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U.S. Fiscal Uncertainty Could Be Outsized Driver of Gold Demand

Isaac Nuriani    |
Apr 26, 2024
  • National debt has been rising at the rate of $1 trillion every 100 days.
  • Multiple analysts say the current national debt surge is helping to push gold higher.
  • Public policy think tank suggests a fiscal “point of no return” is fast approaching.
  • Renowned hedge fund manager says fiscal uncertainty is why he’s in gold now.
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Gold’s resilience continues to impress. 

By now, you surely know of gold’s particularly durable performance since the end of February. From that time through yesterday (Friday), gold has climbed 15% on a wave of momentum.[1] As a matter of fact, the price of gold had risen 18% by the end of last week, to more than $2,400…but some profit-taking in subsequent days amid a decline in Middle East tensions saw the yellow metal lose some ground.[2] 

But not too much ground, mind you. The fact is, gold has hung tough through interest rates at 23-year highs, in the wake of recent news suggesting those rates likely will remain high, and even after sudden declines in the Middle East tensions.[3] 

Gold’s ability to continue standing tall in spite of these headwinds has prompted analysts to attribute its recent strength to not just one or two drivers, but, rather, to an array of fundamental energy sources rooted in both economic and geopolitical uncertainty. Among them are persistent inflation, recession concerns, central bank diversification away from the dollar, the ongoing Russia-Ukraine war, the troubles between Hamas and Israel, and trade tensions between the U.S. and China.[4]  

It’s not just the array of concerns supporting gold that’s notable, but also the stature of those turning to gold to help mitigate the cited risks…such as central banks. 

Not only have central banks been net purchasers of gold for the last decade and a half, but annual central bank gold demand has been at all-time highs the previous two calendar years.[5] And metals strategists say there’s no reason to believe that vigorous central bank gold demand is going to decline anytime soon.[6]  

There’s a lot here already. But as much as it is, we’ve left something out; something that experts say is strengthening gold now and expected to strengthen it for some time to come. 

That would be America’s deteriorating fiscal profile. Not only its fast-rising national debt – $34.6 trillion and counting – but, more structurally, the nation’s overall growing fiscal unsustainability.[7] 

This week, we’re going to take a closer look at America’s fiscal uncertainty as a driver of gold, both now and going forward. We’ll even take a look at what’s on the mind of Ray Dalio, founder of world’s-largest-hedge-fund Bridgewater Associates, who recently explained that fiscal uncertainty is why he’s turned to gold to help hedge his personal fortune estimated to be in excess of $15 billion.[8] 

But before we get to the discussion of America’s fiscal concerns in the context of gold, it might be a good idea to discuss the nation’s fiscal outlook, more generally – and clarify why it may have morphed from being a concern of the future, to one that now seems much more imminent. 

CBO: Annual Budget Deficits Posed to Average $2 Trillion for the Next Decade 

One need not be a close observer of America’s fiscal structure to recognize that cracks have been forming for years in that part of the national economic foundation. 

Remember budget surpluses? I wouldn’t blame you if you didn’t. The last time we had one was during the Clinton years…nearly 25 years ago.[9] 

Since then, it’s been nothing but annual budget deficits. That’s bad enough. But what’s worse is just how big those deficits have become in recent years. 

The onset of the global health crisis seemed to trigger the era of the outsized deficit. The 2020 deficit reached $3.1 trillion, an all-time record. The following year was no slouch either; that saw the deficit hit $2.7 trillion…the second-largest deficit in history.[10] 

But I referred to this as the era of the outsized deficit – and here’s why: Even though the immediate concerns of the pandemic had subsided and there was no other compelling crisis in play, deficits were extraordinarily large the last two years, as well. The 2022 deficit reached $1.4 trillion, while the 2023 deficit hit $1.7 trillion last year…the fifth- and third-largest deficits in history, respectively.[11] 

And this year – with, again, no real crisis in sight – the government is on pace to rack up a deficit totaling $2.1 trillion.[12] 

It appears the government has turned a troubling corner with respect to the ease with which it now accumulates deficits and debt. And as a result, it seems the fiscal outlook is poised to only worsen from here. 

