The gold market is witnessing an unprecedented rally, and it's not just another spike. It’s a reflection of the world recognizing the precious metal's potential as a viable substitute for US Treasuries in the global reserve landscape. The crux of this shift? Reports suggesting China’s inclination towards issuing gold bonds. This could signify the gold’s formal rise as a reserve asset, presenting a direct challenge to the US Treasury’s stronghold. This evolving narrative from Reuters sheds light on the reasons behind gold's surge and the diminishing allure of Treasuries. Witness a pivotal moment in financial history unfold especially when investors smell the pivot in the Bitcoin narrativ too: from funny money to a potential reserve asset and store of value. The next capital will be amazing!
253 sats \ 10 replies \ @gabybaby 20 Oct 2023
It's interesting to note how certain asset classes are diverging from their historical performances relative to each other. Namely, gold and BTC holding steady (if not rallying) in the face of sliding bond prices (and rising yields); normally, one would expect liquidity to continue to be sucked out of these yieldless assets given the increasing attractiveness of "risk-free" debt and cash/cash equivalents.
Setting any potential China move aside, I think this signals the market's awareness that 1) strong and sustained fiscal deficits are inflationary, and 2) overall debt loads worldwide make any further sovereign borrowing that much riskier given demographics, battered consumers, and squeezed businesses.
reply
0 sats \ 7 replies \ @chungkingexpress 20 Oct 2023
Another question please, someone said to me that total debt "does not matter", only GDP / Debt ratio. What do you think about this take?
reply
840 sats \ 1 reply \ @usagi 23 Oct 2023
A good way to think about this is to make an analogy to something more concrete, something you may be able to relate to: a mortgage on a house.
If someone told you they had an $800k mortgage on their house, would that be enough information for you to form a judgement on their financial situation? No, you'd need to know a lot more. Now, let's say they also told you that their mortgage payments were $8k/month and their annual income was $360k. That would give you a much better idea of their situation.
Now suppose that they didn't tell you any of this, and instead the only thing they told you was that their monthly mortgage payments amounted to 27% of their monthly income (i.e. same situation above). Would that be sufficient to gauge their financial health?
Yes, but only if status quo is maintained. What if it turns out they had an adjustable-rate mortgage, and their monthly payments were set to rise and fall with prevailing interest rates? Suddenly, the amount of the mortgage itself ($800k in our case) matters, because you'd need to know that in order to calculate what the monthly payments will be.
In the above analogy, mortgage debt is analogous to US federal debt, and income is analogous to GDP (but really, government income aka tax receipts is some fraction of GDP).
Does it matter that our federal debt is around $32T [1] if the interest payments are less 2% of GDP [2022 data, see 2]? I would say it absolutely matters, because a huge chunk of that debt was issued when interest rates were low and will need to be refinanced (e.g. they charged a bunch of money onto a 0% interest rate credit card but as the principal payment comes due, they pay it using another credit card that is charging 4.5% interest – this will cause interest payments to increase dramatically).
You can also see that I glossed over some details that are necessary to get an in-depth view of the situation: namely, the structure and terms of the debt. How much debt was financed when, under what terms?
Hopefully this is helpful and will allow you to reason things out a bit without relying on someone else's opinion. Also, a disclaimer: I'm just a layman and have no expertise in this area. The above is just my understanding. But I believe the gist of it really is this simple – no rocket science here.
[1] https://fred.stlouisfed.org/series/GFDEBTN
[2] https://fred.stlouisfed.org/series/FYOIGDA188S
reply
0 sats \ 0 replies \ @chungkingexpress 23 Oct 2023
Thank you
reply
840 sats \ 3 replies \ @gabybaby 20 Oct 2023
At first glance I'd be inclined to agree, largely because the Debt/GDP ratio gets to the heart of a nation-state's ability to service its liabilities which matters much more to creditors than its debt load in absolute terms. I will say, though, GDP is an imperfect measure of productivity (in my opinion) and the true burden of servicing debts depends on many more factors than just an economy's run rate.
reply
0 sats \ 2 replies \ @TomK OP 20 Oct 2023
Of course You should do a realistic calculation and add hidden debt and discounted future obligations. But the relation holds economically.
reply
0 sats \ 1 reply \ @gabybaby 20 Oct 2023
Totally. I'm trying to think of an example when that relation isn't as important as total debt load, but as with most things in economics it seems amounts and figures hold far less meaning in a vacuum.
reply
0 sats \ 0 replies \ @TomK OP 20 Oct 2023
That's correct. You need points of orientation to make things measurable and comparable.
reply
0 sats \ 0 replies \ @TomK OP 20 Oct 2023
I would say that's a valid thesis.
reply
0 sats \ 1 reply \ @TomK OP 20 Oct 2023
Exactly. Thanks for adding this thought!
reply
0 sats \ 0 replies \ @gabybaby 20 Oct 2023
Thanks for the zap - what do you think about sovereign debt in general? Personally I think they're shitcoins, I don't have any allocation at all to the asset class. Sovereign borrowing seems to be on a purely upward trajectory from here (in the US, but probably most of the world too) and will likely crowd out private debt in the market, suffocating businesses in the process.
Seems clear to me that the 40-year bull market in bonds is over. Sovereign CDS rates likely bear out some recognition of the increased riskiness of being a bagholder in the bond market.
reply
143 sats \ 2 replies \ @grayruby 20 Oct 2023
Tom, always enjoy your posts. @Undisciplined is doing a push for an econ sub. Posts can be found at Econ Meta Takeover. I think you would be a great addition to the conversations they are attempting to stir up.
reply
10 sats \ 1 reply \ @Undisciplined 20 Oct 2023
Add your voice to the revolution, Comrade!
reply
163 sats \ 0 replies \ @TomK OP 20 Oct 2023
It's a pleasure, of course!
reply
10 sats \ 5 replies \ @davidw 20 Oct 2023
Plot twist for 2024
- U.S. tries to strangle Bitcoin adoption, believing their currency can continue to float on thin air
- China does a u-turn and fully-reserves its new currency using Bitcoin freedom-money, with collateral consisting of Satoshis & Gold
reply
80 sats \ 4 replies \ @TomK OP 20 Oct 2023
But I don't think that the real government (Fink, Dimon et al) will pass the ball to China to give them a solo. These people are well connected and will be filling their bags via commissions out of their ETFs.
reply
0 sats \ 3 replies \ @davidw 20 Oct 2023
I appreciate it's ridiculously unlikely. I just like to entertain the thought of such a surprise
reply
0 sats \ 2 replies \ @TomK OP 20 Oct 2023
Ahh, got You now. Slow day today...
reply
10 sats \ 1 reply \ @davidw 20 Oct 2023
Just followed you on Nostr. Love it when people include their npubs in profiles.
This weekend feels like things are brewing. Do you think the gold market is sniffing that out?
reply
21 sats \ 0 replies \ @TomK OP 20 Oct 2023
Thanks for following. It's a great experience to me as tech- analphabet.
Yes, Gold seems to get it right. Watch energy prices and bonds in addition.
My base case for the upcoming years is energy inflation and credit deflation (contraction).
reply
0 sats \ 0 replies \ @wingalt 21 Oct 2023
Another factor to consider is the collapsing Chinese real estate market propped up for years by cheap debt and encouraged by the government. Money will need to find another place to park and gold could be the next fever for people already inclined to it in this part of the world. So gold could not only serve as an alternative savings mechanism for the Chinese but also help the government to undermine the dominance of the US dollar, everybody wins
reply