Short and Sweet

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Published : September 18th, 2020
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Government spending is a tailwind for gold

The problem with monetary stimulus is that it requires takers, i.e., people and businesses willing to borrow and spend. Private borrowers, though, are not as prolific as the Fed or federal government would like at this juncture. Governments, on the other hand, are ready borrowers and big ones at that. In fact, as Manhattan Institute’s Brien Riedl recently pointed out in a National Review article, the Fed has already financed roughly half of government spending to combat the economic hit from COVID-19.  How is all of this a ‘tailwind’ for gold? The overlay chart below showing the federal debt and gold tells the story at a glance. With the rest of the world worried about financing its own debt, the buyers of U.S. debt are likely to become scarcer and that is where the Fed steps in by monetizing those obligations. When all is said and done, that is perhaps the most basic reason why gold has behaved as it has since March of this year when it sold for $1470 per ounce.

Sources: ICE Benchmark Administration,  U.S. Treasury, St. Louis Federal Reserve [FRED]
The national debt trendline (graphed quarterly) does not reflect the current $26.5 trillion figure.


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