If there’s one solid reason gold will continue to rise in price, it’s because mountains of debt are enabling it to climb ever higher. From governments to corporations to everyday Americans, the amount of debt outstanding in the US continues to grow every day. And while debt can be used productively to grow business operations, buy a house, or get ahead financially, many people aren’t using it that way. They’re taking on more and more debt, hoping that they’ll be able to pay it off down the road, only to find out too late, and to their own chagrin, that they’ve dug themselves into a hole too deep to climb out of.
With so many of the financial “assets” making up investor portfolios consisting of debt, the continued explosion of debt issuance and the eventual devaluation of this debt should contribute to the ever-growing growth of real, tangible assets such as gold. And those who invest in gold rather than blindly throwing their money into purchases of debt instruments will likely end up in better financial shape over the long run.
Here are 5 reasons the gold price should get a boost from the massive growth in debt going on right now.
1. Growth of Zombie Companies
Zombie companies are defined as those that aren’t earning enough money to pay the interest on their issuances of debt. The danger that presents itself when that happens is that if the company can’t get its finances in order and boost its earnings, it will have to issue more debt to pay interest on existing debt, thus beginning a vicious spiral of debt issuance that could eventually end in bankruptcy.
Zombie companies have always existed, but never before in the US have they made up such a large part of the corporate landscape. An estimated 20% of major corporations in the US today are zombie companies. And even more ominously, they’ve issued more debt than ever before, currently sitting on a debt pile that’s over $1.3 trillion. If these companies go under, they’ll take a large part of the economy with them, especially as defaulting on their debt would undermine investment portfolios around the globe.
2. Small Businesses Failing
It isn’t just large businesses at risk of going under; small businesses are even more susceptible to bankruptcy and failure. And despite the US government’s efforts in the COVID relief bill earlier this year, hundreds of small businesses that received government money in an attempt to keep them propped up ended up failing anyway.
That’s a stinging condemnation of the government’s efforts, which in many cases was just throwing good money after bad. But it’s also an indicator that government largesse isn’t a panacea, and that the sufferings of businesses aren’t going to be over anytime soon. Unfortunately, the government might not learn its lesson, and may continue to spend more and more money to prop up businesses that will fail anyway.
3. Government Debt
Speaking of the government, where did the government get the money to support those businesses? The federal government was already expected to run a $1 trillion deficit, and it wasn’t getting any additional tax revenues to fund this new spending. That government relief was funded by issuing more debt, adding to an already enormous national debt and pushing it to over $27 trillion. If Congress decides to add even more stimulus in the future, don’t be surprised to see the national debt rise to over $30 trillion by the end of 2021.
This government debt is a major problem, as it’s growing too large to ever be paid off. Investors who hold Treasury securities are just hoping to hold them long enough to be able to sell them off to someone else, hoping they’re not going to be left holding the bag in the case of a debt default.
While an outright default seems unlikely, it’s nonetheless possible. But what’s more likely is a stealth default, in which the government debases the US dollar in order to repay its creditors in less valuable currency. In fact, that’s what happens when currencies are devalued and inflation increases. It’s been happening for decades, and it could get worse in the coming years. While the government benefits from using devalued dollars to pay off creditors and roll over its debt, investors who hold those debt instruments have their wealth stealthily appropriated through inflation.
4. Household Debt Growing
It isn’t just the government and major corporations taking on more debt. Household debt in the US is hitting record highs, driven by mortgages and the high cost of housing. US households are now more indebted than they were during the financial crisis, which doesn’t bode well for their ability to cope with the difficulties of the COVID crisis.
We’re nowhere close to being out of the woods with respect to COVID, and now that state governments seem to be returning to lockdown orders, travel restrictions, and stay-at-home mandates, we’re very likely to see the limited economic recovery that has taken place so far wither away. Households that were already struggling after this spring’s lockdowns could very well find themselves in worse shape over the winter.
5. Foreign Debt Bubbles
The explosion of debt isn’t just a phenomenon in the US – it’s worldwide. And debt crises in other markets could easily reverberate and make their way into US markets. China is one of the biggest risks here, as both a large trade partner and a major economy, and one that is also swimming in debt. The recent failure of a AAA-rated state-owned company reinforced the risk that China’s debt bubble could also come crashing down spectacularly. And once bond markets start to break down in one area or one country, the contagion often spreads rapidly to other areas and countries as well.
The Outlook for Gold
With all of this explosion of debt, the outlook for gold continues to be rosy. As an asset trusted by investors to protect their wealth against financial uncertainty and economic turmoil, gold has understandably gained significant value this year as a result of the economic impact of COVID and investor fear about the future. But even as the economy “recovers” from lockdowns, this mountain of debt remains in the background, weighing down any return to normalcy.
In all likelihood, we’ll probably see a major debt crisis at some point in the next few years, if not next year already. With economic growth this year already having dropped far lower than the 2008 crisis, the next debt crisis could be even worse than 2008, and investors need to be prepared.
High-flying stock markets have boosted the retirement accounts of millions of Americans, but a collapsing debt bubble risks wiping out all those gains. Stock markets lost 55% of their value in 2008 – can you afford a loss that large today?
If you’re looking to protect your retirement assets, gold may be the asset you’re looking for. Over the past 20 years, its performance has been nearly double that of stock markets, and its countercyclical performance, gaining value when markets crash, is almost unparalleled.
Even better, you can invest in gold through a gold IRA, giving you all the same tax advantages of an IRA with the benefit of being able to invest in physical gold coins or bars. And, you can roll over or transfer existing retirement assets from your current 401(k), IRA, TSP, or similar accounts into a gold IRA without tax consequences, allowing you to protect your existing retirement savings against a coming market crash.
Don’t wait any longer to protect yourself against the dangerous effects of a collapsing debt bubble. Contact Goldco today to find out how to protect your retirement savings with an investment in gold.