OCM Perspective – Gold and Debt Correlation
President Biden/Congress suspend U.S. debt limit for two years
Gold priced in U.S. dollars has a 92% correlation to Total Federal Debt Outstanding since Nixon closed the Gold Window in 1971. It is clear to us that the mark down of the dollar versus gold over the last 50 years is tied to the deterioration of the U.S. balance sheet and lack of fiscal discipline in Washington. In 2023, rising interest expenditures are only adding to the rapid rise in Total Federal Debt Outstanding. U.S. budget deficit over the last four months is 4 times greater than 2022 at $701 billion as lower tax revenues along with higher interest expenses take its toll.
Congressional Budget Office’s (CBO) most recent ten-year projection has Total Federal Debt set to rise from $ 31.5 trillion to $52 trillion or 65% by 2033. The issue is the CBO’s ten-year projections have been off by an average of 58% since 1996, which projects to a possible $82 trillion Total Federal Debt number in 2033 if the CBO remains true to form. A scary thought and obviously something will have gone terribly wrong if the U.S. hits that number, be it inflation or a war.
With the ongoing move to “de-dollarize” by BRICS countries and other emerging economies, the foreign appetite for U.S. treasury bonds is declining at a time when supply appears set to accelerate. In our opinion, rates will need to go higher to attract buyers, or the Federal Reserve will need to step in to be the buyer of last resort of treasuries to manage the yield curve to stop higher rates from imploding a leveraged global economy. We believe gold prices may at a minimum hold the historic correlation to Total Federal Debt Outstanding if the Fed aggressively monetizes debt, potentially translating into dramatically higher gold prices from current levels.
A short article on Elements.visualcapitalists.com touches on the relationship of Federal Debt and Gold priced in U.S. dollars since 1970. To read the article click here.
History of CBO Projections for reference:
(In Billions of Dollars)
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The Fund invests in gold and other precious metals, which involves additional risks, such as the possibility for substantial price fluctuations over a short period of time and may be affected by unpredictable international monetary and political developments such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. The Fund may also invest in foreign securities which involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. Prospective investors who are uncomfortable with an investment that will fluctuate in value should not invest in the Fund.
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Past performance is no guarantee of future results
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Past performance is no guarantee of future results. There is no guarantee that the Fund will achieve its objective. Diversification does not ensure a profit or guarantee against loss. The prices of securities of gold and precious metals producers have been subject to substantial price fluctuations over short periods of time and may be affected by unpredictable international monetary and political developments, such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of gold and other precious metals may decline versus the dollar, which would adversely affect the market prices of the securities of gold and precious metals producers. Because the Fund concentrates its investments in the gold mining industry, a development adversely affecting that industry (for example, changes in the mining laws which increase production costs) would have a greater adverse effect on the Fund than it would if the Fund invested in a number of different industries.
The thoughts and opinions expressed in the article are solely those of the author as of June 15, 2023.
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