- The United States did not issue any new debt in the first five months of 2023, now it’s playing “catch up,” potentially doubling or tripling its debt
- Global demand for U.S. bonds is declining
- 60/40 bond stock portfolio is shifting
- A stock market recession can be good for gold
After coming to the brink of financial catastrophe from a federal default, President Joe Biden signed the bill to raise the U.S. debt ceiling on June 3.
The intense standoff between Republicans and Democrats lasted weeks in an arm-wrestle that ended with the suspension of the debt limit until 2025 and restricted government spending.
The U.S. debt limit, now at $31.4 trillion, will allow the government to borrow and pay previous debts.
The Market Herald’s Coreena Robertson sat down with Gwen Preston, editor of Resource Maven to get a quick look the U.S. debt ceiling’s affect on gold.
The U.S. debt ceiling’s impact on gold
TMH: Welcome to Wiser Wealth. Joining me is Gwen Preston. Following the U.S. debt ceiling talks, the U.S. debt ceiling was suspended until after the next election. Gwen, how does this affect gold?
Preston: So the thing about the U.S. debt deal is that it took a long time to get to one, right? And so for the first half, almost at least the first five months of 2023, the U.S. government did not issue any new debt because they needed to give themselves as much time as possible for the politicians to fight and then get to a resolution to raise the ceiling.
And they needed to not hit that ceiling before it got higher. So they weren’t issuing new debt. But the thing is, the U.S. government cannot possibly function without issuing new debt that’s there, that’s far gone. And so now we’re in a phase of catch up. So now the U.S. government is having to issue the amount of new debt that they would usually issue on a monthly basis, plus making up for the five months in which they did not.
So think of it for the next … for the rest of the year, they’re doubling or depending how quickly they try and play catch up, maybe for the next quarter, they’re tripling the amount of debt that they’re issuing. Now, this take, this gets to some pretty big picture stuff, right? This gets to the strength of the dollar and global interest in U.S. bonds.
So those are all big picture topics. But at the end of the day, if you issue a bunch of bonds, then supply is up and prices down. And when bond prices are down, yields are up. Right. So that’s the sort of set-up for the bond market. And I think that’s a pretty reliable set-up.
And it’s not that there’s a lot of new bonds being issued, but it’s also that global demand for U.S. bonds is declining. Now, this is a very slow but real process where countries around the world are trying to reduce their reliance on the U.S. dollar. And so they are coming up with trade deals where they don’t have to do it in the U.S. dollar or if they transact, they transact in one or they transact in gold, whatever it is, and then they don’t have to hold so many of these dollars.
And so generally, demand for dollars is going down slowly. The dollarization is not something that’s happening tomorrow, but it is a slow process that’s underway. And so you end up with this yields up, bond prices down situation, which could well pull money from the stock market over to bonds. And that is something that we haven’t had in a system and real way for years because we had this very Fed-supported stock market, stock bull market, really from the great financial crisis all the way and then redoubled with COVID where everybody just piled their money into stocks.
The 60/40 bond stock portfolio shift
The 60/40 bond stock portfolio went out the window and everybody just owns stocks because bonds yielded nothing and stocks were going to the moon. That fundamental set-up is shifting and will likely shift more because there’s so many bonds available. Now that means yields are awesome. So if you want to just have some safe money that’s making nice returns, you buy money market funds.
Right now, you buy bonds because the yields are really strong and that thinking calls money away from the stock market, which could have a whole bunch of repercussions. Does that encourage a recession? What exactly does that do? I’m not sure, but that is part of the set-up right now. And if we get a stock market recession, of course that is good for gold.
So it’s a big, complicated question, but I tried to keep it somewhat simple.
For more trending gold stories, check out Stockhouse’s Gold page and for additional information on increasing the gold in your portfolio, check out our Wiser Wealth segment on the outlook for gold for the remainder of 2023.
For more of this interview, check out The Market Herald’s Thematica Gold Report.
On Wednesday, gold was trading at just over US$1,972.30 an ounce.
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