National Debt Surge Key Driver of Gold Prices

It seems nothing can sap the strength of gold these days.

Bullion.Directory precious metals analysis 22 March, 2024
By Isaac Nuriani
CEO at Augusta Precious Metals

Analysts say that one reason for gold’s recent upward trend has been talk of falling interest rates, which certainly makes sense. Precious metals, long perceived as stores of value, have a history of responding favorably to dollar weakness, which tends to be a consequence of declining interest rates.

Also, as a physical asset that doesn’t pay interest, metals can react well to more accommodative monetary policy turns because “competitor” assets that do pay interest have less to offer in declining-rate environments. Another way that’s said is the “opportunity cost” of holding metals is reduced when interest rates fall. 

But analysts also say that to focus on a pickup in rate-cut chatter as a driver of improved gold prices is to overlook other sources of support. 

Evidence suggests that more fundamental reasons – including gold’s perceived value as a hedge – have been prompting a wide variety of groups to buy significant quantities of physical gold. Among the motivated purchasers have been central banks, institutional money managers, Chinese citizens and even retail consumers in India.[2] 

And what is it that all of these folks are trying to hedge against? 

Everything, seemingly: the U.S. dollar, inflation, heightened geopolitical tension, economic downturn…even political uncertainty arising from contentious elections to be held both here and abroad in 2024.[3] 

And something else: ongoing deterioration of America’s fiscal structure. 

That structure, which has shown signs of wear and tear since the early 2000s, appears to be in the midst of an accelerated rate of decay right now. In just the last few years, the country has posted the first-, second-, third- and fifth-largest budget deficits in history; the gross national debt has climbed to more than $34.5 trillion; contentious debt ceiling standoffs and persistent budget fights are the rule rather than the exception; and the U.S. saw its credit rating cut for the second time in history.[4] 

What’s more, there’s reason to be concerned that things could get even worse from here. 

We’re going to discuss why that is, exactly, to include detailing a few of the many concerning projections contained in the Congressional Budget Office’s most recent Budget and Economic Outlook. We’ll also review the stunning pace at which both the annual budget deficit and the national debt are growing right now.  

In the course of our discussion, it will become clear why the matter of U.S. fiscal instability is not merely a political talking point, but an integral component of the overall economic uncertainty against which so many investors are seeking to hedge.  

And why analysts are citing this instability as a key reason for gold’s push into record territory. 

Fiscal Year 2024 Budget Deficit on Pace to Total Nearly $2 Trillion

It seems as though Uncle Sam and fiscal soundness have been embroiled in a long, slow divorce for more than two decades.

Following a period from 1998 through 2001 when the federal government racked up four straight years of budget surpluses – under Democratic President Bill Clinton, of all people – the U.S. has not only stayed in the red every year since, but the size of the deficits has grown steadily larger.[5] 

In the four years from 2002 to 2005, the annual budget deficit averaged a little more than $300 billion. In the four most recent fiscal years, the annual deficit has averaged more than $2 trillion.[6] 

As for the gross national debt, that measured a relatively paltry $5.8 trillion as of the end of fiscal year 2001.[7] Now, it’s $34.5 trillion, as I mentioned earlier.[8] 

But as bad as all that sounds, it could be said that things are even worse. That’s because of the rapidly increasing pace at which deficits and debt have been growing more recently. 

In fiscal year 2023, the annual budget deficit grew to an astonishing $1.7 trillion, representing an equally astonishing 6.3% of gross domestic product (GDP).[9] 

So, what makes those figures so astonishing, considering they’re relatively pale in comparison to the far-higher numbers lodged in the “pandemic years” of 2020 and 2021? 

Precisely that. The year 2023 was not a year characterized by an acute national crisis, such as direct involvement in war, a catastrophic economic downturn, a global health event or something else that might justify a sudden and exorbitant level of federal spending.  

And yet the deficit spending that did take place in the previous fiscal year – as well as its representative percentage of GDP – was among the highest in U.S. history. 

