The co-chief investment officer was asked what he believes is driving the yellow metal’s rally during Talaria Capital’s quarterly webinar on 22 October.
“Obviously we’ve seen the photos of people lining up around the block in Sydney. The predominant narrative is that it’s this debasement trade. You know, the government is going to continue to print and it’s ultimately an inflationary step,” Selby-Smith said.
He explained that the current environment reflects themes of currency debasement, fair value and inflation. Selby-Smith argued that the global “fight for capital” would, over the long term, prove marginally inflationary – though he offered no specific view on how high inflation might rise.
However, he noted that this pressure isn’t yet visible in inflation break-evens or long-dated bond yields, with the exception of Japan, where debt levels are exceptionally high. Outside of that, very long bonds have shown little movement.
“My personal view is that it’s starting to reflect worries about the debt issue,” he said.
He added that recent market dynamics are beginning to reflect broader concerns about sovereign debt – an issue that has not received sufficient attention in mainstream discussion.
Recalling a recent conversation with a client, he pointed to August 2007, when BNP Paribas froze several mortgage-backed securities funds, as a moment Selby-Smith described as the true beginning of the Global Financial Crisis.
At that time, gold was trading around US$660 an ounce but by the time of the Lehman Brothers collapse in September 2008, gold had risen to US$1,000 an ounce despite inflation running at negative 4.5 per cent.
“The idea that gold only goes up in this inflationary environment, I don’t believe is true. And my personal take, and, bear in mind, I’ve just written a quarterly all around US debt, is the gold price move to date is a reflection of the debt issue in the system, rather than actually the market talking about an inflationary issue – I do think that comes later, but I think this move is a debt issue,” Selby-Smith said.
Meanwhile, Talaria’s quarterly update focused on the United States moving away from market-led principles to a state-directed model where political goals are prioritised over economic efficiency.
This shift signals the arrival of a new “political economy” in the world’s largest economy, according to Selby-Smith, with significant implications for global investors, capital allocation, and the stability of the international financial system.
“What we are witnessing is a fundamental recalibration of the relationship between the state and the market. The invisible hand of the market is giving way to the clunking fist of government,” he said.
“This new approach involves the government actively managing the economy, moving beyond setting the rules to picking winners and directing investment in key sectors. When politics as well as profits steer capital allocation, valuations become harder to pin down and it is more costly to be an outsider.”
Selby-Smith believes this is marked by a move towards fiscal dominance, where the need to fund government spending and manage the US’ enormous debt takes priority over independent monetary policy, placing the Federal Reserve under unprecedented political pressure.
“The era where central banks could focus primarily on fighting inflation is being challenged,” Selby-Smith said.
“The political need for growth and funding large initiatives can hinder the fight against inflation, creating a structurally different and more volatile environment where investors face a persistent inflation risk premium.”
This expansion of the government’s role in financial markets has been made clear in several ways, including a retrospective equity stake in Intel, securing a “golden share” in US Steel, and creating new sovereign investment vehicles, according to Selby-Smith.
He said the assumption that the US is a purely market-driven economy is no longer true.
“For global investors and policymakers, the rules of the game are being rewritten.”
“Investors must now price in a political risk that did not previously exist in developed Western markets to this degree. This affects everything from inflation expectations and potential future capital controls to the repricing of assets in sectors deemed strategically important by the state.”
Selby-Smith added that rising consumer inflation expectations, a surging gold price, and a weakening US dollar indicate that this shift is already influencing asset allocation.
“We also believe market operators have responded to greater government intervention with an increased appetite for speculation and a growing disregard for the dangers of illiquidity, and there may be a shared sense that the government will act as a shield from disaster.
“This new political economy introduces a layer of complexity that demands a more considered investment approach, and understanding that will be central to navigating the next decade of global markets.”
