This weekend, I listened with dismay to Tucker Carlson’s hour-long interview of Treasury Secretary Scott Bessent. Filled with misinformation and misconceptions presented by Bessent, it made two things clear. First, the tariffs—in case you needed further confirmation—are, to put it mildly, anything but a well-thought-out plan to rescue and reinvigorate the U.S. economy.
And second, investors more than ever need to hold gold, including having a stake in as much physical gold as possible. Along with gold, the message also is to own some silver and copper. As for equities, until the dust settles, only the most special of special situations among domestic equities should be considered. Foreign investments should be weighted higher than domestic ones, but still have nowhere near the weighting of gold.
I had expected more of Bessent, a successful financier who had credibility as a former chief advisor to George Soros. The Soros funds have been notable for their ability to understand and take advantage of geopolitical events. But Bessent exhibited a complete misunderstanding of, among other things, China’s economy along with economic realities here at home.
Bessent began by mischaracterizing the nature of last week’s market crash, saying it was really just a swoon in the massively overvalued “magnificent 7” tech giants and not a statement about the economy. As evidence, he asserted that the unweighted S&P 500 (a version of the S&P 500 that weights all stocks equally) has been handily outperforming the weighted S&P 500 index, which correlates more strongly with action in the handful of giant stocks with super-elevated capitalizations. If accurate, that would be somewhat reassuring. Unfortunately, it’s false: Since their recent highs in late 2024, the unweighted S&P 500 has declined fractionally more than the weighted version.
But even more important was Bessent’s apparent ignorance about both China’s economy and our own. At first it was encouraging to hear that he thought an ultimate goal would be a cooperative approach to our chief rivals, China and Russia. But his argument for why China would welcome cooperation was highly misleading and misinformed.
Bessent portrayed China’s economy as the most unbalanced in recent world history, with overall demand drastically lagging production. That, in conjunction with our larger consumption-driven economy, meant that both the U.S. and China would gain from cooperation. China could focus on pushing up consumer spending as the economy’s growth driver, while the U.S. would benefit by attracting increasing numbers of manufacturers – an outcome Trump has said is the tariffs’ major goal.
There’s no doubt the U.S. would benefit if manufacturing grew. Since the early 1970s, according to most estimates, manufacturing jobs here have dropped to around 10% of total employment, compared to around 25% back then. But the tariffs won’t bring them back, because they do nothing to address the underlying problems that will stymie any effort to do so.
Those problems boil down to insufficient resources here, both material and human. We lack key critical natural elements and don’t have enough skilled workers. These deficiencies, clearly, won’t be helped by making the resources we lack even more expensive because of tariffs. Nor will we lift up our labor force by such measures, say, as eliminating the Department of Education. As China retaliates by raising tariffs on us and sharply restricting its exports of vital rare elements we need for our technologies, what already was a dire situation is getting closer to a catastrophic one.
Moreover, Bessent’s assessment of China’s economic problems was misinformed. It’s true that China’s consumption, at 44% of GDP, is considerably less than that of many countries and much less than the nearly 70% in the U.S. Still, consumption in China is growing, and at a faster rate than other sectors. At 44%, Chinese consumption has moved past both exports and investments as a contributor to GDP. China already has sharply increased government spending to spur consumer confidence and has taken dramatic measures to improve its weakest sector, real estate. The results are already apparent in that real estate prices have leveled and even started to rise, while consumer sentiment has been improving.
Bessent failed to see that China’s relatively weak consumption will actually be an advantage in dealing with the tariffs. Chinese exports to the U.S. already have fallen to about 2% of China’s GDP, lower than for any other country in the world. Because it’s so low, it wouldn’t require heroic efforts to raise overall consumption enough to compensate for a further drop in exports to the U.S.
The interview with Bessent didn’t mention another ramification of the tariffs: the possibility—or likelihood—that they will hasten the demise of the dollar as the world’s primary reserve currency, with gold taking over that role.
The most recent BRICS meeting, held this past October in Kazan, made clear that the only question is when this change will occur. The Chinese have somewhere around 35,000 metric tons of gold in all. And while this includes a lot of gold held by individuals, there are ways to make that portion available as monetary gold – for instance, by issuing bonds to allow investors’ gold to be allocated as monetary gold. At gold’s current level, that could create a situation in which total global monetary reserves held in gold become the world’s largest Tier 1 reserve asset, overtaking the dollar.
Further appreciation in gold, which is tantamount to dollar depreciation, would further solidify the metal’s role. And BRICS, despite some commentary saying otherwise, is perfectly ready to introduce a trading system centered around gold. Prior to the Kazan meeting, the system, created in conjunction with the Bank for International Settlements (BIS), was called Enbridge. Then BIS dropped out, leading most analysts to project the dollar’s reserve role would last at least 10 more years. However, BIS had little to do with developing the Enbridge technology. All that’s remaining to implement a gold-centered reserve system are greater cohesion among the BRICS members and the willingness of China to announce its monetary gold holdings. The tariff war Trump has launched has only made those obstacles far easier to overcome and brought a gold-centered system far closer—likely within the very near future.
For the U.S., the ramifications could, on a worst-case basis, be hyperinflation that might resemble the days of the Weimar Republic, a period that started with deflation followed by a level of hyperinflation hard to grasp. During that period, if you had owned gold, you would have doubled your money in real terms.
We still hope that the U.S. is able to pull back from the brink and cooperate with the rest of the world, avoiding the most catastrophic scenarios. But whether or not it does, at this juncture gold is the indispensable investment. There are many ways to go about owning it, and they’re not all equal. Our preferred approaches are presented in our investment recommendations featured in Turbulent Times Investor.
What do we make of the drop in gold in last week’s last two trading days? History shows that economic turmoil typically leads to some turmoil in gold as well. This can be very painful over the shorter term, as in 2008-09, when gold declined by more than 30%. So far, the recent correction, of 3% to 4%, is barely noticeable. Moreover, it took place within a few-hour stretch and smacks of manipulation, occurring during a Chinese holiday in which the Shanghai gold exchange and other Chinese markets were closed.
If so, it could mean that major banks increased their naked short positions in gold. That would leave them deeply exposed to a rebound in the metal. Over the shorter term we can’t predict how low gold will go, nor can we predict when a rebound will occur. It could be days or weeks; we doubt it will be months. We can say that the longer the decline in gold continues, the more painful it will prove for any banks or institutions participating in the manipulation. That has the potential to become another major problem here.
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