– 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)
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.
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.
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.
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