikes force companies to find new suppliers or shipping routes, raising logistics and production costs, which are passed on to consumers
Rising input costs for domestic producers	Tariffs on key materials cause cost jumps for domestic manufacturers; shifting to local supply often means fewer supplier choices and higher prices
Weakened competitive pressure	Restricting cheap imports gives domestic producers room to raise prices; over time, reduced competitive forces fuel broader inflationary pressures
Foreign retaliatory tariffs	Other countries impose counter-tariffs, raising supply chain costs for firms reliant on global inputs, ultimately passed on to consumers
Investor & exchange rate turmoil	Tariff wars disrupt currency markets; currency depreciation makes imported goods more expensive, and exchange rate volatility amplifies inflation pressures

3. Market performance comparison (Q1 2025)

Asset	2025/3/31	2024/12/31	Quarterly Change	Quarterly % Change
Gold	$3,123.57	$2,624.50	+$499.07	+19.02%
Silver	$34.09	$28.90	+$5.18	+17.94%
Gold Mining Stocks (GDM)	1,288.51	956.60	+331.91	+34.70%
S&P 500 Index	5,611.85	5,881.63	-269.78	-4.59%
U.S. Dollar Index (DXY)	104.21	108.49	-4.28	-3.94%
U.S. Treasury Bond Index	$2,357.12	$2,290.24	+$66.88	+2.92%

4. Technical signals

• Gold’s price chart shows two distinct bullish channels; a break above $3,200 could lead into a more bullish upper channel
• Silver needs to break above $35 to confirm a breakout (Q1 close at $34.09)
• Total gold ETF holdings rose 6.12% in Q1 (from 82.85 tons to 87.92 tons), with retail buying picking up
• Silver ETF holdings were largely flat (+0.51%), forming a base

Companies/Assets Involved

• Gold: Core bullish asset; hit an all-time high of $3,123.57 in Q1, breaking the psychological $3,000 level
• Silver: Bullish; rising lease rates, declining LBMA inventories, and strong industrial demand signal a tightening market; $35 is the key breakout level
• Gold Mining Stocks (GDM): Strongly bullish; surged 34.70% in Q1, surpassing the 2000 peak
• U.S. Dollar Index (DXY): Bearish; fell 3.94% in Q1, losing its safe-haven status
• S&P 500 Index: Bearish; fell 4.59% in Q1, experiencing one of the fastest sell-offs on record
• U.S. Treasuries: Neutral to slightly bullish; falling yields reflect recession/growth concerns, though the 10-year real yield remains sticky at 1.83%

Investment Implications

1. Increase allocation to gold: In a stagflationary environment, gold is the only liquid safe-haven asset; buying by central banks and sovereign institutions is a structural trend, not short-term trading

2. Watch for silver breakout: If silver holds above $35, it could trigger a larger rally; declining LBMA inventories and industrial demand are catalysts

3. Reduce exposure to dollar-denominated assets: The safe-haven function of the dollar and Treasuries has failed; the rapid decline in the S&P 500 reflects market pricing of policy uncertainty

4. Mining stocks offer greater leverage: GDM’s Q1 gain (34.70%) far outpaced gold itself (19.02%); in a gold bull market, mining stocks provide higher leverage

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Theme and Background

This chapter discusses the long-term structural inflation and stagflation risks triggered by tariffs, as well as the profound impact of the rumored "Mar-a-Lago Accord" on the dollar system, the U.S. Treasury market, and gold. The report argues that tariff policies are evolving from short-term tools into structural economic distortions, and if dollar credit is undermined, it will accelerate the shift of global reserve assets toward gold.