February 2024 projections by the Congressional Budget Office (CBO) say the annual budget deficit will average roughly $2 trillion over the next decade. As for the gross national debt, the CBO forecasts that to reach $54.3 trillion by 2034 – nearly 60% higher above present levels.[13]  

And the portion of the federal debt just held by the public? The CBO says we should expect it to rise from 97% of GDP last year to 116% of GDP by 2034.[14] 

Given the absurd levels to which these sums have climbed up to this point – to say nothing of where they’re projected to go over the next 10 years – it should be no surprise that credible organizations now are suggesting even greater potential fiscal issues may be in sight. 

Penn Wharton Budget Model: Time Is Running Out for U.S. to Right Its Fiscal Ship 

One such fiscal alarm was sounded this past October by the renowned Penn Wharton Budget Model (PWBM), a research group focused on public policy. 

PWBM made headlines this past October when it projected that the U.S., based on its current fiscal profile and trajectory, “has about 20 years for corrective action after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt whether explicitly or implicitly.”[15] 

In its analysis summary, PWBM underscored that “unlike technical defaults where payments are merely delayed, this default would be much larger and would reverberate across the U.S. and world economies.”[16] 

PWBM said something else that might be viewed as just as important:  

Forward-looking financial markets are effectively betting that future fiscal policy will provide substantial corrective measures ahead of time. If financial markets started to believe otherwise, debt dynamics would ‘unravel’ and become unsustainable much sooner.[17] 

In other words: If markets and the broader economy start to sense that elected officials aren’t going to do the heavy lifting required to right the nation’s fiscal ship in time, conditions could begin to degenerate much sooner than 20 years from now. 

Although not suggesting we’re on the verge of an explicit point of no return, some say the concerning pace of debt growth in the U.S. is a sign of a real-time deterioration in fiscal conditions.  

Wharton Professor: Markets Could Decide as Soon as Next Year That Fiscal Trajectory Is “Unsustainable” 

In fact, Wharton professor Joao Gomes recently suggested that “sixth sense” on the part of markets regarding America’s fiscal instability could prove problematic as soon as next year. 

In an interview at the beginning of April, Gomes said that if debt growth isn’t reined in, 2025 could be the year the current fiscal path becomes unsustainable. 

“That’s something that could definitely happen to us next year,” Gomes said. “We announce a fiscal path that markets just wake up to and say ‘it’s unsustainable.’”[18] 

Given the pace at which the national debt is growing, it’s unclear if the economy even has until next year before markets decide enough is enough: According to recent analysis by Bank of America, the nation’s gross national debt now is growing at the stunning rate of $1 trillion roughly every 100 days.[19] 

And as the tidewaters continue to rise, some investors are scrambling to stack their sandbags as high as possible. 

And what are those sandbags filled with? Gold. 

Hedge Fund Legend Dalio: Gold Is a Good Hedge Against Fiscal Risk – and That’s Why I Own It 

In fact, the same Bank of America analysis that shined a light on the trillion-per-hundred-days pace at which the national debt is rising suggested that the same debt surge is a primary driver of the momentum enjoyed by gold, currently. 

“Little wonder ‘debt debasement’ trades closing in on all-time highs, i.e. gold $2077/oz,” Michael Hartnett, chief investment strategist at Bank of America, said at the time.[20]  

Since then, gold has climbed $250 per ounce higher.[21] 

Other strategists also see U.S. debt’s accelerated climb higher as a gold catalyst.  

“Concerns about the U.S. debt cycle, devaluation of money – and fiat money in particular – does drive the story and the narrative,” said Brad Bechtel, global head of foreign exchange at Jefferies, who added: 

“Concerns about debasing of fiat money is generally one of the drivers of the gold bugs.”[22] 

One of those “gold bugs” who’s turning to gold as a hedge against fiscal instability is Ray Dalio, founder of legendary hedge fund Bridgewater Associates.  

In a recent post on LinkedIn, Dalio spelled out the differences between fiat currency and gold, and why he’s turned to gold to offset the potential risks posed by fiat currency. 

