Schroders' Sebastian Mullins on the "insane" gold rally, USD debasement and Australia's E-shaped economy

"It had gotten way too frothy all of January," said Mullins. "We were watching it asking, 'what is it going on? We like it, but this is insane'. You've seen the queues outside [in Martin Place]. It's insane. So we thought, 'okay, this is definitely a speculative blow off'."

"We did the trades, got out of gold - we sold gold miners and gold equities. By the time we executed we were down 1-2%. By the time I woke up the morning it was down 15-30% depending on what you were in. So it was a good call."

But he remains bullish on gold, even if he's treating the current market movements with caution. "So we have bought a bit back, but I think we're still in the danger zone," said Mullins. "It's still speculative and there is a bit of whipsawing."

"I wrote you could have a 15% correction and still be in a bull market. I didn't expect it to happen in a day." 

"The debasement trade is a thesis behind gold and I think that's a hundred per cent accurate and is why you want to hold it," says Mullins. 

"But when gold and silver are going parabolic, copper participates, but nowhere near as much, the Euro didn't really rally as much. Bitcoin fell - if there's pure monetary debasement, all those things should have been going up together, but they weren't. It was very gold and specifically silver-centric. That was part of our concern."

But he does see a new structural thesis for gold as part of the unfolding currency phoney war as central banks and governments move away from US treasuries. "There's been a big demand for gold from governments and that's not going away anytime soon," he says. 

"You see gold rerate higher, set a new base, you get your debasement and then you move on with your life."

One of the other key upshots of the ongoing devaluation of the US dollar is its positive impact across emerging markets.

"At the broad level, the case for emerging markets is that the US dollar is weaker," says Mullins. "The Fed have been cutting rates and are potentially cutting rates more. Typically speaking, that's really positive for emerging markets."

"For most economies, when the US dollar is strong, they have to raise interest rates to keep their currency strong to help their imports. What that does is it actually hurts the underlying domestic economy because rates are higher than they probably should be. Now that US currency is falling and the Fed have cut rates, this gives some relief to those central banks. They can cut rates if they need to."

Add falling inflation across essential spending in emerging markets, and it leaves them with a lot of economic wiggle room. 

"Inflation's falling, rate cuts are coming, the economies are quite strong. In general, that's positive for bonds and equities in emerging markets."

On the bonds side, he points to Brazil as an example where real bond rates are currently around 6%.

"You're getting paid a lot of buffer for the geopolitical instability, which I would suggest is now happening in the Western world as well. There's a lot of good valuations, good catalysts, great reason to be in emerging market bonds and local currency bonds."

On the equities side, upcoming rate cuts should be a cyclical boost and come after years in which emerging-market equities have lagged their US counterparts. Mullins also suggests emerging markets should continue to benefit from the current economic megatrends.

"The AI theme trickles into emerging markets as well," he says. "Last year, the world woke up to the fact that Korea makes chips, and 50% of the [KOSPI] index is in memory chips. That's now up 100%."

"Even outside the AI theme, you're seeing countries like Turkey do extremely well. You're seeing South Africa doing well because of gold miners. You're seeing Latin America do particularly well because valuations were so, so cheap relative to the rest of emerging markets. Cheap in an absolute sense and cheap relative to its own history." 

"So for us there's plenty of pockets of opportunity and like I've said before, if you spent all your time just focused on the US, you miss out on these opportunities. We think it's a really compelling case now for emerging markets."

The global shift is so pronounced that Schroders recently wrote in a note that:

“In 2026, we may be paying the same attention to the economic decisions made in Sao Paulo and Mexico City as the next move in Washington.”

The US outlook

On Warsh, Mullins expects him to broadly look to enact Trump's purported fiscal goals. 

"He definitely wants to bring the balance sheet down, but to offset that, he wants to cut rates," said Mullins. "And if you think purely about Main Street versus Wall Street, which is what Trump's always said he's about, it makes sense. Quantitative easing helps asset prices, and cutting rates helps the real economy."

"But the problem is with all that fiscal spending coming, that's going to put pressure on the back end of the curve. You might need to do some QE to keep that steady. But two cuts are coming, maybe more."

Those concerned about Warsh's previous hawkishness should take it with a pinch of salt, says Mullins. 

"Paul Krugman said he's a political animal. So we'll see what he does, but I think he's going to deliver what Trump wants."