GOLD IN EVERYTHING
Every incident in the area of “all things gold” is viewed in terms of how it may affect gold prices favorably or adversely.
The reason was that the bank collapsed earlier in the year. Before then, and ever since, the Fed has dominated discussions about future interest rate cuts.
Two years ago, Russia was pitted against Ukraine. Last month, Israel and Hamas clashed (see Gold Price And Geopolitical Concerns).
Even every week, there is a focus on various economic indicators even though the issues (housing starts, employment, recession, etc.) are unconnected to the price of Gold.
The danger of a government default has been discussed once again. It’s time to dispel another myth about Gold and what it implies for price expectations.
GOVERNMENT FAILURE OPPORTUNITIES
It may seem cheesy, but the United States government will unlikely default on its debt.
Debt default has become a political talking issue due to political posturing and gamesmanship. The United States has a “legal” debt limit, although it has no real-world consequences.
No matter what the various members of Congress (from both parties) say, if they were held responsible for the broad negative consequences of a government debt default, none of them would be prepared to reply to their constituents’ threat; there is adequate fundamental support for a lower gold price rather than a greater one, even in the event of a “default”l of the potential negative consequences.
GOLD PRICES ARE DROPPING
The current default concerns stem from the government’s legal debt limit imposed by law.
Because it has reached its borrowing limit, the United States Treasury cannot issue new bonds to repay existing obligations that have come to their maturity date. Furthermore, the government could not pay its debts and continue operations without additional revenue from bond sales.
The government causes inflation by expanding the money and credit issuance of new bonds. With the expansion of credit and money, the value of all money in circulation falls.
As a result, all present money loses purchasing power. Inflation is caused by increasing eloquence of a decline in purchasing power.
Deflation, the inverse of inflation, occurs when the government cannot issue new bonds to refinance its present obligations and get additional cash to support its ongoing operations.
We are already witnessing a worsening of the money and credit supply as the value of financial assets declines, and increasing interest rates have a detrimental influence on economic activity.
A government debt default might exacerbate the deflationary trend and trigger depression.
Because deflation is the inverse of inflation, your money’s purchasing power would grow rather than fall. The disadvantage would be that there would be less money available.
There is no fundamental reason to forecast a higher price for Gold during deflation since a higher price for Gold over time results from a loss of purchasing power in the U.S. dollar during deflation and a gain in dollar purchasing power during inflation.
There is no fundamental foundation for expeU.S.ing a higher gold price in the case of a U.S. government debt default since there is no real reason to do so during deflation, and such a default would be deflationaU.S.
I make no forecasts about deflation or an imminent government debt default.
My goal is to bring attention to illogical expectations and projections for gold price increases based on events and circumstances unrelated to Gold; in the case of a national debt default, the fundamentals challenge the assumptions.
The expectation of a higher gold price is primarily due to the continuous reduction in the purchasing power of the U.S. dollar.
Conversely, Gold tends to react to such losses after the fact and is slow to detect them. Years may elapse after U.S.e occurrence. (See also The Effect of Deflation on Gold Prices.)