Transcription
Trump has always been unhappy with Powell and has been trying to pressure Powell to lower interest rates, even though the economic conditions in America may not be conducive to lowering interest rates. The person Trump wants to appoint as the new Fed Chair will please Trump and will lead to an increase in the money supply. Real assets, such as gold and real estate, will then rise. The US government has been overspending for a very long time. Currently, Saudi Arabia is selling oil to China and accepting payment in Yuan. Let's move on to the next topic. There is another piece of news that I am excited and anxious about: gold, which was 5,100 yesterday, is now 4,700, a decrease of 12.64%. Why is it so severe? Professor, what is the cause?
Here's the thing: previously, people were pushing up the price of gold because they predicted that Trump, when the current Fed Chair's term ends in May, would appoint someone who would please him. This new appointee would be someone who would open the floodgates, meaning they wouldn't care about economic policy stability, but would instead please politicians and Trump. This would lead to an increase in the money supply, causing the dollar to weaken. The money market would then cause non-dollar assets, such as real assets, to rise, including gold and real estate. For this reason, everyone previously rushed in to prepare for speculative trading in gold.
Another reason is that the US government has been overspending for a very long time, thanks to the petrodollar system, which involves buying oil. During the Nixon era, after he de-pegged the dollar from gold, Kissinger negotiated with Saudi Arabia to require that all oil purchases be paid for in dollars. At that time, Saudi Arabia was the number one oil exporter, so all countries automatically traded in dollars, even though the dollar was no longer pegged to gold. Any country that wanted to buy oil had to hold dollars first. Therefore, during the petrodollar era, dollars held in reserve to buy oil, or received by oil-selling countries, were held as dollars. These dollars, being mere paper, did not generate returns, so they were invested in US government bonds to earn interest. This provided the US government with a source of financing to continue overspending.
This is now changing. For example, Saudi Arabia is selling oil to China and accepting payment in Yuan. Russia is no longer using dollars and is settling in other currencies. Furthermore, Iran is also not using dollars, and Venezuela previously did not use dollars either. In summary, the role of the petrodollar is changing, causing the US government to face more problems in financing itself.
On the other hand, the US has been using the dollar as a weapon. Russia, for instance, knew that buying US government bonds was risky, as the US might default. They then bought European government bonds, only to find their assets frozen and seized. From now on, whether it's European, Japanese, or South Korean government bonds, there's a risk of seizure. This has led many countries, when they have increased foreign reserves, to consider investing in gold instead of dollars, as it's the only remaining international reserve asset. This is why there has been a consistent demand for gold. People also anticipated that once the Fed Chair changed, more money would be printed because the US government's borrowing needs are enormous. If this borrowing is insufficient, the Fed will have to print more money. Therefore, the dollar is expected to weaken, which in turn is expected to drive up the price of gold. This continued until Trump announced the name of his nominee for the new Fed Chair, Kevin. This person has a history with the Fed and is known to be close to the Trump family, offering advice. However, upon reviewing his past, he is not a "dove" but a "hawk," meaning he would be cautious about loose monetary policy. Therefore, with the announcement of this person, it was believed that after May, the Fed might print money excessively, which would cause the dollar supply to increase. This led to a reassessment, and the expectation of a massive dollar outflow diminished. Consequently, people believed that the price of gold might not rise as much as anticipated, causing it to fall sharply.
Professor, is that really all there is to it? Why did it fall so much, 12.6%? Silver also fell 35%. This was a global collapse in one night.
It was an over-speculation beforehand. It was over-speculation because just the announcement of the name caused such a problem that the whole world panicked.
It wasn't just America that panicked; it was worldwide. 124 trillion dollars disappeared.
Yes, the price was driven by the dollar. When the dollar price changed, it affected everything globally, and everything had to adjust.
This price was inflated from the beginning. The dollar weakened, making gold expensive, and it became too expensive. People didn't know what else to do. This news was frightening, causing a collapse. It was a signal for everyone to collapse together. When everyone sold, it went down. The more it went down, the more people panicked, and the more it fell. Professor, do you think it will continue to fall? When panic selling occurs, will it reach a point where it stabilizes and then rises, or what will be the trend? If we only analyze it as panic, it means it should stop soon. Is the panic short-lived, or will it fall further? Will it go from 4,700 to 4,000, or what?