Core Views

• Stagflation is shifting from an expectation to an embedded risk: Consumers' long-term inflation expectations have surged to 4.1% (University of Michigan's 5-10 year outlook). If sustained at elevated levels, this will translate into actual consumer behavior, solidifying stagflation as a psychological norm.
• If implemented, the "Mar-a-Lago Accord" would constitute a selective default: Forcing or inducing foreign creditors to swap U.S. Treasuries for 100-year zero-coupon bonds is essentially a debt restructuring, potentially triggering credit rating downgrades and undermining the market cornerstone of "full faith and credit of U.S. government bonds."
• Once trust in the dollar system is damaged, the global cooperation framework will collapse: Unlike the Bretton Woods system or the Plaza Accord, the current U.S. unilateral tariff hikes and coercive measures erode the foundation of "rule of law," leaving other countries with little incentive to cooperate, and the situation could spiral toward severe negative consequences.

Key Arguments and Data

1. How tariffs simultaneously push up inflation and suppress growth (mechanism table):

• Decline in export competitiveness → Companies are forced to switch suppliers, passing on higher logistics and production costs to consumers.
• Retaliatory tariffs → Domestic manufacturers face a jump in costs, with few local alternatives and higher prices.
• Supply chain restructuring → Economies of scale are eroded, leading to permanently higher operating costs.
• Exchange rate volatility → Currency depreciation makes imports more expensive, amplifying inflationary pressures.
• Reduction in foreign direct investment (FDI) → Long-term weakening of job creation and innovation.

2. Strengthening stagflation signals:

• Consumer confidence has fallen to multi-decade lows (Conference Board and University of Michigan data).
• Long-term inflation expectations have jumped from historical lows to 4.1%, a rare occurrence in recent years.
• Bond market pricing already reflects stagflation as the most likely scenario.

3. Risks of the three key elements of the Mar-a-Lago Accord:

• Debt restructuring: 100-year zero-coupon bonds offer no liquidity, no interest, and carry extremely high interest rate and inflation risks. For comparison, Austria's 95-year 0.85% coupon bond has already declined by approximately 75%, with high volatility.
• Weak dollar: This would prompt investors to shift toward physical assets like gold, reducing dollar-denominated holdings; funding pressures in the Eurodollar market (offshore dollars) could rise, potentially triggering a global financial crisis.
• Global order restructuring: The EU plans to issue approximately $1 trillion in new bonds over the next few years for military and infrastructure purposes, directly competing with U.S. Treasuries. Currently, the dollar accounts for about 60% of global reserves, the EU about 20%, Japan only about 4%, and gold about 23%.

Companies/Assets Involved

• Gold: The report is clearly bullish. Against the backdrop of shaken dollar credit, the risk of U.S. Treasury restructuring, and large-scale EU bond issuance competition, gold—as a liquid, non-political, time-tested store of value—becomes the preferred choice for central banks and sovereign investors. Recent gold price increases have partially reflected the Mar-a-Lago Accord rumors.
• U.S. Treasuries: Bearish. If investors fear restructuring, the appeal of Treasuries across all maturities will decline. Foreign central banks (holding 60% of global reserves) have strong incentives to reduce holdings, shifting toward gold or EU bonds.
• U.S. Dollar: Bearish. If a weak dollar policy is implemented, it will systematically undermine the dollar's reserve status, though the process may be accompanied by severe financial turmoil.
• EU Bonds: Bullish (relative to U.S. Treasuries). The EU's $1 trillion new bond issuance will provide an alternative reserve asset, diverting demand away from U.S. Treasuries.

Investment Implications

• Increase allocation to gold: Under the macro backdrop of embedded stagflation, shaken trust in the dollar system, and the risk of U.S. Treasury restructuring, gold's structural allocation value stands out. Central bank gold purchases (driven by non-traditional fund motives) indicate long-term and price-insensitive demand.
• Reduce holdings of U.S. Treasuries, especially long-term ones. If the Mar-a-Lago Accord rumors materialize, the swap into zero-coupon century bonds would expose existing Treasury holders to principal loss risk; even if not implemented, damaged trust alone is sufficient to depress Treasury valuations.
• Watch for dollar funding risks: A weak dollar policy could trigger a liquidity crisis in the Eurodollar market; monitor the impact of surging offshore dollar interest rates on the global financial system.
• Monitor EU bonds as an alternative reserve asset: The $1 trillion scale will reshape the global reserve landscape, potentially diverting some funds originally destined for U.S. Treasuries, indirectly supporting gold demand.

