(Kitco News) - Something incredible happened this week, and even if you weren’t paying attention, the gold market certainly was.
The threat of a 25-basis-point hike next week continues to put pressure on gold, which makes sense, as rising interest rates push bond yields higher, raising the opportunity cost of holding non-yielding assets.
However, in the grand scheme of things, the U.S. economy has much bigger problems than the direction of short-term interest rates. The U.S. government is starting to lose control of the bond market.
This past week, the U.S. Treasury Department bought $5.1 billion in long-dated U.S. bonds, but instead of bringing down the long end of the curve, yields pushed higher. The 10-year yield ended the week at 4.97%, a three-year high. Many analysts expect it is only a matter of time before yields hit 5%, creating another major hurdle for the economy.
Everyone is focused on the Federal Reserve’s monetary policy decision, but they need to pay more attention to America’s massive spending problem. Last week, U.S. sovereign debt surpassed $40 trillion. The government now has to spend more than $1 trillion annually just to service its debt, and the problem is only getting worse.
The day before the Treasury launched its disappointing buyback, President Donald Trump promised that if Republicans win the midterm elections and maintain control of the Senate, every American adult would receive $5,000. The president’s promise would add another trillion dollars to the debt.
Against this backdrop, investors should ask themselves how much higher interest rates can realistically go.
Analysts have explained that the Federal Reserve can fight inflation, but its room to raise rates is constrained by the nation’s deteriorating fiscal position.
The gold market is paying attention to all of this. While the threat of a rate hike is keeping some investors away, at some point, the risk of not holding a diversified monetary asset will outweigh the opportunity cost of owning one.
That is why investors should stop obsessing over the next 25 basis points and start paying attention to the next $1 trillion of debt.
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