Gold & Buzz Lightyear

sebastienpautrot
Sep 9
3 min read

09 September 2025

As our friend Dave Dredge has argued for some time, the “good outcome” for bond investors would be a recession (more to follow on fiscal dominance). That would weaken final demand driven inflation and increase spare capacity in the labour market. From our perch, the US employment report on Friday was close to confirming a potential recession. Total US non-farm payrolls slowed to 29,000 on a three-month average basis (chart 1). June employment was revised down to a negative number. Excluding the healthcare sector, the US economy shed 142,000 jobs over the last four months. Historically, such a drop has only occurred at the onset of a recession. The weakness in the headline data is consistent with the partial indicators such as temporary hires, job openings, and confidence surveys. We would expect the Fed to cut by 50 basis points at the September FOMC.

Chart 1

Source: Bloomberg

On the 9^th of September, the BLS will release annual benchmark revisions to non-farm payrolls for April 2024 to March 2025. Based on already published data from the Quarterly Census of Employment and Wages for the last three quarters, it is likely that payrolls will be revised down further by 50,000 to 75,000 per month. As we have noted previously, a common pattern in the lead up to recessions is that payroll growth appears healthy in real time, but subsequent benchmark revisions reveal that the economy was deteriorating much earlier than the headlines suggest.

Put another way, labour and inflation are lagging indicators. Rate cuts are almost never the bold, pre-emptive acts that policymakers like to frame them as. They are reactive by design or a signal that something beneath the surface has cracked. The Fed doesn’t ease when macro conditions are healthy; it cuts when stress is visible to insiders. Ironically, the Donald’s label of “Too Late Powell” might be right.

The more optimistic case is that there is a positive fiscal impulse (cash tax savings) from the Big Beautiful Bill and the desire of the Administration to “run the economy hot.” Moreover, in the near-term US companies will likely benefit from positive operating leverage from the weaker US dollar, AI adoption, and capital spending. The shift in short term rate expectations has also eased broad financial conditions that might avert broader deterioration in credit conditions.

From our vantage point, the clear winner when the Federal Reserve pivots inflationary is gold, especially if the policy support requires quantitative easing in addition to rate cuts. Gold has rallied considerably already year to date and in the current cycle. However, if the labour market has cracked, the Fed will need to become a lot more inflationary.

As we noted last week, the way we have expressed exposure to gold is via a basket of gold miners (available on request). We added that position back in the first week of August. The sub-portfolio has rallied 25% since the start of August and 73% so far this year. What is extraordinary is that the basket still only trades at 10 times cash flow compared to 15.8 times for the MSCI World Index. The recent further impulsive breakout of gold is probably not a head fake, rather it likely reflects genuine sustained demand from emerging country reserve managers and investors more broadly to acquire gold as a hedge against inflationary policy.

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