Image source: Wikipedia

Last week I noted that the single most important chart in the world is flashing “danger”.

By quick way of review…

1. The defining trend of the last 45 years was the secular bull market in bonds. This bull market meant that throughout that period debt was ever increasingly cheaper to issue. As a result of this, everyone from individual consumers, corporations, states/ municipalities, and even the Federal Government went on a multi-decade debt binge.

2. The secular bull market in bonds ENDED in 2022. From that point onward, for the first time in 45 years, it was more expensive to issue new debt. This is what triggered the bear market in both stocks and bonds in 2022 (both assets ended down ~20% that year).

3. Since that time, the Treasury market has been in a consolidation. This is to be expected as nothing goes straight up or down and the collapse from 2022-2024 was significant.

4. The #1 issue for the financial system today is whether bonds rally from here, or continue to break down. If bonds rally, then the financial system continues to chug along despite the egregious levels of debt. But if Treasuries break down from here, then the secular bull market in bonds is DEFINITIVELY over and we are heading towards a debt crisis.

Central banks are fully aware of this situation and have been taking steps to prepare for what’s coming. As you no doubt are aware, there are three methods of dealing with a debt problem. They are:

1. Grow out of it (pay it back).
2. Default.
3. Attempt to “inflate the debt away” via inflation/ currency devaluation.

Policymakers at central banks claim that debt levels remain manageable, but their actions speak much more loudly than their words. Case in point, over the last five years, central banks have been on a buying binge, not for stocks or bonds, but for GOLD.

For centuries, gold has been an inflation hedge. What does it tell you about what’s coming that the people who can print dollars, euros, yen, etc. are loading up on gold?

Indeed, for the first time in decades, central banks own MORE gold than they do U.S. Treasuries as a percentage of foreign reserves.

Until 1967, gold was pegged to currencies. Then starting with France, one by one Western nations severed their currencies from gold with the U.S. officially doing so in August 1971. From that point onward, for the first time in history, U.S. Treasuries, NOT GOLD, were the bedrock of our global financial system.

As a result of this, central banks began acquiring Treasuries while reducing their gold holdings.

That period is now ending. For the first time since the mid-1990s, central banks own more gold than Treasuries as a percentage of foreign reserves. This is a TECTONIC shift away from paper assets that can be devalued to hard assets that cannot.

This STRONGLY suggests that central banks will be opting to “inflate” their debts away via currency devaluation. Put another way, they are shoring up their balance sheets in anticipation of what’s coming.

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