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Theme and Background

This chapter explores the deep drivers behind gold’s rally in 2025—a crisis of investor confidence in the US-centric global financial system—and the silver market’s approach to a breakout amid structural deficits and a sharp decline in inventories. The report argues that gold has evolved from a traditional safe-haven asset into a structural allocation tool, while silver faces price squeeze risks due to robust industrial demand and stagnant supply.

Core Views

• The core driver of gold’s rally is a crisis of confidence: The report notes that gold’s record-breaking surge in 2025 stems not merely from inflation hedging or geopolitical risks, but from a structural hedge against the erosion of trust in the US-led global financial system. This view runs counter to market consensus—traditional narratives often attribute the rise to central bank gold purchases or tariff hedging.
• Silver is nearing a major breakout: The report believes that silver’s price ($34.09) is close to the key breakout level of $35. Surging lease rates, a record decline in LBMA inventories, and all-time highs in Comex inventories collectively point to a supply squeeze, with price upside potentially occurring sooner than expected.
• The rare divergence of a weakening dollar and rising tariffs is a warning signal: Despite US tariffs on global imports rising from under 2% to approximately 10%, the US Dollar Index (DXY) has fallen 3.94%, and the Bloomberg Dollar Spot Index posted its worst Q1 performance in seven years, reflecting the market beginning to price in structural risks related to US direction.

Key Arguments and Data

Three Dimensions of the Crisis of Confidence:

1. Erosion of US overseas credibility: The second Trump administration has adopted a confrontational stance toward traditional allies—abandoning Ukraine, threatening NATO, and suddenly imposing auto tariffs on Canada, Mexico, Japan, Germany, and South Korea—leading foreign partners to reassess US policy unpredictability. Additionally, the “Mar-a-Lago Accord” rumor remains unresolved.

2. Risk of weaponizing dollar swap lines: Internal discussions at the European Central Bank and reports from Reuters indicate that foreign central banks are seriously considering the tail risk that the US might politicize the Fed’s dollar swap lines—the emergency liquidity lifeline for global dollar funding.

3. Threat to dollar dominance: Unlike previous “de-dollarization” narratives, the current situation does not involve authoritarian states attempting to bypass the dollar; rather, America’s closest allies are questioning whether they can continue to rely on the dollar. If the US cuts off financial lifelines, undermines the rule of law, and politicizes monetary policy, central bank reserve managers and sovereign wealth funds may reduce dollar exposure out of self-preservation rather than ideology.

Questioning the Integrity of US Institutions:

• Trump has attacked the judicial system, threatened to replace Fed Chair Powell with loyalists, and politicized federal law enforcement, raising concerns about the Fed’s independence and the credibility of US fiscal and monetary policy. Federal court orders have been directly defied, and legal experts and economists are openly discussing the risk of a constitutional crisis.
• In this environment, gold—as a politically neutral, stateless asset—is becoming increasingly attractive to institutional and individual investors.

Key Data on the Silver Market:

Indicator	Data	Time/Notes
Spot Silver Price	$34.09/oz (+17.94%)	Q1 2025 close, highest quarterly close since Q2 2011
1-Month Silver Lease Rate (SOFR-based)	4.82% (YTD average 3.18%)	Spiked in January 2025 due to tariff panic and London-to-Comex arbitrage
Comex Silver Inventories	475 million oz (all-time high)	Continuously increasing, reflecting arbitrage motives
LBMA Silver Inventories	Decreased by 105 million oz in the first two months of 2025 (largest two-month drop on record)	Sustained sharp decline since 2022; March data expected to be similar
Silver ETF Holdings	Approximately 720 million oz	Previously exceeded 900 million oz, once reaching 1 billion oz
US Industrial Silver Demand	Accounts for ~20% of global industrial demand (roughly half of China’s)	Growth driven mainly by photovoltaics and electronics, at multiples of potential GDP growth rate

