(Kitco News) - The "Broken Money" author says the Fed's tools aren't built for this kind of inflation, nobody in Washington wants to cut spending, and gold needs some time before its next run.
By Jeremy Szafron, Kitco News
If you own gold, Monday wasn't a fun day to check your screen.
Gold dropped more than 4% at one point, hitting $4,110.20 an ounce, according to Kitco data. Stocks slipped and bond yields jumped. The 10-year Treasury touched 5.26%, around its highest since 2007, and the 30-year hit 5.57%. Brent crude stayed above $100 a barrel after President Donald Trump turned down Iran's latest offer to reopen the Strait of Hormuz, and traders braced for more rate hikes from the Federal Reserve.
Lyn Alden isn't panicking. She isn't rushing to buy more, either.
"Right now I'm certainly in the hold camp, which is that I'm certainly not selling gold, especially physical gold," Alden, founder of Lyn Alden Investment Strategy and author of "Broken Money," told Kitco News.
She sees gold as a good asset that got ahead of itself. The bigger story, as she tells it, is in Washington. With U.S. debt above 100% of GDP, she says rate hikes can add more to the deficit than they take out of lending. And with neither party willing to cut spending, the Fed is stuck fighting inflation its tools weren't built for.
Gold got ahead of itself
When gold was trading around $2,000, Alden thought it was "very undervalued." Then came the run toward $5,000 and the pullback into what she called the "4,000-ish range." Her conviction hasn't changed, but her excitement level has. Gold is still about a quarter below its record intraday high of $5,589.38 on Jan. 28.
"It's less of a screaming buy than it was when it was half the price not that long ago," she said. "I'm still structurally bullish on it, but when you have that big of a move that quickly, it creates a more symmetrical situation."
She was quick to add that she still thinks "individuals would do well to own gold," and that "the self-custodial aspect of it is very important."
Alden argues that higher prices also raise the dollar value of the newly mined gold that buyers have to absorb. At twice the price per ounce, the same amount of new metal takes twice as many dollars to buy.
"It's not because the asset's any less valuable than it was," she said. "It's just that the asset is two times bigger than it was a few years ago."
So she's waiting. "I'm not a trader, but my base case is that we're back in somewhat of a consolidation for a while," she said. She didn't put a timeline on it, noting the last consolidation lasted longer than she expected. She expects things to stay choppy "until more investors forget about gold." Then, she said, "it can really start putting in another run."
Her point helps explain why central-bank buying alone doesn't set gold's price.
China's central bank did buy more. It added 20.2 tonnes in August, its biggest month since October 2023 and its 22nd straight month of purchases, according to the World Gold Council. But demand for bars and jewelry in China cooled. Withdrawals from the Shanghai Gold Exchange, a good read on wholesale demand, fell 27% from a year earlier.
Alden said the metal is still moving east. "The macro data does show gold outflows from the West toward the East still, with China obviously being a huge part of that."
The Fed's leaking bucket
The Fed raised rates by a quarter point on Sept. 16, to a range of 3.75% to 4%. It was the first hike since 2023. By Monday morning, CME FedWatch put the odds of another hike at the Oct. 28 meeting at 68%.
Alden isn't convinced it'll work. "I'm not sure they have the tools to do it properly," she said. In her view, this is "fiscal-driven" inflation, combined with disruption from the war. Consumer prices were up 3.4% over the year through August, according to the Labor Department. Strip out food and energy and they were up 2.4%.
She pointed to Paul Volcker as the contrast. His rate hikes worked because they went after the real problems of that era, a borrowing boom and an oil shortage. Back then, government debt was about 35% of GDP, by her estimate. Today it's a different story.
"When you have over 100% debt to GDP, if you raise interest rates, you actually blow out the interest expense by a bigger dollar amount than you slow down bank lending," she said.
The interest bill is already huge. Net interest is projected to top $1 trillion this year, more than the country spends on defense, as Oaktree Capital co-founder Howard Marks noted in a Sept. 22 memo. The Congressional Budget Office estimates the deficit hit $2.0 trillion in the first 11 months of fiscal 2026.
