The current economic landscape presents a compelling case for gold, with the stars aligning in its favor. The US has unsustainable public finances, is losing credibility as a reliable economic partner, and is on the path to higher inflation. Furthermore, many major economies, including France, Italy, Japan, and the UK, have compromised public finances, making their bond markets unattractive to investors. This situation has led to a surge in gold's appeal.
The US's public finances are a significant concern, with the Congressional Budget Office predicting a budget deficit exceeding 6% of GDP for the foreseeable future. Even with the economy near full employment, the US public debt is expected to reach levels last seen at the end of World War 2 by 2029. The proposed $500 billion increase in the defense budget could exacerbate the situation, making it challenging for the US to finance its large borrowing needs.
A substantial portion of the US debt is held by foreign investors, who now own $8.5 trillion, or about a third of all US treasuries. However, these investors are losing confidence in the US as a reliable economic partner, partly due to the increased weaponization of US international financial policy. The freezing of Iranian and Russian dollar deposits and Trump's erratic import tariff policy have contributed to this loss of confidence.
The recent spike in US treasury bond yields, with the 10-year yield reaching a 20-year high of almost 5.3% and the 30-year bond yield reaching 5.6%, is another indication of foreign investor concerns. Additionally, central banks in countries like China and Japan have reduced their US treasury bond holdings by $120 billion over the past year. The Norwegian sovereign wealth fund also plans to cut its treasury bond holdings by $80 billion.
The US treasury secretary faces significant challenges in avoiding a full-blown US government bond market crisis and a move to higher inflation. With the need to raise $2 trillion annually to cover the budget deficit and roll over over $3 trillion in maturing treasury bills and bonds each quarter, any reduction in foreign investment could have severe consequences.
In normal times, other major countries' government bond markets would offer a safe haven from the troubled US treasury bond market. However, most major economies have similarly troubled or even more troubled public finances than the US. Japan, France, and Italy have public debt-to-GDP ratios significantly larger than that of the US, while the UK's ratio is similar.
The bull case for gold is strong, given the US's likely government bond market crisis and higher inflation, as well as the shaky fundamentals of other major government markets. Gold's only competitor, bitcoin, has displayed excessive volatility, making it unattractive to serious investors. As central banks increase their gold reserves to 27% of their overall international reserve holdings, gold's appeal as a safe-haven asset continues to grow.
Key points
- The US's unsustainable public finances and loss of credibility as a reliable economic partner are driving the bull case for gold.
- Foreign investors are losing confidence in the US, as evidenced by reduced investments in US treasury bonds.
- The global economic landscape, with many major economies facing similar challenges, makes gold an attractive safe-haven asset.
