Analyst: U.S. Debt and Record-Low Yields Are Driving Gold Prices

Although gold has had many drivers powering its remarkable summer upswing, Forbes contributor Frank Holmes highlights two tailwinds that could prove to be key players for the metal’s value in the short- and long-term: the ballooning U.S. debt and the record-low yields, both domestic and global.

In his analysis, Holmes points to some very concerning statistics regarding domestic debt. The federal budget deficit for the 2020 fiscal year has passed $1 trillion, an unprecedented development during a time of perceived economic stability. The figure goes in line with the constantly expanding U.S. national debt, which now sits at $22.5 trillion. Holmes is also wary of the latest estimate by the Congressional Budget Office (CBO), which forecasts a federal debt amounting to 144% of local GDP by 2049.

Regarding yields, it’s well-known that many top economies have sunk their bonds into low or negative territory, and the landscape looks very much alike on the corporate side. This has revived the issue of corporate debt, which was a major ingredient in the 2008 financial crisis. Large companies made full use of all-time low yields for corporate bonds, as they rushed to borrow as much money as they could. As Holmes notes, giants like Apple and Coca-Cola have been among the record 49 companies to borrow a combined $54 billion through the past Wednesday.

In regards to central banks, Holmes cites Rick Rieder, chief investment officer at BlackRock, who believes that the official sector has entered something he calls the “monetary policy endgame”. Recent years have shown that central bankers have no qualms about slicing rates into negative territory and employing as much quantitative easing (QE) as they wish. The latter point has sparked talks about currency debasement, with many investors feeling that previously-marquee fiat currencies are no longer instilling the confidence that they once did.

Rieder and Holmes agree that we are approaching an era where negative-yielding bonds and zero-yielding currencies will become the norm, each of the two being in infinite supply. In such an environment, investors will have to look elsewhere to protect themselves from an incoming global financial crisis.

Holmes has little doubt that gold is among the best asset to do just that. Its independence and cherished scarcity make it an ideal choice of a shield against dubious government policies. Yet gold offers more than just the assurance of wealth protection. While the metal recently sparked above $1,500 an ounce in spectacular fashion, Holmes thinks that the callous actions of central bankers, especially in regards to currency debasement, could bring its price to $10,000 an ounce in the coming years.

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