Referring to the dollar, euro and other leading global currencies, Dalio noted, “These monies are held in debt assets—i.e., they are debt-backed money—i.e., currency = debt. In other words, when you hold these monies, you are holding debt liabilities, which are promises to deliver you money.”[23] 

“Gold, on the other hand, is a non-debt-backed form of money,” Dalio continued. “It’s like cash, except unlike cash and bonds, which are devalued by risks of default or inflation, gold is supported by risks of debt defaults and inflation. It is held by central banks and other investors for this reason. In fact, gold is the third-most-held reserve currency by central banks, more so than the yen or renminbi.”[24] 

And then he delivered what amounts to the punchline: 

When the financial system is working well—which is when there aren’t debt and inflation crises and the borrower-debtor governments printing debt-backed monies are meeting their obligations and paying their interest without printing and devaluing money—debt assets and other financial assets are good assets to hold; on the other hand, when the reverse is the case, gold is a good asset to own. That’s the main reason that gold is a good diversifier and why I have some in my portfolio.[25] 

Notably, at the conclusion of his piece, Dalio felt compelled to make the following clarification: 

I am not recommending that you buy gold. In my communications with you, I am trying to convey to you how the markets work, explain what I think you should be aware of.[26] 

I couldn’t say it any better. It’s true that a number of analysts see fiscal uncertainty as a gold driver right now…and see that same uncertainty persisting as a more structural gold driver, going forward. Investors who agree with that outlook ultimately may conclude that acquiring gold – either for cash or through a tax-advantaged gold IRA – is an appropriate course of action for them.  

Whether they reach that particular conclusion or not, however, doesn’t change the reality of the nation’s fiscal profile. The risks remain. And because they do, prudent investors would do well to watch carefully

 

 

[1] CNBC.com, “Gold COMEX (Jun′24)” (accessed 4/26/24). 
[2] CNBC.com, “Gold COMEX (Jun′24)”; Jim Wyckoff, Kitco.com, “Heavy price pressure on gold, silver as risk aversion recedes” (April 22, 2024, accessed 4/25/24). 
[3] FederalReserve.gov, “Open Market Conditions” (accessed 4/25/24); Christopher Rugaber, AP News, “Fed’s Powell: Elevated inflation will likely delay rate cuts this year” (April 16, 2024, accessed 4/25/24). 
[4] Steve Goldstein, MarketWatch, “There’s one big mystery in the everything rally: gold’s record-setting ascent” (March 6, 2024, accessed 4/25/24); Rana Foroohar, Financial Times, “Gold is back — and it has a message for us” (April 15, 2024, accessed 4/25/24). 
[5] World Gold Council, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 4/25/24). 
[6] Maxwell Gold, State Street Global Advisors, “What’s Driving Central Banks to Record Gold Purchases — and Will It Last?” (October 4, 2023, accessed 4/25/24). 
[7] FiscalData.Treasury.gov, “Debt to the Penny” (accessed 4/25/24). 
[8] Rebecca Baldridge, Forbes, “Top 10 U.S. Hedge Funds Of April 2024” (April 8, 2024, accessed 4/25/24); Forbes, “World’s Billionaires List – The Richest in 2024” (accessed 4/25/24). 
[9] Kimberly Amadeo, The Balance, “US Budget Deficit by Year Compared to GDP, the National Debt, and Events” (April 5, 2022, accessed 4/25/24). 
[10] FiscalData.Treasury.gov, “What is the national deficit?” (accessed 4/25/24). 
[11] Ibid. 
[12] Department of the Treasury, “Monthly Treasury Statement” (March 31, 2024, accessed 4/25/24). 
[13] CBO.gov, “The Budget and Economic Outlook: 2024 to 2034” (February 2024, accessed 4/25/24). 
[14] Ibid. 
[15] Penn Wharton Budget Model, “When Does Federal Debt Reach Unsustainable Levels?” (October 6, 2023, accessed 4/25/24). 
[16] Ibid. 
[17] Ibid. 
[18] Filip De Mott, Business Insider, “Swelling US debt could tip US markets into crisis as soon as next year, Wharton professor says” (April 4, 2024, accessed 4/25/24). 
[19] Michelle Fox, CNBC.com, “The U.S. national debt is rising by $1 trillion about every 100 days” (March 4, 2024, accessed 4/25/24). 
[20] Ibid. 
[21] CNBC.com, “Gold COMEX (Jun′24).” 
[22] Reuters.com, “Worsening US debt outlook seen more in gold and bitcoin than in bonds” (April 19, 2024, accessed 4/25/24). 
[23] Ray Dalio, LinkedIn, “Do You Have Enough Non-Debt Money?” (April 18, 2024, accessed 4/25/24). 
[24] Ibid. 
[25] Ibid. 
[26] Ibid. 
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