Gold reserves measured in years of interest on debt
This chart depicts the US gold reserves divided by the interest on debt.
The interest on debt is calculated as a proxy by multiplying the 10 year interest rate with the total federal debt.
Whether this is accurate or not is not so important as we just want to compare this ratio with its historic values.
It is important to note that official US gold reserves have remained unchanged since the closing of the gold window in the early 70's.
This metric has risen and fallen quite a bit.
First this metric rose during the stagflation of the late 70's.
The gold reserve of 262 million ounces hit a high of 222 billion whilst the yield did a first peak to 13.5% with the debt, barely over 900 billion our proxy interest was about 120 billion and thus the gold reserve was almost able to pay it off twice.
It is my belief that the rise in gold prices and with it the value of the US gold reserves is what cooled the debt market causing it to revert course into a 4 decade long bull.
Interest rates plummeted, federal debt rose faster, and gold also went down in price.
At the turn of the century gold found itself trading at 290 dollar, the gold reserve reduced to 76 billion, the US debt grown to close to 6 trillion and the treasury rate reduced but at times peaking to close to 7%, the ratio hit a low of just 0.2 years of interest on debt that could be paid by the gold reserve.
The next 11 years were marked with a continuing of the bond bull run whilst also gold rallied to a new all time high.
By 2011 and 2012 the ratio hit close to 2 years again thanks to gold trading at 1800 and the yield as low as 1.5%.
Since then, rising yields and declining gold prices have hit this ratio back to about the middle range.
Technically, not much can be said where we go from here so we'll have to take a look at the fundamentals.
While multiplying the 10yr with the debt is a nice workaround to picture the interest on debt by tradingview the real interest on debt is more difficult to compute.
The US debt consists of bonds with various denominations running from 30 year bonds to bonds with maturities of less than 1 year.
This means that of the 30 year bonds, most have been issued in the 1990's and 2000's and the interest paid on them is the yield of those bond at the time of issuing.
In fact the 30 year bonds that are maturing today have been issued exactly 30 years ago with a yield of almost 9%.
When they mature, they are rolled over in new bonds that -even if we had a small tick upwards in the last couple of years) - have a significantly lower interest of just over 2%.
The same holds for 10 year bonds which 10 years ago had a yield of 3-4% vs 2.6% today.
This effect is what caused the actual interest on debt (treasurydirect.gov/govt/reports/ir/ir_expense.htm) to not even double from 214 billion/year in 1988 to just 402 billion/year as recent as 2015 whilst the federal debt exploded over 20 fold from 900 billion to 19 trillion dollars.
However, all good stories must come to an end and this one is no different.
The bond market has been topping out for the better part of a decade now and yields have seen some upward momentum.
This has meant that a lot of treasury auctions saw the treasury forced to roll over their 5, 3 and 1 year bonds into new bonds with a higher yield than the old one.
Whilst the treasury can steer and man-oeuvre a little bit by opting to sell short term bonds when yields are high and long term bonds when yields are low there is ultimately no escape from market reality.
This has become clearly evident from the last prints of interest expenses on debt outstanding that have risen with 9.1% per year for the last 3 years and show now signs of abating with another 8.6% rise for the first five months of this financial year. This is in stark contrast with the 2.36% increase of the previous 27 years.
I would venture to guess that if nothing is done on a policy level to tackle the accumulating debt and rock the bond markets gently to sleep once more we will enter a spiral of increased debt issuance met with stable or declining demand which will push up yields which in turn will create the need of issuing more debt. This viscous circle will only end through a spectacular rise in the price of gold.
In a previous analysis I had already outlined a possible scenario of the 10 yr yield hitting its magnet level of 7% by 2025.
Given the current debt of 22 trillion, which is increasing at 1 trillion a year, it seems likely that by the start of 2025 we will be looking to a national debt in excess of 30 trillion dollar.
At a ratio of 1.8 for our gold reserve to interest expense on debt ratio we learn that the US gold reserve should be valued at 3.8 trillion dollars.
For this gold would need to rise to at least 14500 dollar.
If for some reason the debt markets stay irrational for a very long time before going in overdrive it could very well be that the US ends up with a 50 trillion dollar debt by 2035 when this scenario fully comes to fruition.
In such a scenario I see no reason to expect that the 10 yr yield would only stay limited to 7% but could easily hit the 1980 value of 13.5% again.
In order to calm the debt markets at these yields and these levels of debt gold would have to rise to about 45000 dollar to repeat the 1980 scenario.
