The National Debt and Gold Prices: How Are They Related?

It’s September 2020, and the U.S. national debt is nearing a staggering $27 trillion. Earlier this year, around the time that the COVID-19 pandemic started to impact the United States, the national debt spiked by $1.54 trillion in just six weeks.

Around 12 percent of the total national debt is owned by the Federal Reserve, who, as discussed in last month’s blog post, has been purchasing treasury bonds at an elevated rate in order to keep interest rates lower and to diminish the economic impact of the COVID-19 pandemic on the American people.

As the national debt has continued to climb over the years, the market price of gold has also gradually increased. The correlation between the two is simple: as our federal government borrows more money and pushes the country into greater debt, the value of our currency decreases. As the U.S. dollar becomes more unstable, consumers look to protect their financial standings with assets like gold and other precious metals, as their inherent value tends to remain relatively steady over the long term.

Many experts believe that the direct nature of the relationship between these two economic players dates back to 1971, when President Richard Nixon called for the removal of the “gold standard” that linked the value of gold to the value of the U.S. dollar. Instead of basing the dollar’s worth on a tangible source of value, like precious metals, the new fiat system operated on trust in the currency and created a debt ceiling for the government to function beneath (a ceiling which has since been broken several times, as seen in the above graph). So, while the value of U.S. currency no longer consistently moves in tandem with the national debt, the movement of gold prices continues to generally follow the same upward trajectory as the country’s debt levels.

Our fiat system has already been seriously impacted by the economic fallout from the pandemic. When operating within an unstable economy, fiat currencies tend to face debasement and become more unstable themselves. As the United States’ financial standing has become more volatile in recent months, the U.S. Treasury and the Federal Reserve have continued to take actions in response to that volatility that, while temporarily stimulating the economy, have dramatically increased our national debt and further debased the value of the dollar. On the other hand, though, gold has been experiencing a historic rally throughout much of this year.While it is likely that the national debt will continue to climb rapidly to new heights, and while the fiscal devastation the pandemic has wrought is undeniably terrible for the American public, it is worth noting that consumers still have access to gold as a potential safe haven in order to help protect their assets as they seek to maintain their own financial well-being in the long run.

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