Tax Cuts + Massive Spending = $2,000/Oz Gold

by: Michael Fitzsimmons


The recent tax cuts combined with a massive increase in spending will lead to record Federal deficits and debt.

Goldman Sachs estimates the Federal deficit will balloon to $2 trillion by 2028 and equate to a whopping 7% of GDP.

Meanwhile, the CBO says that public debt may nearly equal GDP in that same time frame.

Bottom line: Investors, particularly Americans, should own gold. Debt and deficits will push gold to all-time highs: likely over $2,000/ounce.

CNBC recently reported on Goldman Sachs' view that the fiscal outlook for the U.S. "is not good". After the recent "tax reform" and $1.3 trillion spending bill passed by Trump and the Republican controlled Congress, that appears to be the understatement of the year.

Goldman Sachs chief economist Jan Hatzius thinks the federal deficit will balloon to $2 trillion over the next 10 years. Isn't it ironic that the two main proponents pushing Trump's "tax reform" plan (one that included massive tax cuts to billionaires and corporations) were former Goldman Sachs executives: current U.S. Secretary of the Treasury Steve Mnuchin and Trump's former chief economic adviser Gary Cohn? Apparently all the criticism Trump heaped on Hillary Clinton during the campaign for her close ties to Goldman Sachs was just for show. It's business as usual in Washington.

Meantime, a report by the CBO predicts that total public debt will nearly equal GDP in 10 years:

That isn't a stretch considering public debt was roughly 75% of GDP last year. All this reminds me of the old adage:

Republicans only care about debt and deficits when a Democrat is in office.

Regardless, we are where we are. And that bodes well for the future price of gold. This is quite easily predicted by the U.S. Federal Reserve's own historical data regarding the government's surplus/deficit with respect to the price of gold - the so-called FRED graph:

Source: St. Louis Fed

This is basically a graph of Federal debt as a percentage of GDP (modified, left scale) versus the price of gold (right scale). As can be seen, the price of gold was relatively stable from the early 1980s until the late 1990s when it actually trended downward as a result of the budget surpluses generated during the Clinton administration. The pivot point for gold was 2001, when George Bush was elected and the surpluses abruptly took a turn for the worse and headed back into deficit territory. Gold turned around and headed higher. The crowning event was the financial system meltdown in 2008 which eventually propelled gold to nearly $1,800/ounce (shown in the red oval). Gold retreated in Obama's second term as the economy turned around and deficits moderated to more normal levels.

Certainly there are many other factors affecting the price of gold, among them: the value of the U.S. dollar, inflation, trade developments, and geopolitical events. Recently the price of gold has backed off from the $1,350 level as a result of the on-again/off-again/on-again diplomatic efforts between the U.S., North Korea, and other interested parties (notable: South Korea, China, and Japan).


Likewise the U.S. dollar has recently strengthened and has been a headwind for gold:

Source: MarketWatch

Note that the value of the U.S. dollar is now higher for the year after being down as much as 10% since Trump was elected.

All that said, gold is (predominantly) priced the world over in U.S. dollars. Yet similar to oil (see China's New Gold Back Oil Futures Contract Cuts Out The US Dollar), that may be changing. Remember, the British pound used to be the world's reserve currency until it lost its way after World War II.

But despite all the other factors affecting the price of gold, I think the Federal Reserve has got it right with the FRED graph: the dominant factor is U.S. financial strength or, in this case, the coming weakness. Federal deficits and debt will dominate the price of gold over the next decade (and likely beyond...) and - if the FRED graph can be believed - will certainly take gold significantly over $2,000/ounce. When that move starts in earnest is hard to predict, but those holding gold shouldn't try to time the move - it's the macro case that counts. Gold, at least in my mind, should be a part of a long-term diversified portfolio and is a buy-and-hold asset. Investors, especially those in America, should consider a 5% weighting for gold. Multi-millionaires should consider 10% (or more), and billionaires an even larger allocation. After all, they have more to lose in an economic or financial system collapse ala 2008.

There are a number of ways to invest in gold. The easiest to get in and out of and requiring no storage (with the drawback that it is "paper gold") is to simply buy the Spider Gold Trust ETF (GLD). Other options are the iShares Gold Trust (IAU) or the ProShares Ultra Gold Fund (UGL). UGL is a 2x performer as compared to the gold bullion price in London.

And then there is likely the best way: buying U.S. gold coins.

Disclosure: I am/we are long BULLION.

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 were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for investment decisions you make.