The end of the dollar? Deutsche Bank, Newmont, and Desert Gold

Political influence on central banks drives tangible assets

If Donald Trump were to prevail and remove Powell from office - either through a kind of impeachment process, which would require proof of misconduct or by amending the Federal Reserve Act - it would mark a critical moment. The former would be difficult due to a lack of genuine misconduct, while the latter would require the approval of both houses of Congress. Currently, the Republicans hold a majority in both houses. Thus, it is not unlikely that Jerome Powell could be forced to step down. For the capital markets, such a move would be a turning point: Until now, such interventions in the independence of central banks have only occurred in countries of minor relevance to the global economy, such as Turkey. The world's largest economy, with a bond market worth a whopping USD 27 trillion, has not been affected so far. However, it is precisely this bond market that investors worldwide consider a safe haven. In its Tuesday edition, Handelsblatt quoted an analyst from bond investor Pimco as saying: "Our clients are concerned about the Fed's independence." Economist Scott Galloway expressed a similar view, calling the independence of central banks "one of the key factors for the stability of Western economies."

Although Jerome Powell's departure as Fed chair is still a long way off, the plans are cause for concern. Observers assume that a central bank that is no longer independent will also reduce the level of regulation in the financial system, prompting banks to engage in riskier transactions. Experts believe that undermined independence leads to inflation risks, currency devaluation, and a long-term loss of confidence. Specifically, there is a threat of higher risk premiums on bonds and a flight to tangible assets. Just two weeks ago, Deutsche Bank warned of a weakening of the dollar's role in the global financial system.

Desert Gold sprints ahead of gold producers

The development of the gold price shows that this flight to tangible assets is already underway. Shares in gold producers such as Newmont have also performed well recently. Buyers from emerging markets in particular, who have previously relied on the dollar, are currently shifting their preferences to gold. The dollar, on the other hand, is a shadow of its former self and has lost around 10% of its value since Donald Trump took office, as measured by the Dollar Index.

While shares in large gold producers are considered stable, but sometimes perform weaker than the gold price, small gold stocks have the potential to outperform significantly. For example, Canadian gold explorer Desert Gold climbed by more than 16% last week. The reasons for this lie partly in higher risks at the company level but also in the great potential for surprises. Desert Gold operates SMSZ, a gold project in Mali that, with an area of 440 km², is one of the largest in West Africa. The Company has already identified around twenty open gold zones.

The USD 27 trillion market is faltering – A green light for gold?

One highlight is Gourbassi West North, where drilling has revealed gold grades of up to 1.13 g/t over 42 meters. There are already producing mines in the vicinity of the SMSZ project, such as the Fekola mine operated by B2Gold, the Loulo-Gounkoto complex operated by Barrick Gold, and the Sadiola and Yatela mines operated by Allied Gold. Many gold investors are convinced that SMSZ is a potential takeover target given its proximity to existing projects.

While shares in gold producers are already reflecting the growing uncertainty caused by Donald Trump and his administration, the big rush for precious metals does not seem to have started yet. While investments in gold and in shares of the largest producers are relatively straightforward, some investors appear to be hesitant when it comes to smaller mining stocks. However, this could change as soon as yields on US government bonds rise again and Trump takes further action. If the USD 27 trillion US bond market starts to falter, the effect on well-positioned exploration companies will likely be significant. Despite or perhaps because of its low market capitalization of CAD 18.8 million, Desert Gold is an exciting bet in the event of further bad news from the White House.