Hold on, its going to be a hell of a ride.
The interest on debt is calculated as a proxy by multiplying the 10 year interest rate with the total federal debt.
Whether this is accurate or not is not so important as we just want to compare this ratio with its historic values.
It is important to note that official US gold reserves have remained unchanged since the closing of the gold window in the early 70's.
This metric has risen and fallen quite a bit.
First this metric rose during the stagflation of the late 70's.
The gold reserve of 262 million ounces hit a high of 222 billion whilst the yield did a first peak to 13.5% with the debt, barely over 900 billion our proxy interest was about 120 billion and thus the gold reserve was almost able to pay it off twice.
It is my belief that the rise in gold prices and with it the value of the US gold reserves is what cooled the debt market causing it to revert course into a 4 decade long bull.
Interest rates plummeted, federal debt rose faster, and gold also went down in price.
At the turn of the century gold found itself trading at 290 dollar, the gold reserve reduced to 76 billion, the US debt grown to close to 6 trillion and the treasury rate reduced but at times peaking to close to 7%, the ratio hit a low of just 0.2 years of interest on debt that could be paid by the gold reserve.
The next 11 years were marked with a continuing of the bond bull run whilst also gold rallied to a new all time high.
By 2011 and 2012 the ratio hit close to 2 years again thanks to gold trading at 1800 and the yield as low as 1.5%.
Since then, rising yields and declining gold prices have hit this ratio back to about the middle range.
Technically, not much can be said where we go from here so we'll have to take a look at the fundamentals.
While multiplying the 10yr with the debt is a nice workaround to picture the interest on debt by tradingview the real interest on debt is more difficult to compute.
The US debt consists of bonds with various denominations running from 30 year bonds to bonds with maturities of less than 1 year.
This means that of the 30 year bonds, most have been issued in the 1990's and 2000's and the interest paid on them is the yield of those bond at the time of issuing.
In fact the 30 year bonds that are maturing today have been issued exactly 30 years ago with a yield of almost 9%.
When they mature, they are rolled over in new bonds that -even if we had a small tick upwards in the last couple of years) - have a significantly lower interest of just over 2%.
The same holds for 10 year bonds which 10 years ago had a yield of 3-4% vs 2.6% today.
This effect is what caused the actual interest on debt (treasurydirect.gov/govt/reports/ir/ir_expense.htm) to not even double from 214 billion/year in 1988 to just 402 billion/year as recent as 2015 whilst the federal debt exploded over 20 fold from 900 billion to 19 trillion dollars.
However, all good stories must come to an end and this one is no different.
The bond market has been topping out for the better part of a decade now and yields have seen some upward momentum.
This has meant that a lot of treasury auctions saw the treasury forced to roll over their 5, 3 and 1 year bonds into new bonds with a higher yield than the old one.
Whilst the treasury can steer and man-oeuvre a little bit by opting to sell short term bonds when yields are high and long term bonds when yields are low there is ultimately no escape from market reality.
This has become clearly evident from the last prints of interest expenses on debt outstanding that have risen with 9.1% per year for the last 3 years and show now signs of abating with another 8.6% rise for the first five months of this financial year. This is in stark contrast with the 2.36% increase of the previous 27 years.
I would venture to guess that if nothing is done on a policy level to tackle the accumulating debt and rock the bond markets gently to sleep once more we will enter a spiral of increased debt issuance met with stable or declining demand which will push up yields which in turn will create the need of issuing more debt. This viscous circle will only end through a spectacular rise in the price of gold.
In a previous analysis I had already outlined a possible scenario of the 10 yr yield hitting its magnet level of 7% by 2025.
Given the current debt of 22 trillion, which is increasing at 1 trillion a year, it seems likely that by the start of 2025 we will be looking to a national debt in excess of 30 trillion dollar.
At a ratio of 1.8 for our gold reserve to interest expense on debt ratio we learn that the US gold reserve should be valued at 3.8 trillion dollars.
For this gold would need to rise to at least 14500 dollar.
If for some reason the debt markets stay irrational for a very long time before going in overdrive it could very well be that the US ends up with a 50 trillion dollar debt by 2035 when this scenario fully comes to fruition.
In such a scenario I see no reason to expect that the 10 yr yield would only stay limited to 7% but could easily hit the 1980 value of 13.5% again.
In order to calm the debt markets at these yields and these levels of debt gold would have to rise to about 45000 dollar to repeat the 1980 scenario.
Hold on, its going to be a hell of a ride.
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