In our analysis, the downside risk of owning the S&P 500 is as high as we have seen in our lifetimes. If you are still heavily allocated to this index, what the heck are you thinking? It is time to diversify, especially into gold. We see gold as offering highly attractive alpha potential relative to stocks, bonds, and cash for the decade ahead. Surveys, including those from JP Morgan and UBS, show that family offices are under-allocated to gold today, providing a substantial potential tailwind for rotation into it.
We believe Crescat’s activist metals strategy provides substantial alpha potential relative to gold over the next ten years. While past performance does not guarantee future returns, our Precious Metals Fund has substantially outperformed the price of gold since inception six years ago. The activist metals strategy is currently the largest thematic exposure across all five current Crescat private funds. Our Institutional Precious Metals Fund and Precious Metals Fund are exclusively dedicated to this strategy. All five funds are having a strong August month to date, as we show further down in this letter, thanks to this theme.
Crescat Precious Metals Fund has limited capacity for new US investors. *Performance figures presented represent the fund’s net returns calculated without the impact of the San Cristobal Mining, Inc. (SCM) Side Pocket that was designated on July 1st, 2024. The SCM Side Pocket includes a private equity asset that is not available to new investors in the funds on or after July 1, 2024. This asset was included in the fund performance prior to that date. Excluding the SCM Side Pocket after that date provides a clearer view of the performance to investors coming into the funds after July 1, 2024. New investors cannot participate in the SCM Side Pocket and will not share in its potential gains or losses. Investors should consider both the overall performance and the performance excluding the side pocket when evaluating the fund’s returns. Fund performance, including the SCM Side Pocket, can be found on the firm’s website here: https://www.crescat.net/performance/. Returns for the most recent month are based on internal estimates which have the potential to change once finalized. Additional disclosures regarding risks and performance presented are found here: https://www.crescat.net/due-diligence/disclosures/ Sources: Crescat Capital LLC, State Street Global Advisors/S&P Dow Jones Indices LLC, and BlackRock/iShares
Historically High S&P 500 Valuations
The price-to-book value of the S&P 500 recently reached its highest in the history of the Standard and Poor’s fundamental data, significantly higher than the peak of the tech bubble in 2000.
Using S&P 500 enterprise value, which incorporates corporate debt, we show that the valuation excess today relative to the 2000 bubble is even higher compared to equity-only measures, such as price to book.
Technical Levels Approaching 1929 Extreme
If we look at the longest-running US Large Cap index, the Dow Jones Industrial Average shows that it is almost two standard deviations above its 130-year mean regression line. Whether it’s inertia or the madness of the crowd, one might think there is near-term upside momentum-wise, especially given the AI hype, but we are much more concerned about the downside risk for US large cap stock indices. We think the near-term upside potential is extremely limited and not guaranteed at all, while the downside risk is substantial. Hopefully this chart is a stark illustration of that.
The Interventionist Agenda
Scott Bessent’s actions of the past month have cemented him as the most interventionist Treasury Secretary in recent memory. On July 31st, he led the first purchases of Japanese Yen by US authorities in multiple decades. On August 5th the Treasury tweaked language in their Quarterly Refunding Statement saying it was continuing to evaluate potential future changes in coupon and floating rate note sales, previously the language said they were looking at increases in those securities. On August 19th, the Treasury announced that it is “increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities.” The following day Bessent went on CNBC saying “We have a big toolkit …. Part of it is signaling here, and to show that we believe that the yields don’t reflect the underlying fundamentals.”
Taken together, these actions suggest nothing less than an increasingly active effort to influence the yield curve. The yen intervention reduced the need for Japan to sell down its treasury stockpile, which could have put upward pressure on yields, to finance its yen buying. The language change opens the door to potential cuts in issuance of long-dated debt, which in turn would decrease net supply and exert downward pressure on yields. Similarly, at least doubling the planned purchases of outstanding 10 to 30-year debt removes duration from the market and provides additional support for long-term bonds. In our view, these recent developments indicate that the administration is becoming increasingly concerned about the trajectory of long-term interest rates.
Although the Treasury Department has framed the expansion of its buyback program primarily as a measure to improve market liquidity, we believe this is Secretary Bessent testing the waters with an adjacent form of yield curve control (YCC). YCC is typically a monetary policy tool, which involves central bank buying and selling of bonds to manage interest rates across different maturities of government bonds, typically targeting specific yields for the longer end of the curve.
The motivation is straightforward. At current debt levels, the United States is increasingly sensitive to higher interest rates. Without some combination of intervention and creative policy, the United States could be at risk of slipping into a doom loop where investors begin to demand higher returns to hold public debt, which leads to the government taking on more debt to pay the increased interest costs on the debt it just sold, which in turn makes investors demand even higher interest rates.
The True Cost of Debt
It’s common knowledge that the United States has the biggest defense budget in the world, roughly three times that of China, the second largest spender. Defense spending has long been the subject of political and economic debate. Our purpose here is not to weigh in on that debate, but rather to use defense spending as a measuring stick to help understand the scale of US government interest expense. According to the president’s budget, the United States spent more on interest payments than defense in 2025. It is shocking how dramatically the federal government’s interest burden has grown over the past few years.
