Debt Binge Hangover Coming


Today’s edition begins with a question: Is there a touch more glitter to gold right now?

Answer: You bet there is. Especially for bullion priced in Australian dollars.

But can the glisten hold?

Today’s Profit Watch investigates.

Let me declare a bias before we begin. I’m no gold bug. I don’t think returning to the classic gold standard is a good idea.

My colleague, Shae Russell, is far more enthusiastic about the yellow metal than I’ll ever be.

But that doesn’t mean I’m averse to punting on gold if the moment is right.

And that time could be now…

Here’s why. The Federal Reserve is suddenly taking the foot off the accelerator when it comes to its forecasted rate hikes.

Most likely, we’ll get one at the next Fed meeting, due next week. But after that, suddenly everyone is not so sure.

Currently, the two- and three-year yields on US government debt are trading at a higher level than the five-year note.

This means that this section of the yield curve is ‘inverted’. Normally, shorter rates are below longer-term ones.

The Fed will be watching this and attempting to ensure longer yields don’t invert as well.

It will slow down its tightening — and is already letting the market know this.

That puts gold in a more interesting position than previously. Gold yields nothing, so higher interest rates are traditionally viewed as a headwind.

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And then we have the little matter of US government debt.

Trump’s antics may steal the headlines, but his administration is spending money like there’s no tomorrow.

But there always is a tomorrow, and the projections get uglier the further out you go…

A fanciful assumption exposed

The Wall Street Journal reported on this while I was over in the States last month. In 2017, interest costs on the federal debt accounted for 6.6% of all government spending.

That equates to 1.4% of GDP — a figure well below the averages of the previous half century.

All good so far.

By 2028, 13% of US government spending will go to interest expense — and up to 3% of GDP.

Along the way, according to the Journal, this level of debt service will eclipse Medicaid, US national defence and eventually all discretionary programs combined.

These estimates stem from the Congressional Budget Office, which is also making a rather large allowance for no US recession in the next decade.

That’s a pretty optimistic approach. Should the US fall into recession — not something that’s going to happen tomorrow, it should be said — these numbers will turn even worse.

Don’t think this is a problem to dismiss as far off.

It actually puts September 2019 in the coming spotlight because the US Congress will be forced to negotiate around the national debt limit again.

And by the way, 70% of the outstanding US Treasury debt is due to be refinanced in the next five years — at higher rates.

The market will be watching all this now.

The US Treasury is issuing twice as much debt as it did in 2017.

Any rumble in the gold market would suggest the market is worried about the sustainability of this barrage of paper spewing out of Washington.

So the stage is certainly set for a potential gold rally…

Watch this index to stay sane among the true believers  

Here’s the most important part for we Aussies: Gold is already very strong, thanks to the weakening currency this year.

The Australian gold scene for the midcap producers is flying. Gold is around AU$1,700 an ounce.

That’s a very good margin for any producer with low costs and unhedged ounces to sell.

If gold was to rally even higher, it could be a bonanza.

However, there’s a caveat to this idea.

Any gold rally stemming from concerns over US debt would almost certainly impact the US dollar.

That could play out by pushing the Aussie dollar up and eroding some of the benefits Aussie gold producers currently enjoy.

Naturally, it’s possible the Aussie dollar falls further and US gold keeps strengthening.


What to make of this?

Generally, I’ve found most gold rally calls to be off the mark. There are too many gold bugs and true believers who get an airing. The problem is they say the same thing every year.

Watch what industry players do with their money first.

One way to do that is to keep an eye on the Gold Bugs Index [AMEX:HUI] in the US. This is a basket of gold producers that are exposed to the short-term moves in US dollar gold.

If it starts running, you know gold stocks are worth a look at least — and Donald Trump may have a major problem.

In fact, if there was ever a time to take up Jim and Shae’s current book offer, it’s now.

Details here.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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