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US budget deficit pushes gold lower

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What’s a budget balance?

A budget balance is the difference between what a country’s government earns from taxes and other sources and what it spends. A budget deficit occurs when spending exceeds earnings.

When spending exceeds earnings, the government borrows money from its citizens. It also borrows money from foreign entities. If this debt accumulates, the value of its currency could decrease. The currency decreases because of fears within the international community that the country won’t be able to repay its debt.

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Tracking the federal budget balance

The U.S. Treasury reports the federal budget balance monthly. The US government posted a deficit for January 2015 after being in surplus the previous month. The US budget deficit stood at $17.5 billion for January 2015, while the surplus for December 2014 was $1.9 billion. A year ago, the budget was in deficit to the tune of $10.2 billion.

The budget deficit’s impact on US debt

Deficits continue to accumulate, adding to the US federal debt. The federal debt has exploded since 2008, but the situation is getting better. This should be positive for the US dollar. A strengthening US dollar usually leads to weaker gold prices.

This is negative for gold-backed ETFs such as the SPDR Gold Trust (GLD). The deficit is also negative for stocks such as Goldcorp (GG), Randgold Resources (GOLD), AngloGold Ashanti (AU), and Kinross Gold (KGC). It also hurts ETFs that invest in these stocks, such as the VanEck Vectors Gold Miners ETF (GDX).

The companies mentioned above form 23.0% of GDX’s holdings.

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