Can Financial Stress Add to Gold’s Luster in 2018?


Mar. 27 2018, Updated 9:02 a.m. ET

US debt and gold

The main argument for rising debt is that, if it rises beyond a certain point, the country would have to raise taxes and cut spending in productive areas to service its interest costs. Such developments would be negative for economic growth.

If economic prospects aren’t bright, people don’t have many options to fall back on. Gold is one of those options.

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US debt spiraling

The US budget deficit has been increasing by the day. The country recorded a budget deficit of $215 billion in February 2018, the largest in six years. While the fiscal income dropped to $156 billion, 9% lower year-over-year (or YoY), spending increased 2%. Fiscal year-to-date (starting in October 2017), the deficit widened to $351 billion.

The tax law enacted by the government in December 2017 would only lead to a widening of this deficit, increasing the debt load of the US government.

According to analysis by the committee for a responsible federal budget, due to separate tax and spending measures and increased borrowing costs, ~$6 billion would be added to country’s already rising debt in the coming decade.

According to the Treasury Department, as of March 16, US debt totaled $21.03 trillion. This figure is higher than the debt of every other country in the world combined. The debt now stands at 106.4% of the gross domestic product (or GDP).

US debt outlook and gold

According to a senior portfolio manager at Sprott, a precious metal–focused fund, the demand for US debt from international investors is slowing, which is also leading to pressure on the US dollar, supporting gold.

Many market participants expect debt to rise substantially under the Trump administration. A rise in US debt would be negative for the US dollar’s long-term profile. The US dollar affects gold prices, which affect gold companies such as Goldcorp (GG), Barrick Gold (ABX), Yamana Gold (AUY), and Newmont Mining (NEM) as well as funds such as the SPDR Gold Trust ETF (GLD) and the VanEck Vectors Gold Miners ETF (GDX).


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