No one’s promise: why gold matters when interest rates rise

Part two of two

Part one looked at the $10 trillion of US government debt being refinanced this year and what it does to the federal budget.

Rising interest rates are usually bad for gold, because gold pays no interest and bonds do.

But a government refinancing $10 trillion needs cheap money, and that pressure pulls the other way.

Gold’s case does not rest on the next rate decision. It rests on being the one form of money nobody else owes.

There is a straightforward argument against everything in part one, and it deserves a straight answer.

If interest rates are rising, gold should fall. Gold pays no interest. When a Treasury bond yields above 5%, holding an asset that yields nothing has a real cost, and that cost rises with every increase in the alternative. This is not a fringe view. It is the standard relationship, and for most of the past half century it has held.

The objection

The pressure arrived on schedule. On 28 August, in his first Jackson Hole address as Federal Reserve chair, Kevin Warsh said the summer’s inflation readings had not convinced him that underlying trends had meaningfully improved, and that the Fed would have work to do. Markets read it as a signal that the next move might be up rather than down. Futures pricing for a September increase jumped above 50%. Gold fell more than 3% over the following sessions.

Jim Rickards, the economist and author of Currency Wars, accepts the premise while disputing what follows from it. Higher rates are, he agrees, historically a headwind for gold. His argument is that the headwind arrives early. Markets do not wait for a meeting in November to reprice; they discount an expected move the moment it becomes likely. By the time the increase actually lands, most of the adjustment has already happened.

That is a useful corrective to reading each Fed decision as a fresh verdict on gold. It is also worth being careful with. Gold is not supposed to win every Fed meeting, and a store of value that needed defending week by week would not be much of a store of value. The more interesting part of Rickards’ argument is the second half of it.

Interest rates are one variable acting on gold. Fiscal deterioration is another, and it pulls in the opposite direction.

Where fiscal meets monetary

Consider the position the two arms of policy now occupy.

A Federal Reserve chair committed to returning inflation to 2% has reason to keep rates high, or push them higher. A Treasury refinancing $10 trillion has every reason to want them lower. Neither of those is a prediction of crisis, and the tension has ordinary resolutions available. Inflation could fall without further tightening. Productivity could improve. Congress could tighten fiscal policy. Long rates and the Fed’s policy rate do not always move together, and the Treasury’s preference for cheap borrowing is not the same thing as a requirement.

But the pressures do pull in opposite directions, and the larger the interest bill grows, the more forcefully the fiscal side pulls. Economists have a name for the extreme version of this: fiscal dominance, the point at which monetary policy starts accommodating the government’s borrowing needs rather than the price level.

Nobody should treat that as settled. It is a risk rather than a forecast, and it is more unsettling for being a risk, because it does not require anything dramatic to happen. It only requires the arithmetic to keep pointing the same way while the politics stay difficult.

This is why the rate question and the debt question cannot be answered separately, and why the case for gold does not rest on guessing what the Fed does next.

Gold is no one’s promise

Gold will not fix any of this. It cannot balance a budget or discipline a Congress, and its price will move against you in some weeks and some years.

What it offers instead is resilience, and that word is worth being precise about. Resilience is not the same as performance. It does not mean an asset that always rises, or one that never has a bad quarter. It means something that keeps working when the things around it are under strain, because it does not depend on those things to hold its value.

That is the sense in which gold is different. A government bond is somebody’s promise to pay. Money in a bank account is somebody’s liability, an entry on a balance sheet that depends on the institution holding it and on the currency it is denominated in. Gold is neither. It is not issued by a state, not created by a central bank, and not owed by anyone. It cannot be printed to close a deficit, and it does not depend on a borrower keeping their word.

Every problem described across these two articles is a problem inside the debt system. Too much of it, refinanced too often, at rates that are too high, with a political process poorly equipped to reduce it and a monetary system that can always create more currency to soften the blow. Gold’s resilience comes from sitting outside that structure entirely. It is not exposed to the arithmetic, because it is not part of it.

That is a structural characteristic rather than a market forecast, which is why we think of gold first as a way to save rather than as a position to take. It does not stop being true when yields rise.

What Glint adds is use. Our clients buy and legally own allocated physical gold, held in their name. They can save in it. And they can spend it, which is the part the rest of the financial system has never managed to offer.

The $40 trillion headline tells you how large the problem has become. The $10 trillion refinancing clock tells you why it is arriving sooner than most people expect. Neither is something an individual can fix.

What you can decide is what your own savings are made of, and whether some part of them sits outside a system built on debt.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debit card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

• Not insured by the FDIC.

• Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

• Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.