Companies/Assets Involved

• Gold (Spot): Rose 19.02% in Q1 2025 to $3,123.57, breaking through the psychological $3,000 level. The report is bullish, arguing it should be upgraded from a tactical hedge to a core allocation.
• Silver (Spot): Rose 17.94% in Q1 to $34.09, approaching the $35 breakout level. The report is bullish, believing supply squeezes and inventory declines will drive prices higher.
• Gold Mining Stocks (GDM): Surged 34.70% in Q1, surpassing the 2000 peak. The report is implicitly bullish, seeing mining stocks benefiting from structural gold price increases.
• US Dollar (DXY): Fell 3.94% in Q1, with the Bloomberg Dollar Spot Index posting its worst Q1 performance in seven years. The report is bearish, viewing the divergence of rising tariffs and a weakening dollar as a structural warning.
• Federal Reserve: The report focuses on risks to its independence, arguing that politicization would amplify gold demand.

Investment Implications

• Gold should be upgraded from a tactical hedge to a core allocation: In the current environment of declining US institutional credibility, a weakening dollar, and heightened geopolitical risks, investors should increase gold allocation as a core asset to guard against institutional instability and geopolitical volatility, rather than merely as a short-term hedging tool.
• Silver faces upside risk from supply squeeze: With LBMA inventories plummeting and ETF holdings potentially returning to historical highs, a liquidity crisis could emerge. Combined with structural industrial demand growth (photovoltaics/electronics), silver prices may break above $35 and accelerate higher. Investors can focus on spot silver and mining stocks.
• Beware of structural dollar weakness: The rare divergence of rising tariffs and a weakening dollar indicates that the foreign exchange market is beginning to price in US directional risks. If the crisis of confidence persists, the dollar may face further pressure, benefiting dollar-denominated gold and silver.

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Theme and Background

This chapter focuses on the technical and fundamental landscape of the silver market. The report argues that although gold has already reached a new all-time high, silver remains on the verge of a breakout, with its technical patterns and supply-demand fundamentals both pointing to a "major breakout."

Core Thesis

The author's core judgment is that the silver price is about to break through the key resistance level of $35 and rapidly advance to the $40-$42 range. This is a contrarian view against market consensus—current speculative investment levels in silver are low, and the market has not yet fully priced in its structural deficit.

Key Arguments and Data

• Technical Analysis: Silver charts exhibit a highly bullish technical pattern. $35 is a long-term resistance level; once broken, the first target is $40-$42.
• Fundamental Analysis: The report lists four supporting factors:

1. Strong Demand: Industrial demand (photovoltaics, electronics) continues to grow.

2. Stagnant Supply: Mine silver production growth is flat.

3. Plummeting Inventories: Silver inventories at the London Bullion Market Association (LBMA) have declined sharply, reflecting tightening in the physical market.

4. Low Speculative Levels: CFTC positioning data shows speculative long positions at historically low levels, implying significant room for future new buying.

Indicator	Current Status	Potential Impact on Price
$35 Resistance Level	Not yet broken	First target $40-$42 after breakout
LBMA Silver Inventories	Sharply declining	Tight physical supply, supporting prices
Speculative Investment Level	Low	Large potential for future buying
Industrial Demand	Strong	Structural demand support

Companies/Assets Involved

• Silver: The core asset under analysis. The report is bullish, believing it is on the verge of a major breakout.
• Silver ETFs: Mentioned as a source of holdings data (Figure 6), but no specific ETF is named.
• CFTC Positioning: Cited as a sentiment indicator, showing low current market participation.

Investment Implications

• Directional Judgment: Strongly bullish on silver, with $35 identified as the key breakout point.
• Trading Recommendations: Investors should focus on chasing the rally after silver breaks above $35, with a first target of $40-$42. The current low speculative level means that once a breakout occurs, it could trigger a rapid short squeeze.
• Risk Warning: If silver fails to effectively break above $35, it may enter a consolidation phase; however, fundamentals (declining inventories, strong demand) provide solid support for a breakout.