It is a great feeling to own an asset when its price surges. Gold may at least partially be an exception. Most everyone knows that gold serves as a disaster hedge…or a severe inflation hedge…so does gold’s explosive gains signal something we should be concerned about?

While anything is possible, gold’s rise today is troubling primarily in the context of geopolitical rivalries.

America has been the dominant power in the post-cold war period. Much of that power is economic in that we are the largest economy and hold the primary reserve currency, the Dollar. This gives us enormous leverage in international trade as almost 80% of all cross-border transactions are priced in Dollars (even when the U.S. is not on either side of the trade.)

International trade in Dollars is conducted via the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. The willingness of America to provide liquidity to this system is of immeasurable importance to the world. Cutting off countries from SWIFT – as the West did with Russia after it invaded Ukraine – is an enormous handicap to their ability to trade.

China has long thought that this system gave the U.S. too much power (even to sanction China itself in a trade battle.) Their financial system lacks the depth and openness required, and the yuan remains too tightly controlled by the state to serve as a significant reserve currency. Yet they want another option to conduct trade rather than relying on the SWIFT system.

Enter gold, already the second biggest reserve “currency” behind the Dollar. In the last two years, China has become the world’s marginal buyer of gold according to Bloomberg. David Kotok of Cumberland Advisors points out that the Chinese have set up an alternate to the SWIFT system known as CIPS. CIPS issues tradeable warrants backed up by China’s growing hoard of gold.

Use of the CIPS system is growing fast and is now used in 30 countries. Its only limitation is the amount of gold in its vaults. That is why China keeps buying. The big price gains also increases their CIPS capacity. In other words, they are not price sensitive. As shown on the chart below, both the price of gold in Yuan and the number of warrants issued have gone ballistic.

This allows China to influence and control more international trade which provides more security for them. It also supports Dollar weakening which has been occurring for over a year. U.S. protectionism (tariffs) accelerates the process.

Source: Cumberland Advisors, Bloomberg

Gold is not the only asset impacted by this rivalry of great powers and the systems that support them. The recent trade negotiations with China showed that they also have leverage over the U.S. and the rest of the world with rare earth mining and refining. This has led to an all-out campaign by America and others to increase our supply and refining capabilities.

This sudden change from efficient, just-in-time supply chains toward self-sufficiency and security has also impacted the price of semi-precious metals like silver, platinum, and palladium where year-on-year price gains have greatly exceeded that of gold.

Base or industrial metals such as copper, nickel, and aluminum have also experienced huge price gains over this period. These are fundamentally important materials for domestic manufacturing — in peacetime but more importantly in any war or threat of war.

In summary, the massive gain in the price of gold appears to be part of a larger story of a new global order where each side believes it must provide self-sufficiency for its own security. China led the world down this path with its 2015 plan that called for Chinese dominance and/or self-sufficiency by 2025 in the 10 major areas it believes critical. Much of this has already been achieved. This accompanied a massive military buildup.

Gold is a major part of China’s plan. Higher prices for the reserve currency metal are a plus, not a minus, as it builds its reserves faster and with less capital actually spent. That does not mean they will not from time to time pull back their buying, but the price will likely remain on an upward path so long as this plan continues in place. Ed Yardeni last year’s appreciation dinner speaker, has forecasted (since 2023) that gold will reach $10,000/oz by the end of 2029.

Is there anyone left in the country who still believes that we can continue the social benefit promises currently in place without change? Today, over 60% of all federal tax collections go to the major social programs including Social Security, Medicare, and Medicaid. Based on current projections, that percentage will keep rising until eventually exceeding 100%.

Those like myself that have preferred limited government and staying close to the historic percentage of government taxes have to deal with this reality (in addition to the significant increase needed in defense spending).

Either benefits must be reduced, or taxes must go up, or some combination of the two to avoid a financially destabilizing debt crisis and severe cuts to benefit programs. Either of which could easily lead to severe social unrest, even worse than that experienced in France today over these issues.

