The next trillion matters more for gold than the next Fed rate hike

(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. See live precious metals prices for gold, silver, platinum and palladium — in USD, CAD and 12 more currencies. Neils Christensen Neils Christensen has a diploma in journalism from Lethbridge College and has more than a decade of reporting experience working for news organizations throughout Canada. His experiences include covering territorial and federal politics in Nunavut, Canada. He has worked exclusively within the financial sector since 2007, when he started with the Canadian Economic Press. Neils can be contacted at: 1 866 925 4826 ext. 1526 nchristensen at kitco.com @KitcoNewsNOW Tags: gold Federal Reserve rate hike September Fed meeting US Treasury yields 10 year Treasury yield US bond market US debt 40 trillion Sovereign Debt Crisis US sovereign debt federal budget deficit US fiscal crisis dollar debasement interest rates 25 basis points Share Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.