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US Economy Braces for Debt Spiral and Gold Price Surge

Published by Tavex Analysts in category Market News on 15.11.2023
Gold price (XAU-GBP)
1,849.37 GBP/oz
  
+ GBP7.68
Silver price (XAG-GBP)
25.12 GBP/oz
  
+ GBP0.26

According to Jess Felder, an experienced market strategist, the US economy is on the verge of a significant debt spiral, which will drive gold prices significantly higher in the coming quarters.

The Looming Threat of a Debt Spiral in the US Economy

Jess Felder, creator of the Felder Report, told Kitco News recently that the Federal Reserve is desperate to keep financial markets confident in its ability to navigate uncertain economic conditions. However, in its desperation, it is on the verge of making major policy mistakes by maintaining higher interest rates in a world flooded with sovereign debt, he added.

Markets will see through this and see it as a new round of QE, and that is when the gold price explodes.

“The Federal Reserve keeps saying that interest rates will have to be higher for longer, but as a result, we are starting to see problems in the Treasury market,” Mr. Felder said. “We are going to see more signs of financial instability with more volatility in Treasury bonds.”

The US government paid $879.3 billion in interest during the fiscal year that ended September 30 due to rising debt and rising interest rates. In the coming fiscal year, service costs are expected to rise to $1 trillion. The cost of the United States’ debt has surpassed the annual defence budget.

Rising Interest Costs and Shaky Treasury Auction

Growing concerns about US debt are already affecting US Treasury markets. The United States sold $24 billion in 30-year notes last week in a disappointing auction. Analysts noted that during the auction, primary dealers, who buy up unsold supply from investors, were required to accept 24.7% of the debt on offer, more than doubling the 12% average over the previous year.

Over the next few quarters, investors are going to realise that this fiscal problem isn’t going away and will eventually turn to gold.

Felder added that there is a very real risk that the bond market will become unanchored to economic conditions in this environment. According to him, this could push equity markets back into bear market territory and risk pushing the economy into recession, forcing the Federal Reserve to intervene and cap bond yields.

“As Treasury market volatility rises, the Federal Reserve will be forced to intervene.” “They’ll say they’re not going to end the balance-sheet runoff, but they’ll introduce a new programme to help stabilise markets,” he predicted. “Markets will see through this and see it as a new round of QE, and that is when the gold price explodes.”

Quantitative Easing (QE) is a type of monetary policy in which a central bank, such as the Federal Reserve of the United States, purchases securities on the open market in order to lower interest rates and increase the money supply. Read More

Quantitative easing generates new bank reserves, increasing liquidity for banks and encouraging lending and investment. The Federal Reserve implements QE policies in the United States.

Key Takeaways of Quantitive Easing

  • Central banks use quantitative easing as a form of monetary policy to increase the domestic money supply and stimulate economic activity.
  • The central bank buys government bonds and other financial instruments, such as mortgage-backed securities (MBS), as part of QE.
  • When interest rates are near zero and economic growth has stalled, quantitative easing is typically implemented.
  • The Federal Reserve Bank of the United States implements quantitative easing policies.

Read Less

Felder added that gold will be in demand when the unemployment rate in the United States rises and, as recession fears rise, bond yields rise rather than fall.

He stated that yields will continue to rise because the US government is in no position to provide fiscal support when the economy eventually enters a recession.

Gold as a Safe Haven Amid Economic Turbulence

“The size of the US debt and the rising deficit will set this recession apart from others.” Anything the government does will only exacerbate the liquidity crisis in Treasury markets. “This is how a debt spiral starts,” he explained. “Over the next few quarters, investors are going to realise that this fiscal problem isn’t going away and will eventually turn to gold.”

Meanwhile, gold prices, historically a safe haven in times of financial instability, are poised for a potential surge.

How far will a debt-spiral-fueled new rally in gold go? Felder anticipates a run to $2,700 per ounce.

“The gold price’s three-year sideways correction is a classic bullish flag pattern.” When looking at the preceding flagpole, which was the rise in ’18 and ’19, a simple projection from classical technical analysis highlights a target about $700 above the current price,” he said.

The implications for gold prices and the larger financial markets are significant as the US economy navigates through a precarious phase. This phase is characterised by a potential debt spiral and increased treasury market volatility. The Federal Reserve’s stance on maintaining higher interest rates amidst a flood of sovereign debt presents a complex challenge. This scenario has increased pressure on treasury markets, particularly in the sale and confidence in treasury bonds.

The emerging situation has significant repercussions for equity markets, pushing them closer to bear market territory. Meanwhile, gold prices, historically a safe haven in times of financial instability, are poised for a potential surge. This comes as financial institutions, government entities, and individual investors in the bond market and stock market alike grapple with the short-term and long-term implications of these developments.

On Wall Street, the sentiment is cautious, with a keen eye on supply and demand dynamics in the capital market and secondary market. The increased interest payments on government debt further complicate the financial system, influencing the strategies of buyers and sellers. Financial assets, including government bonds, are being reassessed as market prices fluctuate.

In this context, the key takeaways for investors and market observers are multifaceted. Understanding the interplay between government debt, the actions of financial institutions, and the responses of the market is crucial. The need to borrow money by governments and the impact on financial assets like Treasury bonds and equity markets require careful analysis. The current situation shows how important it is to have a strong financial system that can balance all of these different factors, such as changing supply and demand, to keep things stable and encourage growth in the short and long term.

Gold price (XAU-GBP)
1,849.37 GBP/oz
  
+ GBP7.68
Silver price (XAG-GBP)
25.12 GBP/oz
  
+ GBP0.26

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