So far, fiscal year 2024 appears to be more of the same, and potentially even worse. Through the first five months, the budget deficit is up to $828 billion.[10] In unadjusted dollar terms, that would make it the tenth-highest annual deficit in U.S. history…and there are still seven months to go! At the current pace, the deficit will land just shy of $2 trillion by the end of the current fiscal year and have the dubious distinction of being the third-highest deficit ever.[11] 

And, unsurprisingly, as the federal government continues to borrow money at a furious pace throughout the fiscal year, the national debt is rising at a concerning pace, as well, prompting seasoned analysts to cite it as a principal reason why so many are running for cover behind gold. 

Bank of America: Gold “Debasement Trade” Is No Surprise Given Stunning Pace of National Debt Increase

The national debt reached the $1 trillion mark in October 1981, which means it took about 200 years to get there.[12]

Now? It increases by intervals of $1 trillion roughly every 100 days. 

Actually, that’s been going on only recently. And there’s no way to know if it will continue. But there’s also no way to know if it won’t rise even faster. 

The national debt reached $31 trillion in early October 2022 and then surpassed $32 trillion in June 2023, about eight months later.[13] That’s an extraordinary pace in its own right. Since then, however, the rate at which the national debt has been traveling from one trillion to the next has become a lot faster. 

After hitting $32 trillion on June 15, 2023, it reached $33 trillion on September 15, 2023. From there, it surpassed $34 trillion on January 4, 2024.[14]  

And in a recent note, Michael Hartnett, chief investment strategist at Bank of America, said the newly established 100-day or so interval of rising from trillion to trillion should continue as the debt moves vigorously toward the $35-trillion mark.[15]  

Hartnett additionally made the claim that “financing domestic bliss and overseas wars” have resulted in budget deficits over the last four years that are equivalent to 9.3% of GDP.[16]   

And his punchline? 

“Little wonder ‘debt debasement’ trades closing in on all-time highs, i.e. gold $2077/oz,” Hartnett said.[17] 

Bear in mind, that’s when gold was at $2,077 per ounce, at the beginning of March. As noted earlier, it’s now more than $2,150 per ounce. 

Bloomberg Analyst: U.S. Deficit and Debt Outlook Strengthen Bull Case of Gold 

Others see precarious U.S. fiscal uncertainty as an underlying support for gold right now, and expect that uncertainty – as well as the demand for gold they say it’s generating – to continue. 

In a recent piece for Bloomberg about gold’s current strength, analyst Marcus Ashworth wrote: 

US fiscal deficits…are poised to increase for the next decade, according to the Congressional Budget Office. The accompanying increase in debt issuance will be relentless — adding to the bull case for enthusiasts of the precious metal.[18]  

In early January, just as the national debt crossed above $34 trillion, economist and noted gold bull Peter Schiff was sounding the alarm on the disturbing uptick in the rate at which it was rising, projecting on X (formerly known as Twitter): 

I think 2024 will set a record for the largest one-year increase in the U.S. National Debt in history. The only question is will there be a sovereign debt or dollar crisis before the year ends.[19] 

Admittedly, it would be easier to dismiss Schiff’s prognostication as hyperbole if the national debt was not actually rising at a truly jaw-dropping, currently. But it is.  

And the potential implications for precious metals could be significant. 

CBO: National Debt Projected to Rise Another 60% in Just the Next 10 Years

Actually, in the opinion of some analysts, such as Bank of America’s Michael Hartnett, there’s nothing “potential” about the implications for gold.

In his view, those implications are playing out right now, with the national debt’s trillion-per-hundred-days rise serving as one of the current gold upswing’s meaningful catalysts. 

But a look further down the road also does raise the possibility that the nation’s fiscal outlook could be a material source of energy for gold well into the future, assuming the relationship that Hartnett and others say currently exists between gold and the nation’s rapidly growing indebtedness is valid. 

Among the most accurate views of what could lie ahead for the nation’s fiscal trajectory likely comes from the vantage point of the Congressional Budget Office (CBO), the nonpartisan government agency whose very job it is to assess the potential conditions of the nation’s fiscal future.    

