The World Has Racked Up $277 Trillion in Debt

How do you even begin to visualize $277 trillion?

If we convert it into seconds, 277 trillion is the equivalent of 8.8 million years. I’m not sure what was happening that long ago, but I guarantee you it didn’t involve people.

It’s been estimated that Jeff Bezos increases his net worth by about $321 million a day. At that rate, you’d have to work for close to 863,000 days, or 2,364 years, to reach $277 trillion. 

You get the point. It’s an unfathomable sum.

It’s also the total amount of debt the world is expected to hit by year-end. That’s according to the Institute of International Finance (IIF), whose members include some 400 banks and financial firms around the globe.

This year alone, as of the end of September, the world added $15 trillion to the debt pile, with government borrowing accounting for half of the increase, the IIF says. Debt in developed markets is set to hit 432% of gross domestic product (GDP). For emerging markets, it’s closer to 250%.

By 2030, the IIF estimates, we could be looking at $360 trillion in total debt.

So how did we get here, and what can investors do to protect their own wealth?

As you may expect, the economic fallout from the pandemic has dealt a huge blow to government coffers. So far in 2020, the U.S. has added more than $4.8 trillion to the federal debt, the most ever for a single year.

This has brought total federal debt up to a record $27 trillion, or 143% of U.S. GDP. Debt per U.S. taxpayer now comes in at a staggering $218,450.

We can’t blame everything on the pandemic. According to the IIF, the past four years have seen the largest debt buildup on record, with $52 trillion accumulated since 2016.

What this means is that, even during the pre-pandemic economic boom years, governments were not practicing sound fiscal management. Granted, governments weren’t the only contributors to the debt buildup, but they represent a huge part of it.

Knowing this, there’s no way we can reasonably expect them to get us out of this mess.

“There is significant uncertainty about how the global economy can deleverage in the future without significant adverse implications for economic activity,” IIF economists say.

Jared Dillian: Gold Is A Hedge Against Bad Government Decisions

This week, Bloomberg published an article by Jared Dillian, investment strategist at Mauldin Economics.

In the article, titled “Gold Is a Hedge Against Bad Government Decisions,” Dillian argues that investors mistakenly believe that gold is a hedge against inflation and stock market crashes.

Instead, he writes, gold “is a hedge on policymakers screwing up, and there has been a lot of screwing up in the last 20 years.”

Since the year 2000, U.S.-denominated gold has surged roughly 555% versus 146% for the S&P 500 Index. The reason for this, according to Dillian, is that “significantly looser financial conditions” have meant that there are “no constraints on monetary and fiscal policy.”

Indeed, the world is stuck in a low-rate environment. As of right now, no 10-year government bond in any major economy in Europe or North America yields more than 1%. Several countries—including France, Germany, Sweden, the Netherlands and Switzerland—issue debt with a negative yield. And that’s the nominal yield, before factoring in inflation.

Today, in fact, the amount of government debt around the world trading with a negative yield rose to $17.1 trillion, a troubling new record.

Currency devaluation is real, and it’s only likely to accelerate. If you’re seeking to protect your family’s wealth against the failures of governments and central banks, I don’t believe there’s a more prudent option than hard assets. That includes not just gold and precious metals but also real estate, housing and, if you can stand the volatility, cryptocurrencies such as Bitcoin and Ethereum.

Cryptos at a Nearly Three-Year High

Speaking of which, Bitcoin has been on a tear this year, having climbed almost 160%. Today, the world’s largest digital currency by market cap traded above $18,000, hitting its highest for the first time since December 2017. Ethereum, meanwhile, broke above $500, its highest level since June 2018.

The difference between then and now is that, whereas the 2017 Bitcoin rally was highly speculative and retail-driven, today’s surge appears to be propelled by smart money seeking to hedge against the things we just talked about.

That’s the assessment of ex-hedge fund manager Mike Novogratz. Speaking to CNBC this week, Novogratz said he believes Bitcoin has “hit escape velocity” as the cryptocurrency enjoys increasingly greater demand from institutional investors. He has an end-of-year price target of $20,000 and sees $60,000 by the end of 2021.

Emerging Markets to Outperform in 2021?

For what it’s worth, other fund managers aren’t in agreement with Novogratz. Less than 5% of those surveyed by Bank of America believe Bitcoin will outperform next year. Meanwhile, close to half of managers say they believe emerging markets are the place to be heading into 2021, ahead of the S&P 500, oil and gold.

Investors are betting that a vaccine against COVID-19 could benefit emerging economies the most. A weaker U.S. dollar may also make emerging markets more competitive. The U.S. Dollar Index is down more than 3% year-to-date.

Did You Miss the Mining Expo?

If you were one of the many people who attended last week’s Virtual Junior Mining Expo, thank you! The virtual event, co-hosted by StreetSmart Live!, was a huge success, bringing 10 of the most exciting junior metal producers to curious investors such as yourself.

For those of you who missed it or want to watch it again, a recording is now available. Just click here!

 

Gold Market

This week spot gold closed at $1,870.99, down $18.21 per ounce, or 0.96 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 5.54 percent. The S&P/TSX Venture Index came in up 0.55 percent. The U.S. Trade-Weighted Dollar fell 0.43 percent.

