uploads///Trade and budget deficit

How the US Government’s Indebtedness Impacts Gold Prices

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Oct. 7 2015, Updated 2:07 p.m. ET

US budget deficit

The US federal government’s budget deficit is the difference between its revenues and spending. In August 2105, the US budget deficit was $64.4 billion in August 2015, which is a drop of 50% year-over-year (or YoY). While most of August’s improvement is related to calendar timing, for the first 11 months of the budget year ending September 30, the budget deficit is running 10% lower YoY.

The Congressional Budget Office is expecting the full-year deficit to drop to $426 billion, which would be a decline of 11.8% YoY. This is mainly due to increased tax revenues flowing to the government. The annual deficits prior to 2013 had ballooned to more than $1 trillion on the back of increased government spending and lower tax revenues.

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US trade deficit

The US trade deficit, the difference between the value of exports and imports, also declined by 7.4% month-over-month in July to $41.9 billion. Although exports rose due to stronger car sales, imports fell.

For the first seven months of the year, the trade deficit is 3.6% higher YoY. A stronger US dollar and weakness overseas is impacting US exports negatively.

Government indebtedness and gold

In the longer run, the relative value of the US dollar index (UUP), compared to other currencies, is affected by changes in the balance of trade. Also, as budget deficits continue to accumulate, this adds to the US federal debt. In this case, a higher percentage of the country’s income is used for interest payments on the debt. This is negative for the US dollar and the economy’s longer-term prospects.

However, the US budget deficit has been under control recently and should not lead to an escalation of its federal debt. An improving trade deficit and budget deficit scenario is usually negative for gold prices and ETFs like the SPDR Gold Shares ETF (GLD).

It is also negative for gold stocks like Goldcorp (GG), Barrick Gold (ABX), Harmony Gold Mining (HMY), Newmont Mining (NEM), and Kinross Gold (KGC). The ETFs that invest in these stocks like the VanEck Vectors Gold Miners ETF (GDX) are also impacted by the trade balance and budget balance data. Goldcorp, Barrick Gold, and Newmont Mining among GDX’s holdings, accounting for 20% of its total assets.

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