The National Debt And Gold

The comments below are an edited and abridged synopsis of an article by Michael Kosares

Since the 1970s, the logic for owning gold has been bound to the cash flow problems of the US. As the national debt increased, so did the damage associated with it—to the dollar, to financial markets and to the economy in general. Simultaneously, gold’s role as an inversely correlated portfolio hedge grew.

The National Debt and Gold | BullionBuzz
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Deficits matter. Deficit denial has never held water because holders of government paper, foreign or domestic, intend to be repaid—with interest. As interest rates have declined over the years, the interest paid by the feds has increased due to the rapid growth of the accumulated debt.

In the worst-case scenario, the debt and interest payments reach levels the markets find intolerable, threatening the dollar’s reserve currency status and foreign creditors’ confidence in US Treasuries. Since 2011, the red ink flowed at an unprecedented rate, and the debt-to-GDP ratio has gone from 62% in 2007 to 105% today.

For foreign holders of US debt, the process begins with trade imbalances that are later converted to Treasury paper to earn a yield. This showcases gold, which cannot be replicated at will, as the dollar’s counterpoint and chief competitor—a superstar portfolio holding for reasons French President DeGaulle outlined in 1965. France set the tone for dealing with the ‘export’ of dollars by converting those imbalances to gold and taking delivery.

From then on, global investors, both private and public, have followed the French model. For those with capital preservation as the goal, gold has been unbeatable since the US went off the gold standard in 1971 and launched the era of fiat money, federal deficits and the massive federal debt.

The same conditions that created the long-term secular trend for both the US national debt and gold are still in place today. As long as that is the case, gold will continue to attract capital as a long-term portfolio hedge just as it has through the first 46 years of the fiat money system. Gold is trading below the federal debt’s trend line, an indication that it might have some catching up to do in the months and years ahead.

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