The Message is Clear: They’ll Debase Before They’ll Let Bonds Break.
The central framework from my 2024 best-selling book Into the Abyss is playing out right on time.
By way of quick review, the framework was:
- The most critical issue for policymakers is maintaining the bubble in sovereign debt. The reason for this is that these bonds are the bedrock of the current debt-based financial system, and their yields represent the “risk free” rate of return against which all risk assets (stocks, real estate, etc.) are valued.
- Because the crash triggered by the economic shutdowns in 2020 was both extremely rapid (a matter of days) and violent (a 20% decline in less than 20 trading sessions), it forced policymakers to reveal their “entire playbook” for dealing with crises. This playbook consists of three strategies:
- Cutting interest rates aggressively to control bonds on the short end.
- Printing money and using it to buy bonds on the long end.
- Printing money and using it to buy junior debt securities (mortgage-backed securities, student loans, commercial paper).
In this context, the recent move by Treasury Secretary Scott Bessent makes perfect sense. Yields on the long end of the Treasury curve were in danger of breaking out to the upside, which would threaten the “Everything Bubble” including stocks.
This was a critical issue. Remember, ~45% of household wealth is tied up in stocks. And a market meltdown, triggered by a spike in Treasury yields is the last thing the Trump administration needs with the midterm elections approaching.
To address this, the Treasury announced, outside its normal quarterly schedule, that it will be at least doubling the size of its buyback operations for longer-dated government debt, from $2 billion up to a minimum of $4 billion per operation, starting September 9. The move covers Treasuries from the 10-year out to the 30-year sector, and it runs through the current refunding quarter, which ends November 4.
As I outlined in Into the Abyss, this framework favors hard assets. The markets confirmed this earlier this week.
On the day of the Treasury’s announcement, gold ripped 4.3% to north of $4,520 per ounce. Silver did even better, up 5.3% to break through $66. The S&P 500? It closed up a whopping 0.16%.
Let that sink in. The “risk free” asset class (Treasuries) got a direct liquidity backstop from the U.S. government, and stocks could barely manage a rounding error of a gain. Gold and silver moved 25 to 30 times more than the index that’s supposedly the beneficiary of all this intervention.
This is exactly what the framework predicts. When policymakers are forced to choose between defending bond prices and defending the dollar, they choose bonds every time, because a disorderly move in Treasury yields threatens the entire financial system, while a weaker dollar is just an inconvenience. But hard assets don’t care about that distinction. Gold and silver price in currency debasement directly. Stocks have to work through discount rates, earnings multiples, and investor psychology first, all of which take time and can go either way in the short run.
Put another way: Treasury just told the market it will use its balance sheet to cap long-term yields whenever they get uncomfortable. That is a standing subsidy for every asset that benefits from a lower cost of capital and a weaker dollar. Gold and silver collect that subsidy immediately and directly. Stocks collect it eventually, and only if earnings cooperate.
This is why I’ve been telling readers to own hard assets and the companies that produce them, not just as an inflation hedge, but as the cleanest, most direct way to front-run policy. The Fed and Treasury have shown their hand. They will debase before they let the bond market break. Gold and silver are simply pricing that in faster than anything else in the market.
If you haven’t grabbed a copy of our Survive the Inflationary Storm yet, do it now. What I described two days ago is playing out faster than even I expected.
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Best Regards,
Graham Summers
Chief Market Strategist
Phoenix Capital Research