As we discussed in our letter The New Inflation Regime, Congressional Budget Office projections are based on assumptions for interest rates and debt growth that we see as incredibly optimistic. The expense projections contained in the Budget of the United States Government appear similarly hopeful. From 2016 to 2025, net interest grew at a compounded annual growth rate (CAGR) of approximately 15%. The projection for 2026 to 2031 has a CAGR of only about 5%. The difference represents the largest gap between recent historical growth and projected future growth among the major federal budget categories. If all line items grew at their 2016 to 2025 CAGR, by 2031 net interest would be the largest outlay, exceeding Social Security by nearly $50 billion.
US Government Fiscal 2027 Office of Management and Budget Projections
While nothing is set in stone, if Federal receipts and outlays broadly continue to grow at rates resembling those of the past decade, we believe the risk of a debt-driven doom loop will increase substantially. At current debt levels, which surpassed $40 trillion on August 19th, modest increases in yields can have outsized effects. Since the beginning of 2026, the average interest rate on Treasury securities has risen about 13 basis points as of 7/31/2026.
A highly indebted sovereign is increasingly exposed to changes in the cost of capital. The larger the debt burden, the more consequential an incremental increase in yields can be, and in turn a great incentive for policy makers to prevent yields from rising. The debt burden is the kindling, rising yields are the spark that will ignite the debt doom loop.
A Connected Issue
The United States is not the only sovereign experiencing this issue. Global yields began to rise in the aftermath of the pandemic and now again since the onset of the war with Iran. For six months in a row, all G-7 nations have seen their yields creep upwards.
At the same time, Government debt to GDP has been steadily rising post GFC for most of the G 7 nations.
Staying out of the Loop & Getting on the Same Page
Government debt sustainability depends on four factors: fiscal deficits, economic growth, interest rates, and inflation. Breaking the debt loop requires addressing both the cost of capital and the fiscal trajectory. There needs to be a coordinated effort between the Treasury and the Federal Reserve. Scott Bessent and Kevin Warsh need to get on the same page.
Bessent’s recent actions designed to limit pressure on long-term yields appear to be undermining the Federal Reserve. Kevin Warsh recently told reporters the rise in long-term yields served a purpose, tightening financial conditions in an economy still experiencing elevated inflation. One could look at this situation and take it at face value as if the two are butting heads with different agendas, like the Treasury Secretaries and Federal Reserve Chairs have done in the past, or it could mark a shift to a regimen known as Fiscal Dominance and foster surprise inflation.
Under Fiscal Dominance, the Federal Reserve’s mandate of containing inflation becomes increasingly subordinate to the Treasury’s financing needs. Monetary policy evolves from an inflation management tool into an instrument of debt management. The government deploys tools such as YCC to keep borrowing costs below the levels that would otherwise be required to restrain aggregate demand and firmly anchor inflation expectations. Policymakers effectively allow inflation to become part of the adjustment mechanism. Over time, higher nominal prices and incomes reduce the real value of outstanding fixed-rate government debt.
The limitation is that this strategy is most effective when inflation is unexpected. Surprise inflation reduces the real value of existing debt before investors can fully adjust. This raises the question: Is Bessent and Warsh’s disconnect in fact a coordinated effort to create confusion and surprise inflation allowing the fiscally dominant regime to be the most effective? We don’t know if this is the case, and even if it was, if they will be successful. The debt is like arterial plaque; it’s been building up for a long time and stabilizing the situation will require major lifestyle adjustments.
In our view, no matter the outcome, whether it’s a debt crisis or inflation, one asset class stands to benefit from the turmoil. Gold!
Gold Catching a Bid
As we stated in our last letter, we believe that markets have already priced in interest rate hikes that are unlikely to materialize in any significant way, and that was unfairly weighing on gold. At the July FOMC meeting, despite all the hawkish talk in June, rates were held steady. The big question was if this Fed is so committed to achieving price stability and explicitly stated inflation has been too high for too long, why wait? In the aftermath of the meeting, the long end of the yield curve came under pressure as market participants started to question Warsh’s hard stand on the Feds’ commitment to price stability. Is Warsh a dove in hawk’s clothing? Seems some are beginning to think so, as interest rate expectations have begun to decline since the meeting. At the same time, gold has begun to catch a bid again.
Last month, we made a strong case for new and existing investors to add exposure to our strategies during the pullback. We are grateful to those who acted on that opportunity and entrusted additional capital with us. August month to date has been stronger for Crescat’s five funds thanks in large part to our activist metals strategy, as reflected in the performance below.
While we are encouraged by the recent performance, we believe this is only the beginning. We think the recent move in precious metals and mining stocks has much further to go. We lay out this case in our letter The Target Price of Gold. For those who were considering an investment or an additional allocation but missed August 1, there is still time to invest on September 1. Please reach out if you are interested.
Past performance does not guarantee future results; Investing involves risk, including risk of loss. Performance shown is for a partial month which has limitations. See additional important disclosures below.
