Tariff-driven 'sell America' trade leaves gold buyers with just one question: How much?

I am reiterating my bullish view on gold. Gold staged an upside breakout through a cup-and-handle pattern at $2,100 in early 2024 and hasn't looked back. Moreover, it has staged upside relative breakouts against both the S&P 500 SPX and a 60%-stock/40%-bond portfolio, and it has stayed above the relative breakout levels even after its recent pullback.

The technical pattern of multi-year bases and subsequent absolute and relative breakouts is highly reminiscent of the pattern experienced by gold at the start of the century, which took the yellow metal from its breakout at $500 in 2004 to significantly higher prices.

For a longer-term perspective of the upside potential in gold, a point-and-figure chart of monthly gold prices, using a 5% box size and 3-box reversal, shows a measured objective of almost $7,000.

I interpret this as an indication that gold's bull-run has several years to go before it reaches a final top. It's hard to estimate a precise time frame for the $7,000 upside potential for gold, as point-and-figure charts don't have time as a component. The best guess is three-to-five years.

'Sell America' is a tailwind for gold

The "sell America" investing trend has given gold (GC00) a significant secular tailwind. U.S. President Donald Trump's pivot to an isolationist policy for America has shaken confidence in the status of American geopolitical leadership and the status of the U.S. dollar DXY.

The long-term costs of these policies are the probable stall in U.S. productivity, and an increase in the cost of capital to U.S. companies through the removal of the USD's "exorbitant privilege" as a reserve currency.

Credit agency Moody's recent downgrade of U.S. debt to Aa1 from triple-A underlines a number of stress points that are rattling the bond and currency markets, as well as the loss of the dollar's "exorbitant privilege".

-- Deficits are projected to grow as entitlement spending rises and revenue stays flat.

-- Ongoing fiscal deficits are exacerbating a supply-demanding in Treasuries.

-- The inflationary effects of the trade war could see a hawkish Fed against a dovish backdrop by other major central banks, which will reduce the relative growth potential of the U.S. economy against the rest of the world.

-- Possible U.S. policy changes will see investors demand a higher premium for U.S. Treasury debt in the face of increasingly unfriendly tax treatment and rising uncertainty.

Deficits don't matter - until they do

Trump and the Republican-controlled Congress have been operating under the age-old assumption that deficits don't matter. I would say that deficits don't matter - until they do.

Bond rating agencies, as well as the market, may be telling the U.S. Treasury that budgets are about to matter. Consider the budget proposals making their way through Congress. As is the case with virtually all budgetary math projections, the budget plan frontloads the benefits (tax cuts) and backloads the politically painful spending cuts. This will have a stimulative effect on the economy in the first two years, which is potentially equity-bullish, while risking bond and foreign currency tantrums.

Here is why deficits may start to matter as Treasury supply-demand imbalances become evident. Economist Brad Setser at the Council on Foreign Relations documented how official demand for Treasurys has been falling.

In general, bond inflows also have been declining. Setser rhetorically asked if the flows can return to the $1-trillion annual pace, which would sustain a 4% of U.S. GDP funding level, or stay at the $500 billion level. Setser concluded, "I do think it is fair to note that increasing a 6.5% of GDP fiscal deficit into...waning foreign demand for coupons is a well, somewhat bold, move."

Indications that the market is losing confidence in the U.S. and U.S. exceptionalism.

Jens Nordvig, the CEO of Exante Data, had an even more alarming observation. U.S. real yields are spiking even as economic growth expectations are falling. These are indications that the market is losing confidence in the U.S. and U.S. exceptionalism.

Fed wildcard

Meanwhile, over at the U.S. Federal Reserve, policymakers have adopted a cautious approach to monetary policy. While falling inflation indicators would ordinarily warrant interest cuts in the near future, the uncertain effects of the new tariff regime on inflation has resulted in a go-slow and wait for the data approach to interest rate policy.

As well, economist Robin Brooks highlighted a growing divergence between the bond market's inflation expectations in the U.S. and eurozone. While eurozone expectations have been largely flat, U.S. expectations are rising. This will lead to a divergence in monetary policy. The European Central Bank (and other central banks) will ease, while the U.S. Federal Reserve stays tight.

The glass half-full interpretation is that interest-rate differentials should boost the value of the dollar, while the glass half-empty interpretation is a perceived economic growth differential between the U.S. and the rest of the world, which is bearish for the dollar and U.S. assets.

In summary, this leaves U.S. fiscal and monetary policy in a difficult position as it's exposed to rising tail-risk. If fiscal policy is too easy, it risks a bond and foreign currency tantrum that leads to a drop in the dollar and rising bond yields. On the other hand, if fiscal or monetary policy is too tight, it risks a recession, which rapidly expands the deficit and the fiscal sustainability questions raised by Moody's and other rating agencies that downgraded U.S. debt.

Trump spurs capital flight and weakens the dollar

What's bearish for dollar-based assets is bullish for gold.

One proposed provision of the Trump administration's new tax bill, Section 899, increases the tax rate on countries that "unfairly target and burden U.S. businesses and individuals operating abroad" based on the imposition of an "unfair foreign tax", such as a tax on digital services and a global minimum tax. It raises the U.S. federal tax rate by 5% to 20% on tax residents of offending countries and has language that overrides existing tax treaties. The new rates would apply to passive U.S. source income such as dividends, interest, royalties and rents, as well as active U.S. operating income.

At a minimum, an enacted Section 899 of the tax code would impose a tax on interest income such as Treasury and U.S. Agency paper on investment by entities tax domiciled in jurisdictions with "unfair foreign taxes. This would include the EU, which is part of the global foreign tax regime agreed to in the past. Section 899 effectively deters foreigners from holding Treasury paper and reduces demand for U.S. government debt.

Oops. That's one way of encouraging capital flight and depressing the dollar.

What's bearish for dollar-based assets is bullish for gold. To the sell-America trade, add rising U.S. deficits, shaky bond markets, an increasingly hawkish Federal Reserve and policy uncertainty.

Gold's bull run will not end until investor psychology changes and the mom-and-pop investor piles in. Current retail demand is mainly driven by Asian investors, while U.S. and European investors are nowhere to be seen.

As well, global family office allocations to gold and precious metals is just 2%.

Market tops don't look like this.