A Strong Correlation between U.S. National Debt & A Rise in Gold Prices
To keep things really simple, the prices of gold have a long history of rising with national debt. As of now, the United State’s national debt is $20 trillion. With over 300 million people living in the U.S, every citizen’s debt share is around $61000.
One might wonder how this happened. Well, most people have their theories but the main finger point towards the big bang that happened during 1971. This is when President Nixon essentially removed the gold standard. When the gold standard was active, the value of the Dollar was linked directly with gold.
However, after the gold standard was removed and the implementation of debt ceilings, better known as credit limit, resulted in a trust based currency. This essentially allowed governments to overspend and eventually got them into national debt.
National Debt Rises Significantly After Removal of Gold Standard
A massive concern with the raising national debt of the United States is that the country will eventually have to pay it back. The amount the country has to return can come from numerous places, which include spending cuts. These can potentially put the United State’s medicare, defense budget, pensions and social security at great risk.
Other ways it can come from is quantitative easing and increased taxation. However, these could weaken the Dollar even further and increase inflation down the line. In the worst case scenario, a complete default in the United State’s debt would be the only solution. However, it would greatly affect the value of the Dollar and the U.S credit rating.
Every action mentioned above could hamper the strength and economic growth of the Dollar, which is bad news considering that it has already be on a lifeline for years after the monetary policy of the Federal Reserve focused on printing money after suppressing interest rates.
Debt and Gold Price Has 91% Correlation
After the first quarter of 2013, the Federal Reserve decided to lover the monthly purchase of assets. After this, the correlation between gold and the increasing debt of the U.S broke down and ended a rally of 12 years.
Many wonder if gold would ever revert to the trend it was so close to during this century. Despite the correction, there is still a strong correlation over ninety percent. The country’s national debt is increasing, the Federal reserve is making the interest rates higher and the ECB (European Central Bank) is heading towards a campaign of negative interest rate.
All of these factors, paired with the devaluation of fiat currencies will most likely be favorable for gold and other precious metals if history is anything to go by.
Gold and the Federal Debt
The U.S is essentially a federation with various states. All of these states are overseen by the Federal Government. Therefore, the Federal Debt is essentially the amount the United States government owes to different creditors. The figures that the Federal Debt released can be divided in 2 different categories:
- Debt Held by the Public
- Intergovernmental Holdings
Now, let us discuss what both of them are:
Debt Held by the Public: this lists down the government’s different obligations to institutions and individuals who are outside the U.S government
Intergovernmental Holdings: Primarily, intergovernmental holdings are U.S treasury securities that foreign governments hold.
The combination of these categories is referred to as Total Public Debt Outstanding. It is worth keeping in mind that the Federal Debt particularly excludes securities that state and local governments issue. This debt’s level is usually expressed in the form of a Gross Domestic Product percentage for enabling politicians and economists to compare to compare how in debt different countries are.
Ever since the 1970s, the Federal Debt level to GDP has increased from over 25% to more than 62%. It is worth keeping in mind that the percentage was actually in excess of 100% during the Second World War and took a long time to reduce to the mid 20 percents.
The Federal Debt has been a controversial issue among conservatives who usually want to lower the governments expenditures and the Federal Governments size and borrowing habits. On the other hand, liberal politicians are quite different as they are usually pro-government and don’t thing government borrowing is too much of an issue.
The United State’s federal government and has always had Federal Debt throughout its history. This has mainly happened because of the different wars the country has fought. Due to this the government usually pursued a policy where it paid its debts when the budget is in surplus, especially when things are peaceful.
The government can repay Federal Debts in U.S Dollars and these debts usually have fixed interest rates. Governments often reduce their debt’s actual value by letting inflation increase. This essentially reduces the actually value of money they have to pay.
Policies like these greatly undermine the confidence one has in a currency and can possible make it difficult for governments to borrow money in the future. They may even have to pay higher interest rates in some cases, which can be terrible for the entire country.
While monetary policies are deemed more important, the role of fiscal policies is also influential in driving gold prices. So, whenever there is fiscal debt along with the accumulation of federal debt, it undermines the confidence people have in the economy and eventually increases the demand for precious metals like gold.
To a huge extent, this happens because a high amount of debt triggers panic regarding inflation. Why? Because history suggests that high inflation mainly happened was public debt was monetized. There are also concerns regarding the government’s ability to pay off its debts and if it can’t, it may have to increase taxes, cut down its expenditure or resort to other similar tactics, which could damage the economy’s growth.
An example that best showcases the federal debt’s impact on the gold market by the United States during the early 2000s.This is when President George W Bush decided to form a twin deficit, massively deteriorating the country’s fiscal position. This decreased the faith investors had in the greenback, triggering a gold rally. It also confirmed that gold could be a suitable hedge against inflation and poorly planned fiscal policies.
While there is no denying that there were times when gold prices and public debt were moving in tandem, you will also find periods where they didn’t and they were usually longer. A great deal of this depends on the broad macroeconomic contact, monetary policy stances, authentic interest rates and inflation levels.
How the Economic and Trade Policy Impacts the Price of Gold
The federal government is responsible for many things, one of which happens to be the foreign and domestic economic policy. As a whole, these policies have a massive say in the country’s overall trade balance. In turn, this balance impacts the gross domestic product of the nation and its currency’s strength.
Generally speaking, when a country has a strong currency, the nation’s investors usually keep a massive part of their assets in the form of liquid capital rather than gold, silver and other hard investments. This lowers the precious metal prices by reducing demand from investors. On the other hand, if a certain currency market is weak, it will cause investors to opt for stable assets, resulting in an increased demand for gold and other metals, causing their prices to increase in the process.
If you want to really comprehend how foreign and domestic economic policies impact the prices of spot metals, you must first understand how the link between currency strength, foreign trade and domestic businesses work. When the rate of taxes is on the lower side, businesses can invest a massive chink of their profits for creating further value and increasing production. After that, they can sell in foreign as well as domestic markets and gain decent profits.
Any policy that promotes business growth and production can especially make currencies stronger. However, it may put some downward pressure on the prices of precious metals. That being said, this effect is not applicable to every metal out there. This is because metals that are used in different industries quite often (like platinum and silver) are high in demand whenever there are such upturns.
Foreign trade tends to become a little complex when the laws that govern the exchange of goods and market forces come into play. Generally, it would be best to think that the policies facilitating open trade relationships make currencies stronger. On the other hand, trade practices that are restrictive, like import duties and tariffs, often lower international exports and affect the currency’s strength.
