Why gold is at an all-time high

Gold is in the middle of what looks like an unstoppable bull run. It has already punched through $4,000 an ounce. At the rate the price is rising, it may well go to $5,000 within a few weeks, and perhaps even $6,000 as the next year unfolds. There have been lots of different explanations for this, from the looming collapse of the dollar, to secret Chinese buying, to the conspiracy theories circulating on the wilder fringes of the internet, such a secret plot to re-establish the gold standard, or attempts to replace all the metal that is meant to be stored at Fort Knox, America’s official gold reserve, which apparently went missing decades ago. But the real explanation is very simple: it is the only way to hedge against soaring government debt. So long as spending remains out of control, gold is a one-way-bet.

At $4060 an ounce, gold is already at an all-time high, and looks set to go a lot higher before this bull run is over. Why? It may reflect a weakening of confidence in the dollar, although President Trump seems to have given up on his fight with the Federal Reserve, and the US economy has taken tariffs in its stride. Or it may reflect buying by central banks, although given that the Polish central bank is the largest buyer this year that may be exaggerated. 

But the main reason is that government debt is spiraling out of control. In the US, the deficit is likely to remain above 5 percent of GDP even with the government shut down. President Trump shows no interest in bringing that under control. He even looks set to give away all his tariff revenue with $2,000 checks to every household instead of reducing the deficit. In Britain, the Labour government has clearly lost control of its spending, and it is now at the mercy of party rebels who insist they shouldn’t be bossed around by the bond market. In France, a succession of Prime Ministers who attempt to merely slow the rate at which spending rises are kicked out of office. Japan’s new PM Sanae Takaichi looks set to start spending again. Even Germany, the last man standing, has suspended its debt brake, and will borrow up to €900 billion this year to fund investment in infrastructure and defense. All those governments range across the right and the left of the political spectrum, but they are all united on one point: they are determined to keep borrowing more and more.

Perhaps it will all work out fine. The extra spending may accelerate growth, as the UK’s Labour Party and Germany’s Christian Democrats hope it will. Or perhaps it can just be rolled over in perpetuity, which seems to be the strategy of the MAGA Republicans. We will see. The important point is this: if any of those plans go even slightly wrong, and the growth doesn’t materialize, or a recession hits, then gold will be the only asset worth holding. The only real surprise is that it has taken so long for gold to start soaring in price – and now that it has started, it won’t stop until borrowing comes under control again.