What does the debt ceiling deal mean for precious metal prices? [Video]
|After weeks of political impasse, tense negotiations and mounting economic anxiety, the Senate passed legislation on Thursday to suspend the U.S debt ceiling until January 1, 2025, ending a drama that threatened a Global Financial Crisis.
In normal times this kind of news might be celebrated, but in 2023 its cause for concern as the new Debt Ceiling Deal ultimately gives the U.S government free rein to run up unlimited debt until 2025.
If you want to know what the markets think about this new Debt Ceiling Deal – then you only have to take a look at Gold prices.
The precious metal has been on an absolute tear this week as fears of a “bigger debt crisis” ahead bolstered demand for safe-haven metals.
Once President Biden signs the new Debt Ceiling bill into law, the U.S Treasury Department will have the “green light” to issue more bonds to replenish the cash it burned through during the period of extraordinary measures when it could not borrow more money.
According to economists, the consequences of that scenario alone, will suck liquidity out of the global equities markets at a dangerous time when the economy is fragile and recession risks are high.
That, in itself, presents huge bullish tailwinds for precious metal prices.
However, here's where things really start to get interesting.
It's taken over 200 years for U.S Federal Debt to hit the first $2 trillion mark. But based on official Congressional Budget Office data – it now takes on average 18 months for every additional $2 trillion of deficit being added to U.S national debt.
Currently the federal government spends $1.3 billion per day on interest payments, locked in on historically low borrowing rates seen after the pandemic in 2020.
Half of the U.S Federal debt – that’s a whopping $16 trillion out of $32 trillion – matures in the next 3 years. But 30% of the debt matures in the next 5 months!
Inevitably, this debt will need to be refinanced at today's significantly higher interest rates, which according to several top Fed officials could rise further over the next two policy meetings.
Put another way that means the U.S government will have to shell out nearly five times more in interest payments – setting the stage ahead for “the mother of all financial crises”.
The higher rates go, the bigger the risk that the global economy will crack under strain and become vulnerable to more black swan events – just like we have seen recently with the second, third and fourth largest bank failures in history, which have all occurred in past two months.
Most economists have long felt that the Fed has gone one rate hike too far. Now with odds increasing of another rate hike coming this month – the biggest risk is that the Fed may overdo it.
When you consider the full magnitude of events that are currently unfolding then it’s not impossible to see why the current macroeconomic backdrop is fuelling a “perfect storm” for precious metals.
Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions:
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