Gold Fever
Bill Bonner

People are beginning to get gold fever. In the news last week also, came word that one young man had quit his job, loaded up on junior mining shares... and was off for a year of travel. Word is out.

People are beginning to get gold fever. In the news last week also, came word that one young man had quit his job, loaded up on junior mining shares... and was off for a year of travel. Word is out.

Bloomberg: “The world’s $100 Trillion Fiscal Time Bomb” 

The IMF’s Fiscal Monitor on Wednesday will feature a warning that public debt levels are set to reach $100 trillion this year, driven by China and the US. Managing Director Kristalina Georgieva, in a speech on Thursday, stressed how that mountain of borrowing is weighing on the world.  

It seems obvious where this leads. Maybe ‘too obvious.’ Too many people (especially governments) owe too much money they can’t pay back.  

But it makes us nervous that so many people are beginning to see things our way. So many are climbing on the ‘inflation’ bandwagon that it’s beginning to feel crowded. And dangerously overloaded. Heck, even the IMF is onboard. 

So, let’s backtrack to see if we missed something...  

It appeared to us that the bull market in bonds which had begun in 1981 finally came to an end in July 2020, with the yield on the US 10-year Treasury so small you needed a microscope to see it — 0.32%. 

In the summer of 2022 inflation hit 9%... which meant that the real yield was MINUS 8.3%. This was so absurd we could barely believe it. And it marked, we believed, the end of the 40-year Primary Trend towards lower and lower interest rates. 

Real interest rates, adjusted for the official rate of inflation were negative 8.3% in March of 2022

The stock market, meanwhile, had rolled over in January of 2022. After three decades of boosting stock prices with lower interest rates, the Fed was now intent on raising rates.  

It was obvious that bonds were doomed. And banks that had too many bonds in their vaults — such as Silicon Valley Bank, Signature and First Republic — failed.  

The Fed, unable to cut rates to rescue the banks or the stock market, had to stand aside while prices fell. The Washington Post explained: 

It was a tough year to make money in the stock market. The S&P 500 peaked on the first trading day of 2022 and never came close to revisiting its high point.The widely used market gauge had its worst year since the 2008 financial crisis. One thing explained stocks’ struggles: After years of easy money, the Federal Reserve began raising interest rates in March to combat inflation and never stopped. 

We took this to mean that the new Primary Trend in stocks was also down... as it should be. 

This analysis looked airtight until September 2022. Then, the Dow hit a low near 29,000 and bounced. It has been going up ever since. 

What’s going on? 

Stocks should be in a downtrend. But in fact, they are. It’s just hard to see. Gold has been going up too... and going up more than stocks. So, the real trend for the stock market was down.  

As predicted, also, the Fed switched to cutting rates again — as soon as it thought it could get away with it. With so much debt in the economy, and their need to finance and refinance so much debt, the feds need inflation, not deflation.  

The Fed signaled a turnaround — from raising rates to cutting them — back in December 2023. Stock buyers and speculators anticipated the change throughout the year and finally celebrated it when it happened in September 2024. 

Stock prices rose even further. 

But so did gold. The Wall Street Journal: 

Gold Prices Hit New Record, Are Set for Even More Gains 

Gold futures hit a fresh record as geopolitical tensions simmer and economic uncertainty mounts, and they look set to climb even higher. 

Continuous gold futures on the New York Mercantile Exchange rose 0.9% to $2,731.30 a troy ounce in European afternoon trading, having reached as high as $2,732.30 earlier in the session. 

People are beginning to get ‘gold fever.’  In the news last week also, came word that one young man had quit his job, loaded up on junior mining shares... and was off for a year of travel. Word is out... ‘even more gains’ lay ahead. 

The feds have too much debt. Now, they have to inflate it away. Over the last three years, inflation lightened the load by 20% (based on official inflation numbers).  

But simultaneously, America’s debt increased from $29.6 trillion in 2021 to $35.7 today — also by 20%.  

In other words, adjusted for inflation (the feds’ numbers), the exercise of the last three years raised prices by 20% for US consumers... but it did not lower the real value of US debt (since the feds continued to add to it). 

And what this makes us think is that the feds are going to have to try harder. Prepare for more debt…and more inflation…as the ‘fiscal time bomb’ explodes. 

What do you think, Dear Reader... is this ‘too obvious?’ 

Stay tuned. 

Regards, 

Bill Bonner 

Research Note, by Dan Denning

Exactly one minute after the stock market closed on Friday, the US Treasury Department released its Monthly Statement of the Treasury for September. The report was published two weeks later than normal. I broke down what it meant in my Friday note to paying subscribers (American Money). 

If you missed it, the US government ran a $1.83 trillion deficit in 2024 (the government’s fiscal year ends in September). It was the third-largest deficit in US history and was up 8% from the $1.69 trillion deficit last year. Uncle Sam reported ‘revenue’ of $4.92 trillion. But spending was even larger at $6.75 trillion.

There are two things that have to be true for ‘Financial Repression’ to erode the real value of public debt, according to the definitive 2015 IMF Working Paper on the subject (The Liquidation of Government Debt). First, real interest rates have to be negative (as they were for much of the three decades following the end of World War Two). Second, government debt has to go down (as Bill notes, you can’t keep adding debt faster than negative interest rates erode the value of your current debt). 

As you can see from the long-term debt-to-GDP chart above, US government debt DID decline from the peak of the war to the early 1980s. Negative real rates reduced the value of the debt. But government spending declined as the real economy grew rapidly. 

Today, the debt-to-GDP ratio is near the same peak as it was in 1945, at the end of World War Two—war time debt levels. More importantly, as we’ve pointed out in The Dollar Report (which is being updated now), studies show that nations with a debt-to-GDP ratio of 130% or greater enter a crisis situation that almost always ends (51 out of 52 times) in default and/or a currency crisis. 

The debt-to-GDP ratio is 123% in the US today, based on an inflated GDP number of $29 trillion. The actual level is already closer to the 130% ‘tipping point.’ With nearly $36 trillion in debt, the US government has spent more than a trillion on interest payments in the last twelve months. The debt crisis isn’t coming. It’s already here. 

 

 

 

 

 

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