The Republican party refuses to raise taxes while the Democratic party refuses to reduce benefits. And so, despite a building crisis, we have a stalemate. While a crisis is unlikely this year, at some point ahead it will happen without major changes. A bipartisan compromise is the better course. Such a compromise was reached once before with the Greenspan Commission in 1983.

What might such a compromise look like? Here are some of the realities that would have to be addressed.

• The over age 65 segment of our population was the poorest demographic group in 1960 yet is now the richest.

• Those retired are growing rapidly compared to our workforce growth. This will continue for years ahead due to the advances in longevity and our below replacement birth rate.

• The spread between the top 10% of wage earners and the other 90% is now the highest in history while the highest income tax rate is lower than its post WWII average.

•  Social Security’s annual benefit increases have risen far more than inflation over time and continue to do so.

• Asset owners (homes, equities, others) have done far better than non-asset owners yet have more favorable tax treatment.

Based on these realities, the following would be among the realistic changes called for in a grand bargain.

• Means-test Social Security (SS) Benefits. Reduce benefits paid to high-income recipients. (Eliminate the fiction that SS is a pension.)

• Change the inflation calculation. Currently, the annual increase in Social Security is based on the average increase in prices for a certain subset (30%) of workers. Replacing it with the BLS’s “chained CPI” reflects the substitution effect of consumers switching to lower priced products when prices rise. This better reflects the inflation experienced by retirees.

• Move the age for Medicare to 67 (at some point ahead). Medicare should recognize the same reality of longevity as SS. Pass legislation allowing private insurance to provide options to this age.

• Reduce favorable tax breaks available mainly to the wealthy. The tax code is full of special tax incentives to the members of our society that need it least.

  • Eliminate carried interest rules that allow conversion of earned income to more favorable capital gains.

  • Return the top personal income tax bracket to 39.6% (from the current 37%). Our economy has shown it can perform well with taxes at that level.

  • Cap the step up in basis at death at no more than the estate tax exemption. (Eliminates the free ride on billions of capital gains avoidance.)

  • Cap charitable contributions to say $10m in any one year and $100m at death. The mega rich fund hundreds of billions of dollars into foundations for their interests whereas taxes are needed for the public interest, particularly to fund our obligations for social benefits, defense, and interest on the debt.

The American public will rebel against any changes to their benefits unless they are considered modest and fair compared with the changes to the wealthy.

The wealthy have done much better than the rest of the public, which accelerated after Covid. Although they already pay a disproportionately large share of taxes, their share of consumption continues to grow. This implies that their share of disposable income continues to outpace the non-wealthy even with today’s tax load.

We are moving steadily toward being an oligarchy where the “1% (or 0.1%)” controls the means of production, the distribution of incomes, and most capital investment. This is unhealthy for civil society and gives rise to the acceptance of socialist ideologies in our universities, our institutions (including foundations), and political candidates like Mamdani in NYC.

At one point, this was just the political fringe that deemed socialism an acceptable alternative. Yet this acceptance is growing rapidly among our young people—not because it has earned this acceptance anywhere it has been tried, but because of loss of faith in capitalism to share its benefits across the entire population.

In order for such a grand bargain to have staying power beyond one presidential administration, it would have to have large bipartisan majorities in both houses of congress. To achieve this, the wealthy from both parties would have to speak out in favor of it (both publicly and privately). Why would they support it? Because they are the biggest long-term losers if there is a civil or fiscal breakdown.

Of course, some provisions would need to be phased in over a period of years to allow both individuals and the economy to adjust without major disruption. In addition, the new revenues would need to be directly or indirectly applied to reduce deficit spending through budget and social benefit controls agreed to by a large bipartisan majority.

There is no doubt that most observers will contend that a grand bargain could never happen. Certainly, others have tried to craft a grand bargain and failed. But time is running out on our having control over the meaningful changes needed before unplanned and unwanted changes are forced upon us by a social and fiscal crisis.