Gold price: So far immune to debt explosion

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In recent weeks, the International Monetary Fund and the Bank for International Settlements have warned two reputable and crisis-ridden institutions of growing financial market risks.

Unhappy times ahead?

Both see, among other things, the debt explosion seen since the “near-collapse” of global financial systems (2008/2009) as a major problem. The reversal of interest rates in the USA is currently causing massive problems for some emerging economies in particular, as they have become indebted in dollars and have come under considerable pressure as a result of the strong dollar strength. In this context, the IMF named above all three countries:

  • Argentina
  • Pakistan
  • Turkey

But the US should not be too happy about its supposedly relative strength. The tax cuts and spending increases announced by Donald Trump are likely to worsen rather than improve the debt sustainability of the “super-superpower”, especially since the Chinese have largely separated themselves from US government bonds in October.

Just to remind you: the Chinese are considered to be the second most important donor of the United States, with over $ 1 trillion in debt, according to the US Federal Reserve. A massive sell-off could catapult US interest rates to new heights and jeopardize the re-financing of the “extremely debt-hungry nation”.

In Europe, Italy is “worrying”

The Europeans also have a big debt problem – one more, the other less. Italy’s 65th post-war government wants to leave the “path of saving”, increase government spending while cutting taxes.

The new government of Lega and populist 5-star movement has been in power for four months now and plans for next year with a budget deficit of 2.4 percent of economic output. This would exceed the value planned by the previous government by a factor of three.

The plans did not go down well with the EU Commission and the bond and stock markets. For ten-year Italian bonds, the yield jumped to over 3.5 percent and thus has a premium of 300 basis points over German government bonds.

Within the eurozone, Italy has been considered ailing for decades in terms of public finances. In 2017, the accumulated public debt amounted to more than 130 percent of the gross domestic product (see table).

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Debt ratios of various states

Surname 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008
United States
(in% of GDP)
105.4%% 105.8% 100.8% 103.2% 101.2% 100.1% 96% 91.4% 82.4% 67.7%
euro zone
(in% of GDP)
86.7% 89% 89.9% 91.9% 91.3% 89.4% 86.1% 83.8% 78.4% 68.6%
China
(in% of GDP)
47.6% 44.3% 41.1% 39.9% 37% 34.3% 33.6% 33.7% 34.3% 27%
Japan
(in% of GDP)
253% 250.4% 248% 249.1% 244.5% 238% 231.6% 215.8% 210.2% 191.8%
Germany
(in% of GDP)
64.1% 68.2% 71% 74.7% 77.5% 79.9% 78.7% 81% 72.6% 65.1%
Great Britain
(in% of GDP)
85.3% 82.6% 82.9% 80.5% 78.6% 75.1% 71.4% 64.6% 50.1% 35.4%
India
(in% of GDP)
97% 96.6% 95.6% 94.9% 92.3% 89.5% 85.2% 81.6% 78.9% 68%
Italy
(in% of GDP)
131.8% 132% 131.5% 131.8% 129% 123.3% 116.5% 115.4% 112.5% 102.4%
Spain
(in% of GDP)
98.3% 99% 99.4% 100.4% 95.5% 85.7% 69.5% 60.1% 52.8% 39.5%
Portugal
(in% of GDP)
125.7% 129.9% 128.8% 130.6% 129% 126.2% 111.4% 96.2% 83.6% 71.7%
Greece
(in% of GDP)
178.6% 180.8% 176.8% 178.9% 177.4% 159.6% 172.1% 146.2% 126.7% 109.4%

Source: Trading Economics

Among the particularly unsound, financed eurozone countries, only Greece has an even miserable quota (178.6 percent). Even Spain (98.3 percent) and Portugal (125.7 percent) are better placed than the Italians.

Because Italy’s economy still represents the third largest economy in the eurozone despite several years of “infirmity”, everyone should realize that the rescue packages would not be sufficient for this member state.

The risk of a renewed euro crisis can therefore not be denied. So far, the long-standing crisis protection gold has not benefited from the increased uncertainties. Above all, its biggest advantage over bonds is that it has no counterparty risk and has never suffered a total loss. This purchase argument is sought in other asset classes in vain.

Outlook for the current week

Under the aspect of US sovereign debt , Tuesday should be relatively exciting. In that case, the world of finance learns to what extent foreign countries acquired US government bonds in the month of August. In July, net purchases totaling nearly $ 19 billion were reported. Of course, top-rated government bonds are part of a solid, structured portfolio of securities.

The question is: how much should they be weighted? The fact that prices have been manipulated upward and yields have been manipulated downwards by the ultra-expansionary monetary policy of the central banks points to the danger of blistering.

Investors should not forget this. You can not really speak of a “bubble problem” with gold. As an insurance policy against a comeback of financial crises is “old-fashioned gold” in the form of bars or coins always.