Gold: U.S. Income Inequality Is A Powerful Long-Term Bullish Catalyst

Includes: GDXJ, GLD, JNUG
by: Michael Fitzsimmons


Income inequality in the US is far worse than most people realize.

As a result, the government will be the backstop for more poor people and will, in effect, subsidize private corporations. That means more debt.

As a result, ever more US debt will drive gold prices substantially higher.

Robert Reich, a former Secretary Of Labor under President Bill Clinton and who also served in the administrations of Presidents Gerald Ford and Jimmy Carter, recently released a new documentary entitled Inequality For All. The film explores the ever widening income gap between the rich and poor in the United States. Income inequality in the US is much larger than most people realize. Reich contends this inequality will have negative consequences for our economy and democracy. It struck me that there is at least one group of people who stand to profit from it: the gold bugs. That's right: income inequality is very bullish for gold prices. Here's why.

Since the current recovery began, Reich says 95% of the gains have gone to the richest 1%. He said:

If the current trends continue, the top 1% will probably be receiving more than a quarter of total national income a decade from now, and will have over half of the nation's wealth.

Today, the richest 400 Americans already have more wealth than the bottom 150 million put together.

Economic Impact

On the "get the facts" link from the documentary's webpage, Reich reports the following:

  • The poorest 47% of Americans have almost no wealth at all (2.5% of the nation's wealth).
  • The US ranks 4th globally in terms of wealth inequality (trailing only the Ukraine, Russia, and Lebanon).
  • Since 1980, American GDP has approximately doubled. Yet inflation-adjusted wages have gone down.
  • Since 1980, the stock market has increased by over ten times, and the richest quintile of Americans owns 93% of it.

A lively debate would likely ensue in terms of whether or not these issues are actually a problem at all, and if so, if anything should be done about them. But the purpose of this article is not to debate the issue, but to step back, look objectively at the data, and figure out the potential impact.

Here are two main conclusions that I draw from the data:

  • It will become ever more difficult for the US to maintain historical economic growth rates (and prosperity) when a consumer-based economy has fewer and fewer consumers with the economic power to freely spend over and above basic necessities.
  • Increasingly, the US government will be the backstop of last resort to prop-up the increasing number of poor people.

And we are already seeing the impacts today. With such a low minimum wage, many people with full time jobs rely on government subsidies to get by: food stamps, healthcare, and subsidized housing for example. One could make a good case that the US government is actually subsidizing corporations by taking the burden of paying a livable wage off of companies' backs and putting it onto Uncle Sam's. This Bloomberg article, written by Barry Ritholtz, describes how McDonald's (NYSE:MCD) and Wal-Mart (NYSE:WMT) have become "Welfare Queens." The article points out that McDonald's actually has a "McResource" line that helps employees and their families enroll in various state and local assistance programs. It received much public attention when a recording of the McResource line suggested that full-time employees sign up for food stamps and welfare.

US Government Debt Chart

US Government Debt data by YCharts

Government Debt

In the long run, these fundamentals all boil down to one thing: increasing US government debt. And this is extremely bullish for the long-term prospects for gold. While some will make the "% of GDP" argument, all it takes is a financial crisis ala 2008 to show that debt continues higher even when GDP drops precipitously. When that happens, gold shoots higher.

Risks To The Forecast

In order to combat income inequality, Reich advocates changes in tax policy, financial regulation and educational investments, a higher minimum wage and earned-income tax credit, and means by which low-income workers can unionize. However, considering Reich has devoted himself to this cause for decades now, and very little has been done, it would appear income inequality in the US will get even worse before it gets better. That, to me, means US government debt will continue to grow. As US debt grows, gold prices will follow.

Investing In Gold

As all of you know, there are various ways to invest in gold - one of the most popular is the SPDR Gold Shares (NYSEARCA:GLD). I call it paper gold, but it is a convenient trading vehicle for those investors who would rather not deal with the storage and insurance hassles of owning gold bullion directly.

If you want to be exposed to gold in a more higher leveraged manner, you might want to consider the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). This ETF is down substantially since gold's heyday a few years back, but starting to mount a comeback:

If you're feeling very bullish on gold, you might want to climb out on a limb and consider investing in the Direxion Daily Junior Gold Miners Index Bull 3X Shares ETF (NYSEARCA:JNUG). Please realize this ETF seeks daily investment results of 300% of the performance of the Market Vectors Junior Gold Miners Index. The fund seeks highly leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day. JNUG is more for gold market timers. The thesis of this article is to make a long-term bet that gold will climb right along with government debt as a result of continuing (and growing) income inequality.

At the end of the day, most GoldBug purists would advise you to buy and hold gold bullion yourself. In that case, you can find gold coins or bars at or American Precious Metals Exchange ( Alternatively, for those of you who know what you are doing, you might save on shipping and insurance costs by visiting a local gold event in which you may be able to pick up gold coins at less of a premium over spot than is typical of the commercial websites.

Summary & Conclusion

US income inequality will lead to long-term higher US government debt and therefore higher gold prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article was obtained from company documents and/or sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make. Thanks for reading and good luck! I am long gold.