Economy: Will Rising U.S. Debt Bring Surge in Gold Prices?

Economy: Will Rising U.S. Debt Bring Surge in Gold Prices?

By Richard Cox

As all consumers understand, debt is borrowed money and any money that is loaned must be paid back at the time the payments are due. During instances of non-payment, there is a prevalent risk for all parties involved. The same is true for all of the world’s nations. When a country’s debt increases to sizes that are uncontrollable, the risks can be substantial for its government and its citizens.

For investors, this risk comes with a need for safe-haven assets. Historically, gold is renowned as one of the market’s best resources in volatile financial environments. As a result, the price of gold can be expected to move higher as debt grows within a nation’s economy. In instances where the price of gold is falling and the world is building up greater levels of debt, this relationship strengthens even more deeply. Since this is the case in the present set of global circumstances, gold may be gaining in its haven appeal.

(Source: U.S. Treasury / LBMA)

The above chart shows the direct relationship that exists between the total debt in the US and the price of gold. As we can see, the price of gold tends to rise as the level of U.S. national debt in the U.S. increases. This is why the decline in the price of gold that has taken place since the year 2011 has been significant. These declines have also affected gold-based mining funds like the Sprott Gold Miners ETF (NYSE: SGDM) and the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ).

Intermediate mining companies like Yamana Gold (NYSE: AUY ), Randgold Resources (NYSE: GOLD), and Franco Nevada (NYSE: FNV) have also shown significant declines over the last 52 weeks. These companies total 13.9% of the price changes that can be seen in the trading values of the VanEck Vectors Gold Miners fund (NYSE: GDX).

Can Gold and Silver Become Investor Anxiety Insurance?

For many years, precious metals have been regarded as a sound investment when every other asset class is failing. However, the bearish investor sentiment seen now has played a different role. The stock market upheaval coming from trade wars with China, terrorist attacks in Paris, and geopolitical tensions coming from Turkey and Russia have had only a limited impact on gold prices.

Most investors remember that 2008 was an extremely dire financial situation, and during this time the price of gold reached all-time record highs. By the end of 2008, the price of gold had tripled when compared to the 30-year lows from 2001. In other words, this means that prior to the Lehman Brothers bankruptcy demand for gold coins was so high that many retail dealers had already been cleaned out of their metals inventory by the time the investment bank failed.

(Source: COMEX)

In this financial markets chart, We can compare the value of the S&P 500 with the price of gold. Note the important differences, as it is clear that gold coins provide asset protection when we see economic circumstances pointing toward a global monetary crisis. The global currency crisis and the government debt bubble seen currently in the US have often been suggested as reasons for investors to consider having gold in their investment portfolios.

However, this market environment makes gold seem that gold could benefit as investor anxiety insurance and the market’s main risk protection instrument. In other words, gold will likely continue to follow the historical dynamics of financial market cycles. Many expert financial analysts have a positive outlook on precious metals, and this may affect companies within the precious metal mining industry to a significant extent. Benchmark gold mining based funds like the SPDR S&P Metals and Mining fund (NYSE: XME) Global X Silver Miners fund (NYSE: IL) are key examples.

Individual stocks may also be affected. Senior mining companies like Agnico Eagle Mines (NYSE: AEM), Newmont Mining (NYSE: NEM), and Goldcorp (NYSE: GG) could ultimately see the effects of a bullish run in gold prices. When the stock values of these companies are combined, the total constitutes roughly 18% of the price value of the VanEck Vectors Gold Miners fund (NYSE: GDX).

Gold Prices and Geopolitical Instability

As the stock market unrest of 2008 unfolded, gold prices hit new records and this is a trend we have seen throughout history during times of rising global tensions. Famously, the price of gold peaked at $850 in 1980 when the Soviet Union enacted a military invasion of Afghanistan. These types of wartime scenarios are often bullish for gold, and silver follows the trend in almost every case.

In August of 1990, the nation of Iraq invaded the nation of Kuwait. The unrest caused by these events led investors to initiate a spike in gold prices. In 1991, when the first bombardments occurred in Iraq in 1991, those metals prices spiked once again. This marked the early stages of the Iraq War and the financial markets witnessed gold prices rise considerably.

(Source: COMEX)

Recent political tensions between Turkey and Russia could have the same impact on metals and the financial markets. Turkey recently shot down a Russian military airplane and this has raised geopolitical concerns for investors around the world. In other words, these are the types of events that can lead to spikes in gold prices.

For many market traders, price changes in silver and gold can also be replicated using exchange-traded funds. Two of the most popular examples are the iShares Silver Trust fund (NYSE: SLV) and the SPDR Gold Shares fund (NYSE: GLD). For the most part, price changes in gold and silver will also impact mining companies.

For stock traders, examples here might include Pan American Silver (NYSE: PAAS), Coeur Mining (NYSE: CDE), and New Gold (NYSE: NGD). When the values of these three stocks are combined, they determine roughly 5% of the value of the benchmark VanEck Vectors Gold Miners fund (NYSE: GDX).