A day or two ago, I read an article explaining that the United States had a total budget deficit of $530 billion in just the first eight months of its fiscal year. In the addition, the past few weeks have seen further deterioration in Medicare and Social Security along with further information that basically causes me to doubt that the United States will get its fiscal house back into order anytime soon. On the other side of the pond, we also see deterioration in the financial position of many European governments. Overall, the combination of these factors could lead investors to see a safe haven for their money. One possible beneficiary of this could be gold (GLD).
Debt Problems in the United States
As mentioned in the introduction, the United States had a Federal budget deficit of $146.8 billion in May, which brings the total over the trailing eight months of the 2018 fiscal year to $532.2 billion. This was the highest budget deficit that the government has had in the month of May since the financial crisis.
It has been widely reported by both members of the mainstream media and Wall Street analysts that these deficits are likely to continue for the foreseeable future due to both the recent tax cuts and spending increases. Most estimates point to the United States having a total budget deficit of approximately $850 billion for 2018. These deficits are not expected to go away anytime soon and, in fact, the most recent projections from the Congressional Budget Office point to ever growing deficits over the ten-year horizon:
These forward deficits will add to a national debt that already surpasses the nation's GDP, long and widely considered to be a critical point of financial crisis.
It is difficult to see how the nation will get out of this problem, especially when we consider that the debt burden is already equivalent to a home mortgage on the back of every taxpayer and likely to get worse. At some point, it seems certain that international traders lose confidence in the United States and begin to sell off U.S. dollars and assets, which would push the currency down and should cause the price of oil to rise.
A similar situation would occur if the nation is ultimately forced to print money to support its debt and spending addiction as so many nations have in the past. This would increase the supply of dollars in circulation and thus decrease the value of the currency. In this event, gold prices should also rise since gold cannot be printed out of thin air and takes actual work to extract from the ground.
Gold and Emerging Markets
There is evidence that international sentiment has already begun to turn against the U.S. dollar and towards gold, particularly in emerging markets. I have mentioned this in the past, for example, that both China and Russia have been adding to their gold stockpiles in recent years. These two are far from the only emerging nations to purchase gold, however. As we can see here, the amount of gold held by the developing nations of the world has been increasing at a fairly rapid pace while the amount of gold held by developed nations has remained relatively static.
Interestingly, this huge source of demand has not had a significant impact on the price of gold, which could partly be due to the influence that the futures market has on the price of the physical metal. This could very easily break down at some point though should a delivery failure or something similar occur.
In past articles, I have discussed how the nations of Russia and China have been actively seeking to supplant the U.S. dollar from its privileged position as the reserve currency and replace it with a gold-backed alternative. It now seems as though the nation of Turkey may also desire that. At an April 16 meeting of the Global Entrepreneurship Congress in Istanbul, Turkish President Recep Tayyip Erdogan suggested that all international loans be made in gold. In addition, shortly following this conference, Turkey repatriated all of the gold that it held on deposit at the New York Federal Reserve. While some analysts have suggested that this may be a prelude to backing the Turkish lira with gold, there has been no evidence to this effect. What we can say for sure is that Erdogan's statements and the country's subsequent actions show a clear desire to get away from the U.S. dollar.
Contrarian Market Sentiment
A few days ago, Ronald Stoerferle, head of strategy and portfolio management at Incrementum AG, gave an interview with Peak Prosperity shortly after he finished authoring his firm's annual investment report on gold. In the interview, Mr. Stoerferle discussed a few of the reasons why he is bullish on gold at these levels. One of his arguments was a contrarian one. Basically, financial managers right now are bullish on nearly every asset class except for gold and silver. He points out that even bond markets are doing well despite the interest rate tightening cycle that is already underway. At some point, the argument goes, gold will begin to creep up in price and once it hits a certain resistance point (Mr. Stoerferle puts it at $1360 per ounce) then the financial managers will have more confidence in it and will cause the price to rapidly appreciate to the $1500-$1600/oz. level.
There are certainly some very valid reasons to be bullish for gold right now. In particular, the worsening financial situation of the United States poses very real threats to the dollar's use as a store of wealth along with the growing international push to replace it with something else that is not controlled by the United States. Finally, gold is one of the only unloved assets in the market today so at some point it will likely see some love.
Disclosure: I/we 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.