Four Charts: Debt, Defaults and Bankruptcies To See Higher Gold

Four Charts: Debt, Defaults and Bankruptcies To See Higher Gold

- $8.8B Sprott Inc. sees higher gold on massive consumer debt, defaults & bankruptcies 
- Rising and record U.S. debt load may cause financial stress, weaken dollar and see gold go higher
- Massive government and consumer debt eroding benefits of wage growth (see chart)

by Bloomberg

Rising U.S. interest rates, usually bad news for gold, are instead feeding signs of financial stress among debt-laden consumers and helping drive demand for the metal as a haven.

That’s the argument of Sprott Inc., a precious-metals-focused fund manager that oversees $8.8 billion in assets. The following four charts lay out the case for why gold could be poised to rise even as the Federal Reserve tightens monetary policy.

Gold futures have managed to hold on to gains this year, staying above $1,300 an ounce even as the Fed raised borrowing costs in December for a fifth time since 2015 and is expected to do so again next week.

The increases followed years of rates near zero that began in 2008. Low rates coupled with the Fed’s bond-buying spree contributed to the precious metal’s advance to a record in 2011. Higher rates typically hurt the appeal of gold because it doesn’t pay interest.



Paper Losses

The U.S. posted a $215 billion budget deficit in February, the biggest in six years, as revenue declined, Treasury Department data show. That’s boosting the government debt load, fueling forecasts for higher yields and raising the specter of paper losses for international investors who own $6.3 trillion of U.S. debt.

Slowing demand for Treasuries from overseas buyers is contributing to dollar weakness against the currency’s major peers, helping support gold prices, according to Trey Reik, a senior portfolio manager at Sprott’s U.S. unit.



Debt-Laden Shoppers

The yield on the 10-year U.S. Treasury, which has been in decline for more than three decades, has risen over 40 basis points this year as the Fed raised rates and U.S. debt ballooned to more than $20 trillion.

That has ramifications for American households already struggling to pay down their credit cards and auto loans, dimming the outlook for consumer spending that helped fuel U.S. growth.

Those concerns have been widely overlooked by investors but will spur demand for haven assets like gold, Reik said.

“With as much debt as there is in the system, if you have a backup in rates, you’re going to see a default wave pretty quickly,” Reik said in an interview at Bloomberg’s headquarters in New York. “You’re going to have personal bankruptcies flare up. Gold really does well when financial stress starts to take hold in the system.”

In December, Fed officials signaled they may boost interest rates three times this year amid improving U.S. economic growth and a tightening labor market that could spur wage growth and push inflation toward the central bank’s target of 2 percent.

Even with a synchronized global expansion, though, consumer debt is likely to erode the benefits of rising wages, undercutting the argument from gold bears that an improving world economy will damp haven demand for gold, Reik said.

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Prepare For Interest Rate Rises And Global Debt Bubble Collapse

Data shows rising interest rates is positive for gold as seen in 1970s and again from 2003 to 2007. Source: New York Federal Reserve for Fed Funds Rate, for Gold (PM fix)

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Gold Prices (LBMA AM)

20 Mar: USD 1,312.75, GBP 935.60 & EUR 1,066.22 per ounce
19 Mar: USD 1,311.70, GBP 934.59 & EUR 1,066.41 per ounce
16 Mar: USD 1,320.05, GBP 945.42 & EUR 1,071.09 per ounce
15 Mar: USD 1,323.35, GBP 949.24 & EUR 1,070.72 per ounce
14 Mar: USD 1,324.95, GBP 949.59 & EUR 1,071.35 per ounce
13 Mar: USD 1,318.70, GBP 948.94 & EUR 1,069.60 per ounce
12 Mar: USD 1,317.25, GBP 950.66 & EUR 1,069.87 per ounce

Silver Prices (LBMA)

20 Mar: USD 16.25, GBP 11.60 & EUR 13.22 per ounce
19 Mar: USD 16.29, GBP 11.59 & EUR 13.24 per ounce
16 Mar: USD 16.48, GBP 11.79 & EUR 13.36 per ounce
15 Mar: USD 16.52, GBP 11.86 & EUR 13.37 per ounce
14 Mar: USD 16.61, GBP 11.88 & EUR 13.42 per ounce
13 Mar: USD 16.51, GBP 11.88 & EUR 13.38 per ounce
12 Mar: USD 16.46, GBP 11.88 & EUR 13.39 per ounce




Snaffew Silverfoot Tue, 03/20/2018 - 10:16 Permalink

no love for either...the monkeys are out in full force today...silver is getting another beatdown.  This does tell me that the global economy has very weak production, since silver is more of an industrial metal than a precious one.  Recessionary environment for sure. If pm's get smacked down, then the markets will take a beating too---no safe place to hide on the long side imo.

In reply to by Silverfoot

bshirley1968 Snaffew Tue, 03/20/2018 - 11:41 Permalink

Notice the Fed funds rate listed from '03-'07. I had forgotten that they raised rates by 400%.

Look up a fed funds rate vs. total debt and see what happens everytime they raise rates. Every time, we go into recession. Last time they raised to 5.25%. This time will take no more than 3% since the amount of debt has just about doubled again.

I agree we have never left the last recession. Let's just say the pain medication is about to wear off at 3% and everyone else will realize we never left recession i.e. reality.

In reply to by Snaffew

unplugged Tue, 03/20/2018 - 11:43 Permalink

by now it is quite obvious that total global debt, or any major nation's individual debt, does not matter

those debt levels are completely meaningless

all due to coordinated global totalitarianism of the financial/monetary/economic systems

nobody is going to call anyone's hand because they are all in it together since if one falls, they all fall

looks like its going to be this way well past our lifetimes

we should have gone all-in on bitcoin !

there will never be an honest system that persists because people tend towards dishonesty and taking advantage
of others to get ahead and gain wealth and power - its just the way it is and always has been