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Bad for Gold: US Public Debt Levels Off, Debt-to-GDP Stabilizing

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Why does debt-to-GDP ratio matter?

The ratio of debt-to-GDP (gross domestic product) shows how much a country owes compared to how much it earns. Investors use the ratio to measure a country’s ability to make future payments on its debt. As US public debt rises beyond a certain point, the country will have to increase taxes and cut spending in productive areas in order to service the interest costs. That would be bad for economic growth. If economic prospects aren’t bright, people don’t have many options to fall back on. Gold is one of those few options.

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US public debt growth

The US public debt was almost flat month-over-month in May. It came in at $18.15 billion in May, same as it did in April. The ratio of debt-to-GDP was also constant at 102.6% in May, based on the GDP for the March-ending quarter.

Ratio is stabilizing

As you can seen in the graph above, after having risen steeply from 2008 onward, the debt-to-GDP ratio has stabilized lately. This is positive for the US economy and for the US dollar’s long-term prospects.

The US dollar affects gold prices. Gold prices have an impact on gold companies such as B2Gold Corp (BTG), Barrick Gold (ABX), and Hecla Mining (HL) as well as on gold-backed ETFs such as the SPDR Gold Trust (GLD). They also impact ETFs investing in gold stocks such as the VanEck Vectors Gold Miners ETF (GDX). Hecla Mining makes up 1.3% of GDX’s holdings.

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