Mounting US debt and its implication on gold prices

We all know about the co-relation between the US dollar and gold prices; they are inversely related. But, what about the relationship between the US debt and gold prices?

If we take data from the years 2000 to 2018, gold and debt have a positive co-monthly correlation of 87 per cent. It was since 2012, that we have seen a divergence from the positive correlation as the gold prices fell after hitting $ 1,920 to $ 1,300, as the US debt kept on increasing at similar pace.

Before that, if we look at the chart when the debt increased from $ 6 trillion to $ 15 trillion during 2003-2013, prices of gold rose from $ 4,00 to $ 1,800 per ounce. The decline in gold price happened when the US Federal Reserve unveiled massive $ 1 trillion quantum easing (QE) programme, and we think that the additional liquidity shifted from gold to equity. So now we can say that gold, which was overvalued in 2011 is equally undervalued in 2015, when it was trading at $ 1300 per ounce.

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(Source: World Gold Charts)

The US debt has reached around $ 21.03 trillion. This astronomical number is greater than the combined debt of all the countries in the world. No other nation in history has ever accumulated this much debt.

The US government is under pressure to close the fiscal deficit. They have started taking steps in form of a trade war with China and Europe. However, the Department of Treasury announced plans to borrow nearly $ 1 trillion this fiscal year – an 84 per cent increase from last year.

The US Treasury is continuously raising the debt ceiling to meet the federal government’s borrowing needs with no apparent cap in sight. Now the US Fed is putting an end to its QE programme, so they will no longer be printing money to buy the US Debt. Two countries owe maximum debt and they are China and Japan. Now both these countries have scaled down the purchase of US debt. So with falling demand and supply rising, US has no option but to raise the interest rates.

Rising interest rates will put enormous pressure on the market. Last few years, record low interest rates have inflated major asset prices in form of stock, bonds and real estate. Rising interest rates not just apply to government debt they have a major impact on corporations and individuals. The corporations will have to borrow and refinance at a higher rate and property prices will fall, as it will be more expensive to get a mortgage. The US government will also have to pay more interest on their debt so they will have to borrow more to pay more.

Last five years with US debt increasing, it was frustrating for gold bulls to see prices drifting lower, but now with US treasures out of favours from China and Japan, there are fewer buyers for the US debt.

The US dollar is also losing its value as global currency because of high debt to GDP. Bond yields are increasing and we have written previously that how rising bond yields are positive for gold.

The world may have neglected the negative consequences of rising US debt on its economy, but we need a tool to protect ourselves from the monetary madness of debt based fiat currency system. The tool is in form of gold, which acts as a hedge against such uncertain times. After all, world has never seen such high global debt and it is difficult to predict how long this phenomenon may last. It is just a big Ponzi scheme, where the government has no intention to pay back but to raise additional debt so that they can service their previous debt.