The $52 trillion case to buy gold and SPDR Gold Trust  ETF(GLD)

Gold price has moved sideways in the past few days as investors assess the impact of last week’s Federal Reserve decision and the falling US consumer inflation. The precious metal was trading at $1,957 on Monday, ~6% below the highest level this year. Similarly, the SPDR Gold Trust ETF (GLD) is hovering below its all-time high.

The case for gold

Gold is the most precious metal in the world. It is held by many developed and emerging market central banks like the United States, UK, Turkey, and China. Unlike other metals like copper, iron ore, and lithium, gold does not have a major industrial purpose.

Instead, gold is seen as both a currency or an insurance against riks. It is also seen as an alternative to the US dollar and a hedge against inflation. And in this regard, gold has outperformed the dollar. While gold price has jumped by 60% in the past five years, the dollar index hs risen by less than 10%.

The most bullish case for gold is the soaring US public debt. Data compiled by the Peterson Institute shows that America’s public debt stands at $32.6 trillion, which is equivalent to $97.6 per person.

Debt has been in a strong upward trend over the years. Data compiled by the Federal Reserve shows that the US had $5.5 trillion in 2000 and $3 trillion in 2000. Sadly, the debt has regained momentum recently and the situation will only get worse.

US debt to hit $32 trillion

At the same time, the soaring interest rates are making it worse. In 2022, the US spent over $465 billion in interest payments. This year, it will spend almost a trillion dollars. With deficits soaring, analysts believe that the country’s public debt will jump to more than $52 trillion in 2033.

If this happens, and if interest rates remain higher, it means that the US will be spending over $2 trillion in interest payments by 2033. At the same time, analysts believe that social security will run out of money by 2034. 

All this means that the US will soon get into a major debt crisis in the next decade unless the trajectory changes. Sadly, this trend won’t change in the current political environment. To balance the budget and reduce debt, the US needs to reduce its spending and raise revenue. Republicans are opposed to tax hikes while Democrats want to expand the welfare state.

Therefore, it will reach a point where foreign buyers of US debt will find it difficult to buy more treasuries. Alternatively, they will constantly require higher interest rates to cushion themselves from default riks.

Most importantly, it is worth noting that some of the biggest buyers of this debt like China are not America’s allies. As such, as tensions rise, it will become difficult for them to buy this debt. And instead, as we wrote here, central banks will continue accumulating gold.

Therefore, there is a likelihood that gold and the SPDR Gold Trust (GLD) prices will continue outperforming in the next decade