Date Event Survey Actual Prior
Nov-15 China Retail Sales YoY 5.0% 4.3% 3.3%
Nov-18 Eurozone CPI Core YoY 0.2% 0.2% 0.2%
Nov-18 Housing Starts 1460k 1530k 1459k
Nov-19 Initial Jobless Claims 700k 742k 711k
Nov-24 Hong Kong Exports YoY 6.0% 9.1%
Nov-24 Conf. Board Consumer Confidence 98.0 100.9
Nov-25 Initial Jobless Claims 733k 742k
Nov-25 GDP Annualized QoQ 33.1% 33.1%
Nov-25 Durable Goods Orders 0.9% 1.9%
Nov-25 New Home Sales 975k 959k

Strengths

  • The best performing precious metal for the week was platinum, up 6.26 percent, as hedge funds boost their net-long  position to a two-year high on expectations platinum will find new demand in the green hydrogen space as the catalyst for electrolysis to liberate hydrogen. The World Platinum Investment Council projects a platinum deficit of 1.2 million ounces for 2020, the largest since records began. Pandemic-related mine closures by key producers is likely to keep the metal in deficit even as demand from autocatalysts, the biggest consumers of the metal, is forecast to drop by 16%. The metal could get a boost from the surge in green hydrogen interest. Platinum plays a key role in electrolysis and in the fuel cells used in hydrogen powered vehicles.
  • Newmont is on the Dow Jones Sustainability World Index for the 13th year in a row, which represents the top 10% of the world’s largest 2,500 companies in the S&P Global Broad Market Index. Newmont was named the top global gold mining company for its leading environmental, social and governance (ESG) performance, reports Kitco News.
  • Silver imports by China and India are expected to rebound over the next six months as de-stocking ends, according to Citigroup. Swiss gold exports to India rose almost fivefold in October as jewelers restocked ahead of Diwali, which is typically a strong time for purchases as gold gift giving is considered auspicious. BS sees palladium peaking at $2,600 an ounce in 2021 due to strong Chinese car sales and a COVID vaccine pushing the economic recovery and keeping the metal in deficit.

Weaknesses

  • The worst performing precious metal for the week was silver, down 2.00 percent, yet hedge funds have now taken their net-long position to a 17-week high. Gold fell for a fourth day as the U.S. dollar strengthened on positive vaccine developments. Gold-backed ETFs sold off for a fifth straight session on Wednesday and have lost 52 tons of gold since Pfizer announced its vaccine breakthrough last week. This is sparking fears that investors are “giving up” on gold as it potentially heads back down to $1,700 an ounce. Demand for haven assets has fallen as the news of a COVID vaccine nearing gives investors hope for an economic recovery.
  • Money managers are also turning bearish on the yellow metal. Bullish gold bets decreased by 10,994 net-long positions according to weekly CFTC data on futures and options. This is least bullish net-long position in more than 17 months, according to Bloomberg
  • Macquarie said in notes this week that “gold prices have already peaked at their August high of $2,075 an ounce.” The banks said prices are likely to remain around current levels then progressively move lower over 2021 as the 10-year Treasury yield rises toward 2%. Bloomberg notes Macquarie has lowered its price outlooks for coming quarters after saying gold is at “the end of the cyclical bull market.”

Opportunities

  • After saying last week it was discussing a “merger of equals,” Endeavour Mining announced it has agreed to buy Teranga Gold for a 5.1% premium. According to Bloomberg calculations Endeavour has valued Teranga at $1.86 billion and the combined company will produce 1.5 million ounces of gold across West Africa. The company now seeks to list on the London Stock Exchange.
  • Brixton Metals announced high-grade gold, silver, and copper content in 17 samples collected at its recently acquired Trapper Target on its Thorn Project. A total of 11 companies were granted new gold mining concessions in Egypt, according to the Oil Ministry, including Centamin, Barrick Gold and B2Gold.
  • Gold jumped on Friday morning after Treasury Secretary Steven Mnuchin said his agency and the Fed have enough firepower to continue supporting the U.S. economy. Citigroup remains bullish on gold even as a COVID vaccine nears completion. The bank says gold’s advance back above $2,000 an ounce in 2021 looks inevitable as the vaccine would only slow the bull cycle.

Threats

  •  Bullion is at risk of a “major collapse” if support continues to falter. The 100-day and 50-day moving average for gold just crossed, also called a death cross, and this is indicative of a “sharp drop” down in price, according to Gary Wagner, editor of the GoldForecast.com.

  • Applications for U.S. state unemployment benefits rose unexpectedly for the first time in five weeks, suggesting the labor market recovery is slowly due to spiking coronavirus infections, reports Bloomberg. Claims totaled 742,000 in the week ended November 14, up 31,000 from the week prior. The U.S. now has over 11.8 million cases and reported 187,428 on Thursday November 19. The CDC has strongly advised against traveling for Thanksgiving and to only celebrate with those in your household.
  • BlackRock CIO of Fixed Income Rick Rieder said on CNBC that bitcoin could take the place of gold to a large extent because crypto is “so much more functional than passing a bar of gold around.” Rieder added that he thinks crypto is here to stay due to central banks developing their own digital currencies and millennials’ “receptivity” to technology.

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 0.73%. The S&P 500 Stock Index fell 0.77%, while the Nasdaq Composite gained 0.22%. The Russell 2000 small capitalization index rose 2.37% this week.
  • The Hang Seng Composite gained 1.32% this week; while Taiwan was up 3.34% and the KOSPI rose 2.39%.
  • The 10-year Treasury bond yield fell 7 basis points to 0.825%.

Go to http://www.usfunds.com/investor-library/investor-alert/the-world-has-racked-up-277-trillion-in-debt/ to read the remainder of the article.

 

November 20, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors