One of the more important factors influencing gold prices, but seldom mentioned, is the impact of refinancing the federal debt on gold prices. In case your eyes are glazing over at the prospect of an esoteric economic theory, let me try to make this practical for individual investors.
Understanding How the Government Borrows
Essentially, our federal government takes in revenue and then spends it (fiscal policy). When it spends more than it takes in (budget deficit), it has to borrow money to make ends meet by taking out loans (selling government securities like treasury bonds, T-bills, and notes). When those loans come due with interest, if the government doesn’t have the money to pay it back, it will pay off the loan by borrowing what it needs at whatever the best interest rate is at the time.
If the interest rate on the new loan is higher than that on the old loan, it increases the amount of interest due when the loan matures. Eventually, if the interest rate rises as well as the total amount of debt, this amount becomes so large that it causes significant problems.
Rising Interest Payments: A Growing Burden
Imagine the federal government as a household earning $52,000 a year but spending $70,000 a year. It has to borrow $18,000 continuously over the year to make ends meet. Those loans come due anywhere from 4 weeks to 30 years. The total running total of all the borrowed money is $362,000, and the average interest rate of all the loans is 3.3%, which makes the interest payments $9,200.
Currently, as each loan comes due, the household pays off the old loan with a lower interest rate (say 1.5%) and takes out a new loan at a higher interest rate (now 4.75%). Applying a higher interest rate to a growing total of borrowed money means that the interest payments alone will soon exceed $10,000. Now add eight zeros to those numbers to grasp the enormity of the U.S. government’s situation. To put interest payments in perspective, the interest on the national debt ($920 billion) exceeds the entire defense budget ($850 billion).
All the solutions to this problem can cause other problems. The federal government can cut spending (eg. DOGE), which usually slows the economy in the short term. It can also increase revenues through higher taxes (which also usually slows the economy) or new revenue streams (such as tariffs, which can raise prices in the short term). Revenues can also be increased by growing the economy, in which taxes are applied to a larger base, but this can take some time to have an impact.
And the policies that fuel economic growth usually cost more money in the short term (whether government stimulus or reduced tax rates), which means more borrowing and interest payments. (So far, DOGE cuts have not hurt economic growth, and tariffs have brought in $100 billion without causing inflation.) Or the federal government can kick the can down the road, meaning it won’t change much and let the debt and interest continue on their current path, which many believe is unsustainable.
The Dollar’s Decline and Inflation Risks
Regardless, all this means the government is creating more U.S. dollars in the short term (by borrowing more money) and that can harm the value of a dollar. Domestically, too much money can create inflation, just as it did during the COVID-19 pandemic, when the Federal Reserve increased the money supply by 40% and citizens saw inflation spike to 9% (a 40-year high).
Internationally, the value of the dollar is relative to the performance of other currencies. And currently, the dollar is having its most significant fall in value (concern over the budget, debt, and tariffs) since 1973, when President Nixon took the dollar off the gold standard.
Why This Matters for Gold Prices
What does this mean for gold prices? The global gold market is priced in U.S. dollars, and when the value of the dollar falls, it takes more dollars to buy the same amount of gold. While other factors influence the price of gold, such as geopolitical risk, economic uncertainty, the growing size of budget deficits, national debt, and interest rates, these factors will only gain importance in the future.
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byEdmund C. Moy