This past week was a whirlwind in markets, and we have a lot to talk about. However, a lot of the things that happened also did resolve by the end of the week. So today, let's talk about two things. First off, let's talk about the ongoing super rally in gold and silver. Silver breaching $100, gold just shy of 5,000. And as we discussed, we also have to weave in what happened in Davos because I think the two are related.

Now, starting with the precious metals. If you look at a chart of silver, it looks like it's gone absolutely parabolic. Now, as you guys know, silver is basically the original memecoin. Before there were meme stocks, before there was crypto, before there was NFTTS, there was silver. And retail investors really, really liked buying silver. Over its history, silver often, well, periodically goes into these parabolic surges and then uh implodes. So, it looks like we're in another parabolic surge. Silver just, you know, when these happen, you have no idea how high it can go. Whispers of 150, whispers of 300, and honestly, not too long ago, the whispers were for 100. Now, gold is also, of course, doing very well as well, but then that seems to be a much steadier trend.

Now, one of the big drivers of the precious metals rally has to do with geopolitics. Last weekend, we had the prospect of an EU-US trade war. The president had told the European Union that he needed Greenland and if he couldn't get it, he would put tariffs on them. European leaders stood up for themselves and also suggested that they would fight back. Now, with this background, we kind of had flashbacks from the liberation day trade war last year. Remember last April was a very volatile time in markets. What happened then though was that there was a big sell-off in US assets. So the dollar sold off, equity sold off, and even treasury sold off, a very unusual combination. In retrospect, when we look at the official data, it becomes clear that there was a big foreign exodus from US assets in April. But the foreigners came right back months later and actually last year, according to official data that we have so far, was a pretty big year for inflows into US equities. So the sell America trade last year was fleeting, but it did come back this past week as prospects of the trader were heating up. There was very much a sell America trade, and so there was a lot of uncertainty as to how this would resolve.