Sources: HFR, Inc., NASDAQ, and Crescat Capital LLC. Past performance does not guarantee future results; Investing involves risk, including risk of loss. See additional important disclosures below.
Sincerely,
Kevin C. Smith, CFA
Founder & CEO
Nathaniel Gilbert
Analyst
For more information, including how to invest, please contact:
Marek Iwahashi
Head of Investor Relations
(720) 323-2995
Linda Carleu Smith, CPA
Co-Founder & Chief Operating Officer
(303) 228-7371
© 2026 Crescat Capital LLC
Important Disclosures
Discussion and details provided are for informational purposes only. This letter is not intended to be, nor should it be construed as, an offer to sell or a solicitation of an offer to buy any security, services of Crescat, or its Funds. The information provided in this letter is not intended as investment advice or recommendation to buy or sell any type of investment, or as an opinion on, or a suggestion of, the merits of any particular investment strategy. This letter may contain certain forward-looking statements, opinions and projections that are based on the assumptions and judgments of Crescat with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Crescat. Because of the significant uncertainties inherent in these assumptions and judgments, you should not place undue reliance on these forward looking statements, nor should you regard the inclusion of these statements as a representation by Crescat that these objectives will be achieved.
CPM has not sought or obtained consent from any third party to use any statements or information indicated herein that have been obtained or derived from statements made or published by such third parties.
All content posted on CPM’s letters including graphics, logos, articles, and other materials, is the property of CPM or others and is protected by copyright and other laws.
Performance
Performance data represents past performance, and past performance does not guarantee future results. Performance data, including Estimated Performance, is subject to revision following each monthly reconciliation and/or annual audit. Individual performance may be lower or higher than the performance data presented. The currency used to express performance is U.S. dollars. Before January 1, 2003, the results reflect accounts managed at a predecessor firm. Crescat was not responsible for the management of the assets during the period reflected in those predecessor performance results. We have determined the management of these accounts was sufficiently similar and provides relevant performance information.
1 – Net returns reflect the performance of an investor who invested from inception and is eligible to participate in new issues and side pocket investments. Net returns reflect the reinvestment of dividends and earnings and the deduction of all expenses and fees (including the highest management fee and incentive allocation charged, where applicable). An actual client’s results may vary due to the timing of capital transactions, high watermarks, and performance.
2 – Performance figures presented Excluding SCM SP represent the fund’s net returns calculated without the impact of the San Cristobal Mining, Inc. side pocket that was designated on July 1st, 2024. The side pocket includes a private equity asset that is not available to new investors in the funds on or after July 1, 2024. Excluding these assets provides a clearer view of the performance to investors coming into the funds after that date. New investors cannot participate in the SCM Side Pocket and will not share in its potential gains or losses. Investors should consider both the overall performance and the performance excluding the side pocket when evaluating the fund’s returns.
Benchmarks
The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies, including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry.
The HFRX Equity Hedge Index measures the performance of the hedge fund market. Equity hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios.
The HFR Indices are being used under license from HFR Holdings, LLC, which does not approve of or endorse any of the products or the contents discussed in these materials.
The PHLX Gold/Silver Sector Index (XAU) is a capitalization-weighted index composed of companies involved in the gold or silver mining industry.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
VanEck Junior Gold Miners ETF (GDXJ®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® Global Junior Gold Miners Index (MVGDXJTR), which is intended to track the overall performance of small-capitalization companies that are involved primarily in the mining for gold and/or silver.
VanEck Gold Miners ETF (GDX®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MarketVector Global Gold Miners Index (MVGDXTR), which is intended to track the overall performance of companies involved in the gold mining industry.
SPDR® Gold Shares seeks to reflect the performance of the price of gold bullion, less the Trust’s expenses.
iShares® Silver Trust (the ‘Trust’) seeks to reflect generally the performance of the price of silver.
Returns for any index include the reinvestment of income and do not include transaction fees, management fees or any other costs. The performance and volatility of the funds will be different than those of the indexes. One cannot invest directly in an index. Benchmarks are unmanaged and provided to represent the investment environment in existence during the time periods shown.
Hedge Fund disclosures: Only accredited investors and qualified clients will be admitted as limited partners to a CPM hedge fund. For natural persons, investors must meet SEC requirements including minimum annual income or net worth thresholds. CPM’s hedge funds are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933 and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act. The SEC has not passed upon the merits of or given its approval to CPM’s hedge funds, the terms of the offering, or the accuracy or completeness of any offering materials. A registration statement has not been filed for any CPM hedge fund with the SEC. Limited partner interests in the CPM hedge funds are subject to legal restrictions on transfer and resale. Investors should not assume they will be able to resell their securities. Investing in securities involves risk. Investors should be able to bear the loss of their investment. Investments in CPM’s hedge funds are not subject to the protections of the Investment Company Act of 1940.
Those who are considering an investment in the Funds should carefully review the relevant Fund’s offering memorandum and the information concerning CPM. For additional disclosures including important risk disclosures and Crescat’s ADV please see our website: https://www.crescat.net/due-diligence/disclosures/