The Rush to Dump U.S Debt to Buy Gold

As the world continues down the road of extreme uncertainty, investors and foreign central banks continue to turn to the oldest form of money as a measure of providing some stability, gold. 

Globally, monetary and fiscal policy is showcasing that the fiat monetary system has no limits regarding how much money can be created and deployed as we are witnessing unprecedented quantitative easing programs and stimulus packages. The Federal Reserve has embarked on unlimited QE and is playing real-life monopoly as it is: 

  1. Buying all the treasury debt 
  2. Buying unlimited mortgage-backed securities 
  3. Buying individual corporate bonds 
  4. Buying junk bonds 
  5. Buying ETFs 
  6. Conducting loan programs to universities 
  7. Conducting loan programs to charities 

The Federal Reserve balance sheet has ballooned by 64% since March as it is just slightly below $7 trillion. 

One of the most startling things throughout this process is that as of June, the Federal Reserve had monetized all treasury issuances in 2020. 

This showcases that something very significant is taking place right now, which is that the very thing that the USD is dependent on is beginning to fall by the wayside, which is, of course… confidence. These Keynesian economists will soon learn that when trust is lost, the game is over. Rampant debasement persists as wealth begins to transfer to scarce assets.

On top of the monetary chaos that presently persists globally, the fiscal policy continues to run rampant in the United States. It was reported early in July that the U.S budget deficit hit an all-time high of $864 billion in June. 

The previous record was in April, which amounted to a $738-billion-dollar deficit. For the first nine months of the year, the deficit has totaled $2.74 trillion, which is another record for that period. 

The United States is projected to have a $3.7 trillion deficit for the whole year, as forecasted by the Congressional Budget Office. The Federal debt is projected to be 101% of GDP by the end of September.

One thing is clear: the United States is buried in debt and will only continue to worsen in the months to come. 

All of this might explain why private foreigners sold Treasuries in May, which amounted to $27.7 billion. Even though foreign central banks added to their position in May if you look at the chart below, foreign central banks have been net sellers most months ranging back to 2014: 

This has set the perfect environment for gold as it drew its second-largest inflow on record this week as the U.S dollar hit its lowest level in nearly two years.

Due to its stable nature and its historical use of being a successful hedge on inflation, central banks continue to be net buyers of gold even during the economic crises. Central banks around the world added 39.8 tons of gold in May.  

So far, in 2020, central banks have added a net of 181 tons of gold to their reserves. Gold continues to retain its position of being the most reliable store of value and means of exchange in times of extreme uncertainty. This should explain why several central banks plan on continuing to increase their gold reserves in 2020.

According to the 2020 Central Bank Gold Reserves (CBGR) survey, 20% of central banks intend to increase their gold reserves over the next 12 months, compared to just 8% of respondents in the 2019 survey. The increase is particularly notable as central bank buying has reached record levels in recent years, adding around 650 tones in 2019 alone.

In a time of extreme uncertainty, expect individuals alongside central banks to continue increasing exposure as the environment signals extreme currency debasement in the coming years on a global basis.