The U.S is facing significant challenges from political and economic uncertainty, and investors can bet on gold to hedge against these risks.
On September 29, incumbent President Donald Trump and his rival Joe Biden squared off in the country’s first presidential debate of the 2020 election. The two candidates took polar opposite stances on many major issues. If Biden becomes president (which is likely judging by recent polls) he would probably work to undo many of Trump’s signature policies, leading to significant uncertainty in the economy.
Meanwhile, the national debt continues to creep higher–trapping the nation between a rock and a hard place.
The government can’t afford to cut taxes or slow spending without potentially crashing the economy. But the unpayable debt could lead to a massive crash in the dollar. In times like these, investors should look to gold to protect their portfolios.
Gold has posted a tremendous rally in 2020, with its price soaring 26% year-to-date. But the bull run has tapered off a bit since August, with the metal currently trading 5% below its all-time high of $2,089.
Analysts believe the yellow metal faces headwinds from a stronger dollar amid rising coronavirus cases and new lockdown measures in Europe–factors pushing international investors towards the U.S. markets in a flight to safety.
But the U.S. economy is far from safe. International investors could be in for a rude awakening as the political situation in the country becomes more unstable, and debt levels continue creeping higher.
America’s national debt currently stands at $26.8 trillion, which comes out to around $81,179 per citizen, according to U.S debt clock.org. The debt load could get significantly worse if Congress passes the $2.2 trillion HEROS Act designed to stimulate the economy.
America’s debt is a catch-22 because if the government cuts back on spending or raises taxes in the middle of the coronavirus-recession, the economy could crash. But the U.S. economy is too weak to “grow” its way out of the debt crisis no matter how much money Congress and the Federal Reserve throw at the problem.
In the end, investors could lose faith in the dollar because of these challenges.
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The unpayable debt load is not the only factor that makes the dollar an extremely risky asset. According to Steven Roach, former Chairman of Morgan Stanley Asia, the U.S. dollar could collapse by the end of 2021 because of the nation’s worsening trade deficit.
The current-account deficit in the United States suffered a record deterioration in the second quarter. Lacking in saving and wanting to grow, we run these current-account deficits to borrow surplus saving, and that always pushes the currency lower.
While Roach’s predictions are extreme, he may be on to something.
America’s current account deficit, which measures the flow of goods, services, and capital in and out of the country, increased by 52.9% to $170.5 billion in the second quarter. This could put negative pressure on the value of the dollar if the situation continues.
Gold and the U.S. dollar usually compete for safe-haven status, but over the long term, gold looks like the safer bet. The greenback is under pressure from America’s unsustainable debt load and massive trade deficit. It’s only a matter of time before these factors case the dollar index to collapse lower.
Last modified: September 30, 2020 3:31 PM