Here's the thing: if many people analyze that previously, when the accelerator was pressed, it was pressed too hard, causing the price to surge like a rocket instead of a steady rise. Such rapid increases cannot be sustained, and at some point, there must be a correction. Now, what's easier to analyze is looking ahead. For example, if we look to the second half of the year, the US government's need to borrow will still exist.
Yes.
It will still exist. In the Netherlands, the US Treasury Secretary changed. Previously, when the US government borrowed, it did so in proportions of Treasury bills (less than 1 year) and 10-year, 20-year bonds, etc. This was a long-standing practice. During Yellen's tenure, she reduced the proportion of long-term debt and increased short-term Treasury bills. Why? Because she didn't want to issue too much long-term debt, as higher long-term interest rates would negatively impact stocks, especially the "Magnificent Seven." Therefore, Yellen supported the market by taking the risk of the US government having a large amount of short-term debt that would mature. When the election was over, Biden lost, and a new administration came in. The new Treasury Secretary, even before taking office, criticized Yellen, saying she manipulated the books to support the stock market. This led to an increase in the US Treasury's issuance, as the short-term debt that matured was substantial. The new Treasury Secretary inherited this situation. Despite criticizing Yellen, the new Secretary did the same. Therefore, at this time, the amount of debt maturing and needing to be reissued this year is enormous, with calculations showing it exceeding 3 to 4 trillion dollars. Considering this, the need for new borrowing remains high.
Secondly, let's look at the long-term interest rate situation in other countries, especially Japan. If we look at the Japanese market, it's clear that people still feel there's a high chance of inflation that cannot be controlled. When the Japanese government has massive debt and inflation is high, lenders will demand higher interest rates. We see that long-term interest rates in Japan have been steadily rising. As Japanese long-term interest rates rise, US long-term interest rates will also have to rise to keep pace. In fact, not just in America, but globally, interest rates will be forced to rise. Given this, can the US government, even after changing the Fed Chair after May, bear such high long-term interest rates? I don't think so. Therefore, I suspect that even after the Fed Chair changes, the Fed will have to step in and inject money, especially into the long-term bond market, to prevent interest rates from rising further. This would be a form of quantitative easing (QE) again. When this happens, the dollar will certainly weaken, and the prices of gold and real assets will gradually rise. From this perspective, in my opinion, in the long run, the prices of gold and other assets will continue to rise, but the short-term outlook is unpredictable.
So, we now see the dollar and gold as intertwined, like twins. Whatever happens to one affects the other. If the dollar falls, gold rises, and if gold falls, people buy dollars. It's a cycle, and we're back where we started. Therefore, we need to watch the trend of the dollar. Gold still has room to fall, but it will eventually reach a point where it shouldn't fall further, as its fundamentals support it. The next thing to watch is whether there will be any changes regarding the dollar, especially with Kevin, whom you mentioned as a hawk. Will he follow Trump's policy of low interest rates? Will the Fed's interest rates decrease in the near future?
That's the thing. Initially, people felt that Kevin would be a hawk, as he had a reputation for being a decisive "samurai" in the past. However, after his name was announced, people discussed and analyzed whether he could truly stand up to Trump.
Yes.
Because he was appointed by Trump, and regardless, he would have to please Trump to some extent. Therefore, some people believe that he might not be a true hawk.
He was selected by Trump. Trump announced his name, so Trump must trust him. If Trump wants low interest rates, will Kevin dare to keep them high? It's unlikely. Therefore, any predictions seem volatile and erratic. We think it will weaken, we think it will strengthen, we don't know which way it will go. It's unpredictable. Professor, in your personal opinion, if you were Trump, would you prefer it to be weak or strong?
If I were a politician, not just Trump, but any politician, they would want the economy to boom, especially this year, which is an election year.
Yes.
It's a midterm election year.
Yes.
Therefore, by November, they want the economic atmosphere and the stock market to look good. They will try to maintain everything. We see them playing games in international politics, showing their strength, demonstrating America's power, to impress American citizens by claiming success and special abilities in foreign policy. This is to make people forget, to some extent, the problems occurring domestically. Everything in America right now is geared towards the midterm elections. Therefore, any policies should be analyzed with the midterm elections as a factor.
So, the chance of it weakening is high because they want the economy to be good, which requires low interest rates. This is a plausible idea. We will have to continue to guess what the actual outcome will be.
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