Political events continue to cause gold prices to fluctuate, but the growing cost of debt can spell good news to investors of precious metals. Read on for everything you need to know.
In this article:
- Relationship Between Debt and Gold
- The Global Debt Effect
- Gold’s Performance in Recent Years
- The Financial System’s Sustainability
- Why People Invest in Gold
Gold Prices Fluctuate With Growing Global Debt
Relationship Between Debt and Gold
What is the gold standard? The gold standard is a system in which the value of a nation’s currency is linked to a certain amount of gold. In the U.S., a dollar was worth 0.35 troy ounce of gold.
Abolishing the gold standard meant the creation of a currency without a certain value to benchmark itself with. This opened the floodgates for overspending, and in turn, increased debt to uncontrollable rates.
The Global Debt Effect
The problem with debt is that it had to be paid back somehow. Getting the money needed to do so can come from multiple sources, such as budget cuts to social services like Medicare and Social Security.
At worst, governments worldwide would default on their debts, which will plummet the credit rating of many central banks and slash the purchasing power of different currencies. This doesn’t bode well for the U.S. dollar, as the Federal Reserve’s monetary policy focuses on lower interest rates and money printing.
The global debt will continue to grow into 2020 as central banks continue to pump more money into the financial sector. In fact, fringe economic theories like the Modern Monetary Theory have started to enter mainstream conversation.
What is Modern Monetary Theory? The Modern Monetary Theory is an economic framework that says countries who make their own currency like the U.S., Japan, and the U.K. shouldn’t have to default as long as they have the control over their currency.
The only way to repay the global debt is to induce inflation through initiatives like printing money.
Gold’s Performance in Recent Years
Historical gold prices fluctuate inversely with the amount of debt the market is holding. In 2019, the gold market saw its biggest performance gains in almost 10 years.
As of February 4, 2019, the current price of gold at $1,569.80/ounce – up from $1,316.90/ounce the same day in 2019. Analysts indicate that spot gold prices can reach the $1,800 mark at the end of 2020.
On the flip side, debt growth further increased the amount of negative-yielding bonds to as much as $17 trillion with no signs of shrinking. Negative-yielding bonds are a massive threat to investors, but there appears to be no concrete moves to fix the root cause.
What are negative-yielding bonds? Negative-yielding bonds are bonds that cause the investor to lose more money once the bonds mature.
The World Gold Council reports that central banks have purchased 374 tons of gold in 2019. As a central bank considers gold as its assets, the increase in demand can drive prices even further.
The Financial System’s Sustainability
People still appear to have faith in the financial sector as long as average interest rates remain in the black. Only time will tell when the debt hole can cause interest rates to plummet into the negative range.
At the same time, looser financial policies and lower interest rates encouraged central banks to go into even more debt. Analysts from the Institute of International Finance noted that total global debt has reached $253 trillion in Q3 2019.
They also added that this new debt has diminishing returns. 2019 preliminary data has also suggested that the debt-to-GDP ratio grew at its fastest pace since 2016 even with growth at its slowest since the 2008 recession.
Why People Invest in Gold
With another financial crisis looming on the horizon, demand for gold has increased. Many retirees flock to gold, silver, and other precious metals for a variety of reasons:
- History of holding immense value — Gold managed to maintain its high value amidst the volatility of financial crises. Most of it is due to some unique properties you can only find in pure gold, such as its color and ability to withstand the elements.
- Protection from effects of inflation and deflation — Because higher gold prices go hand-in-hand with a higher cost of living, investing in gold make for good inflation hedges. Gold coins are the easiest way to hold cash to tide over the wave of turmoil until the economy recovers.
- Security — Gold is considered as a “crisis commodity” as people hold on to it as tensions increase. It especially increases the lower people’s trust in government falls.
If you want to start investing in gold, you can use gold spot price charts to track the price of gold and know when is the best time to buy. You can then stock them in a Gold IRA the same way you do with legal tender.
What is the spot price of gold? This is the price of one troy ounce of gold before it gets processed into gold bullion, coins, or rounds.
If you have a limited budget and can’t afford to purchase entire physical gold bullions, you can invest in some gold exchange-traded funds (ETFs) or futures contracts like one of the following:
- SPDR Gold Trust (GLD)
- Investo DB Gold (DGL)
- GraniteShares Gold Trust (BAR)
Stashing some gold bullion or coins somewhere will give you a cushion you need to have a comfortable retirement. Even as gold prices fluctuate in the short term, signs point to how this investment holds in the long term.
Have you invested in gold or are planning to? Let us know in the comments section below.
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