

“Uncertainty” is one word that encapsulates the economic conditions that can impact gold prices the most. Perhaps now more than ever, uncertainty is what surrounds the upcoming debt-ceiling negotiations that must begin in January of 2025.
While market consensus prior to the election was that the government could operate until the end of August 2025, there is currently little consensus post-election, with most estimates shortening the time to March 2025 before a potential crisis if the debt-ceiling is not increased. Many factors make this round of debt-ceiling negotiations more precarious than previously experienced and likely to impact gold prices.
It’s Different This Time
The last time we faced debt-ceiling issues was in 2023 when the Federal Reserve had $2.2 trillion parked in the overnight reserve repo facility, which provided liquidity for the Treasury.
Today, there is only $150 billion available for this purpose due to a significant increase in capital sitting outside the Fed and the banking system (held by hedge funds instead). No one is certain how this capital/collateral will respond when the government starts running out of money.
While the FED usually cooperates with the treasury department during periods of debt-limit crisis, many hedge funds are under no such obligation. If hedge fund managers decide to sell the treasury debt on their balance sheet, it could complicate debt-ceiling negotiations and significantly shorten the time to a crisis.

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Another factor that makes this situation precarious is that the Federal Reserve will be operating somewhat blindly and unable to gauge where short-term interest rates should be to help keep reserves at an appropriate level.
The increased risks and uncertainty can cause fluctuations and scarcity of available capital at a time when liquidity is needed the most. While most agree that ultimately the debt-ceiling will be raised or temporarily eliminated, the process of getting there can make for messy markets and higher gold prices. And while gold prices can spike during negotiations and settle down sometimes immediately after the crisis is averted, ultimately, higher debt levels equate to higher gold prices.

When analyzing what happens to the price of gold as the national debt increases, I noticed an interesting pattern. The price of gold increases by approximately $1,000 for each $15 trillion of debt. When the national debt was around $15 trillion in 2009, gold was around $1,000 per ounce. When the debt reached $30 trillion in 2020, gold was around $2,000 per ounce.
Of course, the price of gold can fluctuate daily and is influenced by other things besides the national debt (war, pandemics, geopolitical upheaval, etc). However, the general trend line for gold prices has been to mirror the rise in the national debt. The above ratio of gold price/debt level for the current debt level suggests that the current gold price should be above $2,500 - and it is.
Two-Pronged Rise for Gold
So in essence, the upcoming debt-ceiling negotiations provide two opportunities for gold to rise. There will likely be some exciting spikes in the gold price enhanced by the uncertainty surrounding the process of how we get from here to there and how far we go out on a limb before reaching a consensus. Secondly, even if the process is smooth and ends quickly, the only reason to discuss raising the debt ceiling is to allow the national debt to increase ultimately.
In spite of the desire of the incoming administration to make government more efficient, those efforts will not likely bear fruit for several years. In the interim, we will continue to see higher debt levels and, consequently, higher gold prices.
Based on where gold and the national debt were for this 2021 article on the topic, gold is currently undervalued compared to the current level of national debt. In other words, there is a floor and protection building for gold around the $2,500 level, based on the national debt alone. This means the potential downside for gold prices is much less compared to other risk assets such as stocks or real estate, especially during debt-limit negotiations. Stocks can tend to perform poorly during periods of uncertainty, whereas gold tends to thrive.
In the end, we don’t have to base our decision to invest in gold merely on speculation about what may or may not happen during the upcoming debt-ceiling discussions in Washington. History has shown us that gold prices generally rise as debt levels increase. We can also see that gold has performed favorably compared to several alternative asset classes, whether looking at this year or the last 10 years (see graph below).

International Reactions to Debt-Ceiling Shenanigans
Besides the current financial conditions inside the United States, what makes this season of debt negotiations particularly dangerous is the current standing of the US Dollar in international markets. With the current trend among the BRICS+ nations to swap out dollar reserves for gold, a new government shutdown could turn out to be the latest snowfall that causes a fresh avalanche of dollar dumping to occur. Current trends indicate that there is not sufficient international demand for US debt to facilitate current spending levels.
If the value of the dollar is compromised due to uncertainties surrounding the debt ceiling, this will only compound the problem faced by a treasury trying to refinance debts coming due this year. Furthermore, the increased borrowing that results from a higher debt ceiling will require higher rates of interest to find investors for new treasury debt. Higher interest rates will lead to national debts accumulating faster, while government spending on public services and entitlements comes under greater pressure and scrutiny.
When it comes to rising national debt levels, owning gold is one of the best ways to protect your future purchasing power. It is unlikely that we will see a lower debt ceiling or a lower national debt any time soon. As we’ve plainly shown, higher debt levels often leads to higher gold prices. Make sure you and your family can take advantage of this trend.
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