Market Oracle: Free-spending Biden and/or Continued Fed Stimulus Will Hike Gold Prices

Article by Richard Mills in Market Oracle

Gold may have come off the boil a bit after rising beyond $1,900 an ounce in the aftermath of the US election, but the precious metal will do well under a Biden presidency, an Ahead of the Herd analysis has found.

The main factors are drastically increased government spending, leading to even more unsustainable US debt levels than currently; dovish monetary policy as the Fed continues to advocate “lower for longer” interest rates; and a sinking US dollar. Gold prices and the USD generally move in opposition to each other.

Gold and the debt to GDP ratio

The debt-to-GDP ratio is an important metric economists use for comparing a country’s total debt to its gross domestic product (GDP).

The percentage arrived at by dividing the country’s total GDP by its total debt indicates the country’s ability to pay back its loans. The higher the percentage, the higher the risk of a country being unable to pay the interest on its debt, and therefore defaulting on its debt.

According to the World Bank, countries whose debt to GDP ratios are above 77% for long periods experience significant slowdowns in economic growth. Every percentage point above 77% knocks 1.7% off GDP, according to the study, via Investopedia.

During the rounds of quantitative easing (QE) conducted by the US Federal Reserve during the financial crisis, the Fed increased the money supply by $4 trillion. 

We saw the debt to GDP ratio jump from 62% in 2007 to 83% in 2009, 90% in 2010, and it has kept climbing ever since.

Gold, being a hedge against inflation, which typically rises when the money supply increases, has done well under periods of quantitative easing, when central banks literally “print money” to purchase sovereign debt instruments (like US Treasuries) and mortgage-backed securities (MBS).

Historically, we know that as the percentage of debt to GDP rises, so does gold. The close correlation between gold and the debt to GDP ratio can also help to forecast gold prices, even during our current predicament. As the pandemic worsens in the United States amid a “second wave” of infections there and in several other countries, including Canada, GDP will fall, likely dramatically.

We are already seeing signs of distress in the US economy, as the recovery that started in summer begins to sputter amid a shocking rise in Covid-19 cases.

That’s the first part of a rising debt to GDP ratio - a hit to GDP. The second part is an increase in debt. Back in March, when the Fed began to “spray billions into the US economy” to deal with covid-19, a Bloomberg article stated that Combined with an unlimited quantitative easing program, the Fed’s souped-up lending facilities are set to push the central bank’s balance sheet up sharply from an already record high $4.7 trillion, with some analysts saying it could peak at $9-to-$10 trillion. As of Nov. 4, the Fed’s balance sheet stood at $7.2 trillion.

Consider what a $10 trillion balance sheet will do to the debt to GDP ratio. Already at 98%, a level not seen since World War II, the Congressional Budget Office said it expected federal debt held by the public to exceed ....

To read this informative article in Market Oracle in full and view the relating charts, click here.