Bloomberg analyst Marcus Ashworth alluded to the CBO’s projections in a statement that I excerpted earlier. And those projections are not very attractive, if your taste in sovereign fiscal profiles runs toward the stable and the sound. 

A few lowlights: According to the CBO’s Budget and Economic Outlook: 2024 to 2034, the annual budget deficit will trend broadly upward over the next 10 years, reaching $2.6 trillion in fiscal year 2034. The CBO projects the gross federal debt will reach $54.4 trillion by that same year – an increase by nearly 60% over current levels. And the portion of the federal debt held by the public, which through 2023 was roughly $26 trillion and made up about 97% of GDP, is on pace to reach slightly above $48 trillion and represent 116% of GDP by 2034.[20] 

As if that isn’t enough, the CBO also notes: 

From 2024 to 2034, increases in mandatory spending and interest costs outpace declines in discretionary spending and growth in revenues and the economy, driving up debt. That trend persists, pushing federal debt to 172 percent of GDP in 2054.[21] 

In other words: To whatever extent gold is being supported currently by investors turning to the metal as a hedge against burgeoning U.S. fiscal instability, it’s not unreasonable to consider that support may continue in light of the CBO’s latest projections.

Some retirement savers may decide they, too, are sufficiently concerned about the nation’s fiscal outlook to contemplate acquiring the metal – perhaps even through a gold IRA. But regardless of whether investors choose to take an explicit stand against the risks posed by fiscal instability, it seems relatively certain those risks will persist.

And as they do, so will their potential to serve as a structural driver of worldwide gold demand.

[1] CNBC.com, “Gold COMEX (Apr′24)” (accessed 3/14/24).
[2] Barron’s, “Jerome Powell Says Rate Cuts Will Begin This Year” (March 7, 2024, accessed 3/14/24).
[3] CME Group, “FedWatch Tool” (accessed 3/14/24).
[4] Neils Christensen, Kitco.com, “Gold rally could go further still after hedge funds place record bullish bets” (March 11, 2024, accessed 3/14/24); Jack Denton, MarketWatch, “Gold Keeps Hitting Records and ‘Not Everything Adds Up.’ What’s Moving Prices.” (March 7. 2024, accessed 3/14/24); Steve Goldstein, MarketWatch, “There’s one big mystery in the everything rally: gold’s record-setting ascent” (March 6, 2024, accessed 3/14/24).
[5] CNBC.com, “Silver COMEX (May′24)” (accessed 3/14/24).
[6] Lee Ying Shan, CNBC.com, “Gold prices to hit $2,200 and a ‘dramatic’ outperformance awaits silver in 2024, says UBS” (February 4, 2024, accessed 3/14/24).
[7] Neils Christensen, Kitco.com, “Gold and silver to lead 2024 with average prices to rise more than 6% – LBMA annual price forecast” (February 1, 2024, accessed 3/14/24).
[8] TampaSteel.com, “Which Metal is the Best Conductor of Electricity?” (accessed 3/14/24).
[9] Maria Smirnova, Sprott, “Silver Demand and Supply Trends to Watch” (May 26, 2022, accessed 3/14/24).
[10] Lee Ying Shan, CNBC.com, “Silver set for a ‘terrific year’ and could outperform gold to hit a 10-year high” (February 6, 2024, accessed 3/14/24).
[11] Ibid.
[12] Ibid.
[13] Sam Meredith, CNBC.com, “Gold prices could keep climbing — but analysts expect silver to steal the show before long” (March 11, 2024, accessed 3/14/24).
[14] Lee Ying Shan, “Silver set for a ‘terrific year.’”
[15] StockCharts.com (accessed 3/14/24).
[16] Matt Whittaker, U.S. News & World Report, “Should You Invest in Silver as an Inflation Hedge?” (August 24, 2023, accessed 3/14/24).
[17] CPM Group, “Silver Does Outperform Gold…Most Of The Time” (accessed 3/14/24).
[18] CompaniesMarketCap.com, “Silver’s Market Cap” (accessed 3/14/24); CompaniesMarketCap.com, “Silver’s Market Cap” (accessed 3/14/24).

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