Now the president went to Davos, met with all the European leaders on the stage. He gave a speech. He basically reiterated the absolute need for the US to have Greenland. Suggested that, you know, the US has always been there for NATO. You know, it doesn't seem like it's uh NATO may not always be there for the US. After all, it doesn't have much military. So, you know, maybe these guys should, you know, be nice and do him a solid and give him Greenland or something like that. So what did calm the market a lot though was the president said that he would not use military force to take Greenland, and for some reason there were rumors or fear of that could happen, and when the president affirmed that, that seemed to calm the markets down a lot. Um, later on, there were whispers that there was a framework of a deal. It seemed like everyone climbed down and they would work something out, details uh to be announced. Now this really uh reversed the sell America trade pretty quickly. So it was really again, just a fleeting moment. Uh, during that moment though, you did have European uh pension funds, one in uh in Denmark in particular, I believe, go out and tell everyone that they sold all their US treasuries. They held about 100 million. So basically zero. But there were talking heads that were suggesting that maybe the European Union could put pressure on the US by selling US assets. After all, we all know that the president cares very much about the stock market. Looking at the data, it's clear that the Europeans do hold a lot of US assets. Among them, the largest category is US stocks. Not for the goodness and not out of the goodness of their heart or for the benefit of the president, of course, but because US stocks have been a pretty good investment, especially if you want exposure to AI, which the European Union doesn't have very much of. Um, but so far this uh this sell America trade happened briefly, unwound again, but it's something that seems to be lurking in the background. There is increasing unease uh with how the world is changing, and the European leaders, I think President Lagarde of The ECB memorably told everyone that she would do a SWOT analysis, strengths, weaknesses, uh opportunities, threats, like a good technocrat. This is a wakeup call, a bigger one than we ever had. And I think that Europe is going to look at its strength, look at its weaknesses, do a, you know, a big SWOT analysis and decide what do we need to do to be strong by ourselves. Um, but of course, technocrats have been doing a terrible job over there for a long time. Um, so it just kind of shows to me at least that a lot of people there just don't fully grasp that the world is changing, but they are beginning to now. One star that stood out throughout all this turmoil was precious metals. Now, even last April when we had the Sell America trade, everything did poorly, but gold did well. So it seems like there's growing awareness in the markets that when you have risk that emanates from the United States, gold is a good hedge. And there's an interesting work from the BIS just last month suggesting that we may be in a bubble in gold because a lot of the inflows were driven by retail investors, which makes sense to me since gold really is more of a retail investment. If you are a professional investor, you know, you go to economist school and they read Ben Graham or something like that and they want cash flow. But I think there's more awareness now that you can have gold as a portfolio diversifier. And if that's the case, a lot of the large investment managers, big accounts are going to be underinvested. And so, uh, that suggests that there could be further upside in gold. I mean, silver I think is something separate. But I think this geopolitical issue, this and this awareness of greater diversification benefits of gold is a good tailwind. Now at Davos, we also had a very memorable speech uh by Prime Minister Mark Carney of Canada. It was actually a very well-received speech and I thought it was very insightful. Basically Carney is laying out that the world has changed, that we middle powers, we have to unite. If we're not at the table, we're on the menu. As he memorably said, it was uh very much uh not so subtly hinting that the US is behaving in kind of a hegemonic aggressive way, and that everyone else, if we don't stand up together, we're going to be taken advantage of, which is again, very, I thought, a very clear analysis of of what's happening in the political situation. However, though, it did elicit very poor reactions from the president who called him out, and also today he is announcing that he's going to put tariffs on Canada if they do a trade deal with China. Now, just as Mark Carney is talking about having a multi-polar world, being able to hedge relationships with other people, he also is acting on it by going to China last week, concluding a deal with China where Canada would sell canola oil to China, and in return, tariffs they have on Chinese EVs. Currently it's at 100% basically, uh, no Chinese EVs into Canada. That's changing now. There is a quota on this, and there is some domestic politics there. Ontario, where the car industry in Canada is is based, is upset about this. But it does show that Mark Carney really is diversifying his relationships, maybe building more better relationships uh not just with um like Europe, but with with China as well. Now, at the moment, Canada does do the bulk of its trade with the US. So it's very reasonable and sound to diversify those relationships. U, but that did make the president unhappy. His speech was very obviously targeted uh in a defying tone towards the president. And of course, we do have upcoming NAFTA renegotiations in somewhere, which looked like it was going to be difficult. Now, one other thing that when it comes to geopolitics, we have to keep in mind on is that there is increasingly risk, not just let's say in Latin America, which you saw Venezuela, but there's increasing reports that there are military assets being moved to the Middle East, and that looks like it's going to be something that that is going to keep a bid on gold. As if there is war in the Middle East, if the US does decide to strike Iran, as is periodically reported in big publications, uh, that's going to be a major tailwind for for for gold.

But looking at more traditional metrics, one other thing that happened last week, of course, was just as the sell America trade last year unwound with treasuries being bit again and equities rallying again. Um, last year though, the dollar did not really recover its big sell-off and had a pretty bad year last year. This week, something similar happened. The dollar uh also didn't have a good week. If you look at the dollar index, notable decline, and of course, weaker dollar gives upward pressure, upward tailwind to gold. Now, dollar has been declining against many currencies, but one currency it has not been declining against is the Japanese yen, until of course, this Friday.

So, secondly, let's talk about what happened in Japan the past week. So Japan, just for context, is in a very interesting situation. So inflation, it looks like it's around two, between two and 3%. So it's definitely at the BOJ's target. But on the other hand, the BOJ has kept interest rates very low. Even uh so, it's projected to continue to hike rates, but right now it's 0.75% on its policy rate. That is of course, a lot lower than say, 2 and 1.5% inflation. At the same time, it's running what many people perceive to be more stimulative fiscal policy. Now, the data suggests that the fiscal position of Japan is improving, but Prime Minister Takahi over there called snap elections, is trying to get a bigger majority in the legislature. And I think it's widely perceived that if she were to get more legislative power, she would try to run a more stimulative policy and potentially also have a little bit more say in how monetary policy is conducted. So you have the very much the prospect of some degree of fiscal dominance, and also um at a time where it doesn't seem like the economy is needs uh needs that. And so you have Japanese bond yields consistently rising. Now, to be clear, bond yields in Japan have been very low, and so for them to adjust to this, you know, two, 3% inflation regime, plus uh the prospect that this may continue, plus that BOJ may continue to hike as the market projects, is totally reasonable, but it is becoming a little bit disorderly in the long end of the Japanese bond. You had a huge, huge upward surge earlier in the week, and that probably played a role in impacting US assets as well, as US treasuries as well. Now, when you move further out into the curve, it's going to be less liquid, and so some kind of hiccup is to be expected. And so, towards the end of the week, we did see um some of that retrace. At the BOJ meeting, the BOJ officials also suggest that working with the uh fiscal authorities there to try to maybe do something. So, it seems like they're aware of this, but it doesn't seem like it's something that is uh kind of like a total panic. It really seems to me at least so far that it's the rate market adjusting from decades and decades of disinflation to basically a return to more of a normal 2 to 3% inflation, and potentially more as the population ages.

