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While the market remains relatively calm this week, with all eyes on Powell’s speech at Jackson Hole on Friday, I want to update you on some critical underlying developments that are laying the groundwork for one of the biggest market moves we may witness in years.

I recently came across a chart of Chinese government bond yields that looked like a clown’s rainbow wig. The news is spreading, and more people are beginning to realize what is really happening in the global bond market. Behind that colorful plunge lies a much darker story about the state of the world economy.

The bond market is flashing warning signals I haven’t seen since the months leading up to the 2008 financial crisis. What’s happening now in both the Chinese and U.S. credit markets is creating a “perfect storm” for the U.S. dollar to surge while dragging down precious metals and mining stocks.

I’ll break down why this situation is dangerous and why it likely favors the U.S. dollar while temporarily weighing on gold, silver, and copper.

China’s Bond Market Is in Crisis

Here’s something unusual: the People’s Bank of China is actually fighting against a bond rally. The 10-year Chinese government bond yield has fallen to just 1.613%, so low that the PBOC has been forced to halt its bond purchases altogether.

Think carefully about that. When was the last time you saw a central bank deliberately try to stop bond prices from rising? This is nothing short of a monetary policy red alert. The reason is clear: China’s economy is deteriorating badly. The Producer Price Index has fallen for 33 consecutive months. Household loans in early 2025 dropped to their lowest level in 20 years. Property prices are down 4.8% year-over-year, wiping out about $18 trillion in household wealth.

Chinese investors feel so unsafe that they’re piling into government bonds, pushing yields to alarming lows. The PBOC knows this can’t last because it pressures the yuan and threatens financial stability.

The yield spread between U.S. and Chinese 10-year government bonds has now widened beyond 300 basis points—a huge gap that’s driving capital flows and ensuring major volatility ahead in currency markets.

U.S. Credit Market: Back to May 2007

What’s even more worrying is that U.S. high-yield credit spreads are now just 2.88%, a level reached only a handful of times in history. The last time? May 2007, right before the global financial crisis erupted.

This is nearly a carbon copy of the pre-2008 setup, when spreads compressed to extreme lows even as fundamentals were already deteriorating. Credit card delinquencies are now at their highest since 2011, while auto loan defaults have risen to their highest since 2010.

Yet corporate bond spreads remain near record lows. This is a classic pre-crisis sign: the market isn’t pricing in real risk. When Trump announced tariffs in April, investment-grade spreads jumped 8 basis points in a single day—the sharpest move since the 2023 banking crisis. That was just a taste of what will happen once credit markets fully wake up.

Why the U.S. Dollar Is About to Explode Higher

I know the USD has been weak this year—down over 10%—but that’s about to change dramatically. Here’s why: In financial crises, everyone needs dollars. It doesn’t matter if the crisis starts in the U.S. (like 2008) or elsewhere. When panic hits, dollar funding demand skyrockets, creating massive buying pressure.

We’re already seeing early signs. Cross-currency basis swaps show dollar funding costs remaining high. In 2008, these spreads blew out violently as everyone scrambled for dollars. The EUR/USD basis hit negative 364 basis points at peak stress.

China’s situation makes this even more likely. If its economy keeps weakening and bond market stress spreads globally, we’ll see a flood of safe-haven capital rushing into U.S. assets—regardless of America’s own domestic issues.

Where else can trillions of dollars go? Some will say gold, and they’re partly right. Central banks have been buying at a record pace—over 1,000 tons annually for three straight years. China, Poland, Turkey, and others have boosted reserves, with gold now accounting for 19% of global forex reserves, making it the second-largest reserve asset after the dollar.

But here’s the bottom line: gold was around in 2008 too, yet the dollar surged while gold fell during the height of the crisis. Central bank demand supports gold in the long run, but in acute financial stress, the short-term scramble for dollar liquidity overwhelms gold’s safe-haven status. U.S. Treasuries remain the only safe-haven asset with the size and liquidity to absorb such massive flows during crises.

Copper’s Collapse Tells the Real Story

Copper has plunged 21% in just the past month, to $4.41 per pound, largely due to Trump’s tariff announcements shaking industrial demand. More importantly, copper is now below its 2011 nominal peak—a key technical breakdown signaling deeper trouble ahead. It’s also decisively broken its upward red trendline, confirming the bearish move. Technically, copper faces a steep decline.

Here’s what many don’t realize: Chinese companies have long imported copper not only for actual industrial use but also for financial purposes. With credit tightening, that demand has almost vanished. And that’s exactly what’s happening now.

Today’s interest rate environment makes it worse. Higher rates have shifted commodity markets from backwardation into contango, making storage far more expensive. Financing and warehousing costs are directly tied to rates: every 100-basis-point increase raises annual costs by 15–25%. The copper-to-gold ratio is plunging, and historically this has been a reliable leading indicator for U.S. Treasury yields—implying further economic weakening ahead.

What This Means for Gold and Mining Stocks

Now to the part gold investors care about. While all this chaos could be bullish for gold in the long run, the short- and medium-term picture looks very different.

What most gold bulls don’t want to hear is this: gold fell sharply during the 2008 crisis, especially in its early phase. The reason was the overwhelming strength of the U.S. dollar. Technically, gold has already broken down into a confirmed bearish trend. The key takeaway for the medium term is this: as the dollar surges—just like in 2008, which I expect to repeat—gold will face heavy downward pressure. It will rebound after the crisis, like a phoenix rising from the ashes, but a drop first is unavoidable. In other words, my gold outlook for August 2025 remains bearish.