View: Ballooning US deficit is good news for Indian gold investors

October federal deficit for the US was more than $100 billion, which is 58 per cent more than last year. In October 2017, the monthly deficit was $63 billion.

Spending rose 18 per cent while receipts increased just by 7 per cent. The Congressional Budget Office (CBO) projects that 2019 deficit for the US will come close to $1 trillion. Last time the US ran more than $1 trillion deficit, gold ended up at over $1,800.

Gold is not participating in spite of the huge US deficit is because of strong dollar. However, US dollar is not getting stronger because of strong economy, but turmoil in Euro zone and the UK, which is making their respective currencies weaker, is in turn making US dollar stronger.


Generally, massive federal debt makes gold shine. If we look at the chart below there are consistent correlations between size of federal debt and prices of gold.

The deficit is expected to increase because of Trump’s administration of tax cut and an increase in defense spending. We expect annual budget deficit for 2018 will reach $981 billion, just shy of $1 trillion. In 2011 and 2012, the price of gold was trading around $1,700-$1,800, when the US was running more than $1 trillion deficit.

That time, US were coming out of a great recession so the high gold price was justified since majority of the investment was getting deployed in precious metals. But now with US economy is going gung-ho, yet deficit on higher side, is an early warning sign.

History has shown that recession is followed by a hike in interest rate. The US Fed has increased interest rate from 0.025 per cent to 2.25 per cent in just three years.

JP Morgan is saying there is 60 per cent chance of recession in 2020 and 80 per cent by 2021. We all know a recession is good news for gold. There is a massive gap between the prices of gold and US budget deficit.

With US running deficit close to 2011 high, gold is nowhere near to its 2011 high. So there is plenty of upside room.

We are already seeing signs of contraction in Chinese economy due to trade war tariffs and the US may also soon feel its impact. We are not saying gold will see an immediate recovery, but historically there is roughly one-year lag time where gold prices have reacted to the yearly deficit hitting $1 trillion level.

Even if we go by conservative estimate, gold prices will see levels above $1,400 at the end of 2019 when the US deficit will hit $1 trillion.

(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry Readers are advised to consult their financial advisers before taking any position based on these observations)