Higher rates don't hit everyone the same way, either. Take a fairly wealthy older investor with cash in money market funds and a fixed-rate mortgage. For that person, Alden said, a hike means "all they've really done is give you a raise." The people who feel it, she said, are "younger families looking to buy homes for the first time" and smaller businesses that lean heavily on debt.
"I wouldn't want to be managing the Fed right now," she said.
Later, she summed up the Fed's position with a metaphor: "It's kind of like trying to get water out of a boat with a bucket that's leaking."
Nobody wants to cut
So who gives first? "The fiscal side will win," Alden said. "Congress is not going to change their policies realistically based on what the Fed's doing."
Don't expect voters to force the issue, either. "One of the few things Democrats and Republicans agree on today is don't cut Social Security or Medicare," she said. She sees "no appetite among either the voter base or Congress or a president in the US currently to prioritize cutting spending," even though that spending is "the key source of why inflation's still sticky." Over the next five years, she figures the U.S. will run roughly $10 trillion in deficits.
"That's why I think a lot of this is locked in and nothing stops this train."
What she saw in Egypt
Alden just got back from several months in Egypt.
"Right now official inflation in Egypt is 15%, and that's a normal Monday," she said. She doesn't think any of her friends or family there even mentioned it. She was clear she isn't saying the U.S. is headed there. Her point was that a lot of investors have adjusted to the 2010s and may not realize how much longer elevated inflation can last.
She said she knows doctors in Egypt who keep U.S. dollars in cash in their apartments, because currency pegs can break and dollars in local banks can be hard to get out. Talk about self-custody with most Americans, she said, and it sounds like you're "describing some Mad Max situation." Her view is that holding some of your wealth with no counterparty risk makes sense, with the right amount depending on the person. "Generally speaking, zero is the wrong number."
If something breaks
If the Treasury market ever locks up, Alden expects the Fed to step in. The first tool would be its standing repo facility. If that isn't enough, it could take Treasuries off the market directly, even with inflation still above target. She could already picture Fed Chair Kevin Warsh getting through "a couple awkward press conferences" and calling it "a technical issue."
"The cost of all this, of course, is longer term debasement," she said.
For now, the Fed has slowed its balance-sheet expansion. Roberto Perli, who runs the Federal Reserve's securities portfolio at the New York Fed, said on Sept. 22 that its reserve-management purchases of Treasury bills had been at zero since mid-August because banks had plenty of reserves. The Fed is still reinvesting principal payments from mortgage-backed securities into Treasury bills. The pause covers only the additional reserve-management purchases, not all of its bill buying.
Alden said the "gradual print" she's written about is still happening, just more slowly. Over any intermediate stretch, she said, it'll be smaller than the "big printers" think.
Bitcoin, stablecoins and her own money
Alden also owns Bitcoin and is a general partner at Ego Death Capital, a Bitcoin-focused venture firm. She said the recent bounce has more to do with liquidity than with more people adopting it, and that the "fast money's already out."
Bitcoin was trading around $83,000 on Monday. On Aug. 20, when she told CNBC it was "near the low end of its valuation and sentiment range," it was about $72,660. She's not calling for a major rally "in, say, the next three months."
Citigroup and Coinbase announced Monday that merchants using Citi's payment business will be able to accept stablecoins. Alden thinks stablecoins, at the margins, "slightly increase the overall demand for dollars." But she called that "a smaller story than some people will say, and especially a smaller story than say the Treasury Secretary will say."
As for her own portfolio, the war with Iran hasn't changed much. "Largely not, because I was already positioned for energy," she said.
She keeps things split three ways: high-quality stocks, cash and short-term bonds, and hard assets such as gold, Bitcoin and energy producers. Most of what she does is small adjustments, she said, "leaning into slightly what's cheap and leaning out of what's a little bit overbought."
Watch the full interview with Lyn Alden above to hear what she thinks about rare earths, what could force the Fed's hand, and where she's still finding opportunities around the world.