Now the flip side of course, with the BOJ keeping interest rates low, is that it also has been very negative for the currency. If you look at a chart for USD JPY, you can see that even as uh the United States dollar depreciated against many other currencies, it continues to appreciate against the yen, with the yen surging to around 160 yen to the dollar. Now, this has historically been a time where it's been a red line where Japanese authorities intervene. Um, part of it is because when you have very weak yen, that becomes a problem for um inflation in Japan, especially as they import a lot of stuff like crude oil. So inflation politically unpopular, the government does something. This time around though, um, it seems like this was also a red line. But also note that at the moment, with energy prices so low, analysts are thinking that, you know, this inflationary flow through from weak currency is not going to be as strong because oil is uh, you know, just around $60. Um, the BOJ did reportedly seem to intervene. What we saw in the yen market on Friday was that a discreet kind of uh appreciation in the yen, USD JPY go lower. Uh, but then that was, you know, just a little bit. What really, really seemed to kick in the buying in the end selling in US JPY was murmurs that there was a rate check by the New York Fed on Friday. And what that is is that the New York Fed, which is uh where the trading desk of the Fed is, was calling dealers, like when the Federal Reserve interacts with markets, they do it through the primary dealers, calling dealers and asking about, you know, where yen is trading and so forth. And so, um, that seemed to tip off to the market that maybe the Fed would intervene into the currency markets, since that's kind of what you would do, right? You would kind of see where the market is trading first. Now, the Fed does not have jurisdiction over currency policy. So, this is going to be on behalf of the Treasury. So, what it is, it's seeming like Secretary Bessend or whoever over there has had enough of this yen weakness and is doing something about it. And they could be doing this in coordination with the uh Japanese authorities. Maybe the Japanese authorities are thinking that, you know, our intervention really hasn't been super effective. After all, we only have so many foreign reserves. But if we have the US step in, the US has basically, you know, a dollar printing press. They can continue to sell dollars and buy yen, that is to say, strengthen the yen. Maybe that would be more authoritative. But in any case, this was very effective. And just the New York Fed on behalf of the Treasury, just making some phone calls, really had a big impact on the market. And it's telling everyone that it's not just the Japanese authorities are drawing this 160 uh USD JPY as a line in the sand, but the US Treasury is on board as well. And so I think historically speaking, um, you know, this sudden strengthening of the yen has been risk negative. And so it's be interesting to see what happens uh when markets open uh Sunday. Now, it doesn't necessarily mean there's going to be a carry trade blow up. I mean, maybe people don't have uh heavy positions in that, but there are going to be people who are conditioned, maybe algorithms and so forth, to say that a strong yen is going to be riskoff. So I think that that's going to be interesting to see how that happens. Um, oh, one other thing, of course, is to note that uh the BOJ did in their meeting last week revise up their inflation forecast. So the market and again, continues to think the BOG will continue to hike, and that should strengthen the yen, but I think the problem is that they're approaching it too slowly, and you know, inflation is 2, 3%, policy rate is at 0.75, so they are by many metrics still pretty easy.

All right, so that's all I prepared for this week. Uh, this coming week, I believe is a Fed meeting. So I'll be back to talk to you about what I think uh happened at the Fed. Doesn't look like it's going to be much happening. Very, very boring is my guess. An interesting development in the Fed chair race is that now Rick Ryder of Black Rockck is now favored to be Fed chair. There were some positive comments that uh were whispered about him over the past week. So, we'll see how that happens. He has an interesting view on monetary policy. Uh, there are tweets that suggest he shares kind of an MMT view. So, maybe I write about that this week. All right. Talk to you all soon.