Gold Appears To Be Flashing A Warning For The US Fiscal Risk Outlook
Rising federal debt is likely a factor driving the surge in gold prices recently.
Gold and total federal debt continue to signal high risk for the US fiscal outlook.
Rising federal debt is likely a factor driving the surge in gold prices recently.
March 14 is the deadline for Congress to extend federal government funding and avoid a government shutdown.
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
British economist John Maynard Keynes famously referred to gold as the “barbarous relic”, raising doubt about whether it’s a “useful” investment. A century later, anyone who owns gold lately is certain that it’s useful, at least from the perspective of minting strong returns.
Since early November 2022, when gold bottomed, the original safe-haven asset has surged around 75%, closing above $2,963 an ounce on Feb. 24. What’s driving it higher? As usual, no one’s really sure, but rising US federal debt is probably a factor.
In the three years through 2024’s third quarter, for instance, total federal debt has grown nearly 15% to an eye-watering $35 trillion-plus. Federal debt as a percentage of the economy (GDP) was 121% in last year’s Q3. Although that’s below the 133% peak during the pandemic, red ink’s share of the nation’s output has reached levels last seen during World War II, and the Congressional Budget Office predicts even greater heights are yet to come.
Perhaps not surprisingly, the upward path of government debt raises concerns that, left unchecked, the trend will juice inflation. One more reason for explaining gold’s rise. Comparing federal debt with the price of gold – using SPDR Gold Shares ETF (GLD) as a proxy – suggests that gold’s focus on Washington’s rising mountain of red ink is a relatively recent affair. As the chart above shows, there was a period of roughly a decade pre-pandemic when gold’s price was more or less flat while government debt continued to climb. During the pandemic, government spending soared. The year-over-year pace of growth is much lower these days, but the relentless rise of debt rolls on, and the gold market now seems to be paying attention.
Several other indicators that are tracked in this report still leave room for debate about whether the state of us US fiscal risk has reached the tipping point. The table below lists ten indicators that are relevant for monitoring relative changes in recent history for the task of assessing the US budget situation and related variables. The Fiscal Risk Index (see chart below) aggregates the signals into a composite reading; today’s update shows that, overall, not much has changed in recent months. That’s not to say that all is well. Rather, the Fiscal Risk Index seeks to provide a running measure of how conditions have shifted through time.
While not a lot has changed for the data sets writ large, what’s true for the big picture doesn’t necessarily apply to the specifics. Using a set of assumptions about what constitutes warning signs currently shows the 1-year changes in gold and total debt as crossing into the danger zone. To be clear, it’s not obvious which points of change equate with crossing the Rubicon for markets and the economy. Rather, the ten indicators presented are a reasonably relevant set of numbers for quantitatively assessing the ebb and flow of fiscal risk in broad terms.
On that front, gold and total debt remain the outliers, echoing our previous update in January. To be fair, several of the data sets are published quarterly and so we’ll have to wait until first-quarter numbers are published in April for a complete update.
Meanwhile, politics is the key variable for the days and weeks ahead as the Republican-led Congress negotiates a budget deal. The stakes are high. On the short list: avoiding a government shutdown next month. Markets will be keenly focused on whether any progress will emerge on reducing the federal budget deficit, which exceeded 6% in 2024, or about twice the average since the 1980s.
One of the challenges is that President Trump and the GOP favor extending the Tax Cut and Jobs Act, which expires this year. Extending the law is expected to reduce federal revenues by $4.5 trillion over the next 10 years. Add in Trump’s campaign promises to cut taxes on Social Security and other items and the revenue decline could reach $8 trillion.
The clock is ticking on a related budgetary matter: March 14 is the deadline to extend government funding and keep Washington open. Meanwhile, gold’s bull run suggests that patience is wearing thin for signs that government spending is under control.
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