Gold News

News So Bad, It's Good

...for gold prices, maybe...

THERE's still reason to remain somewhat cautious on the economic outlook long-term, writes Frank Holmes at US Global Investors.

The latest accounting of global debt levels was just released, and the news might be so bad that it's good – for gold prices, at least.

After climbing above $250 trillion in the first half of 2019, the amount of debt that's owed by governments, the financial sector and non-financial sector is now forecast to touch a record $255 trillion by year's end, according to the Washington, DC-based Institute of International Finance.

Says the IIF economists, this mind-boggling sum is the equivalent of 320% of total global economic activity – the highest level ever.

To put it another way, for every $1 that's produced today, an additional $3.20 in debt is created and thrown atop the heap. I shouldn't need to say it, but I will anyway: This is unsustainable.

As economist Martin Murenbeeld writes in his most recent Gold Monitor newsletter, "rising global debt levels is one of our most important medium/long-term factors in the gold outlook."

That's because debt "inhibits growth," Murenbeeld says, "and high debt levels will, when central banks are committed to targeting maximum employment and stable inflation, limit central banks' policy options to 'loose' or 'very loose'.

"All this will be very positive for gold, of course!" he adds.

Here in the US, national debt hit an unimaginable $23 trillion on October 31 – Halloween, of all days. That's roughly 107% of US gross domestic product (GDP), or nearly double its share of the economy from 2000.

This data comes from US National Debt Clock, which I highly recommend you visit if you haven't already done so. It's an invaluable tool.

What I find particularly eye-opening is the amount of unfunded public pension liabilities. They're currently closing in on $7 trillion – the equivalent of $20,700 per US citizen. An unfunded pension is any retirement plan for which sufficient assets have not been set aside, and as Murenbeeld points out, such obligations can inhibit economic growth. The greater they become, the more tax revenues must go not toward infrastructure, education and other public benefits, but to fixed costs.

It should come as no surprise to you that the US city facing the biggest shortfall at the moment is Chicago, Illinois. About a third of the Windy City's budget is earmarked for pension payments alone, and when you combine other obligations such as debt service and "other postemployment benefits" (OPEBs), fixed costs amount to 45% of expenditures.

Back in July 2017, I discussed the Illinois budget crisis at length, and since then not much has improved despite state and city leaders' best efforts. In fiscal year 2019, Illinois taxpayers contributed a record $10 billion toward the state's unfunded pension liabilities, and yet it still wasn't enough to prevent them from growing, from $131 billion in 2018 to $137 billion this year.

Unfunded Chicago pensions have also deepened further into deficit in the four years since former mayor Rahm Emanuel's series of painful tax hikes on everything from property to water services to 911 emergency lines. According to a Chicago Tribune investigation, city pension debt has ballooned to $7 billion since the new taxes went into effect in 2015.

My reason for sharing this with you is that, again, higher debt levels have put tremendous pressure on the Federal Reserve (and central banks in general) to keep monetary policy "loose" or "very loose." In turn, bond yields have been unremarkable lately, to say the least.

Case in point: The nominal 10-year Treasury yield was trading at just under 1.8% on Friday – which, coincidentally, is the current annual rate of US inflation, according to the Department of Labor's October report.

What this means is that the real yield on the 10-year T-note is a big fat 0%. And when this happens, according to the World Gold Council (WGC), "it may be time to replace bonds with gold."

"Re-optimizing portfolio structures for lower future expected bond returns suggests investors should consider an additional 1% to 1.5% gold exposure in diversified portfolios," the WGC writes in a report dated October 30. The London-based group adds that "extremely low or negative yielding bonds could weigh on the overall performance" of investors' portfolios," which favors "additional gold exposure."

Gold has continued to trade below its 50-day and 100-day moving averages as investors seem to be waiting for the next catalyst, whether that is Fed policy, movements in the US Dollar, or developments in the US-China trade war.

In a note to investors, UBS strategist Joni Teves says she sees the pause in gold prices as an opportunity for investors.

"We think the ongoing consolidation in the market is healthy, creating room for further gains, and likely also easing some of the persistent concerns on positioning," Teves writes. "We would view this as an opportunity to gradually re-engage at better levels, especially as investors look to the year ahead, with uncertainty likely to persist and rates likely to stay low."

She concludes by saying that gold could trade at $1600 an ounce next year, with a "pit stop at $1550 over the next three months."

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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