Credit crisis unfolding

Usually, credit crises are in the private sector. Today, it’s a global government funding crisis from which there’s no rescue. Gold and silver are the escape route.

This week brought the beginning of a government financing train-wreck to public attention, affecting all G7 nations. That it is only the start of a crisis is the key point, as our oft repeated chart below has been clearly demonstrating since the forty-year downtrend in bond yields was comprehensively broken in 2022:

It has clearly broken out on the upside. The reason is simple and always leads to the end of a currency’s existence: the accumulation of government debt. A fiat currency is the politicians’ licence to spend without limitation — until suddenly they cannot. They then face a debt trap which is the public sector equivalent of insolvency and bankruptcy, in which the higher the bond yield goes, the higher it must go again. That is where we are now.

President Trump’s promise this week to reward all US citizens with $5,000 each if they elect Republican majorities in both houses in the midterms adds a further $1.2 trillion to the existing estimated US budget deficit of over $2 trillion, which Treasury Secretary Bessent can’t even fund. As a politician, Trump is not alone in failing to grasp the existential importance of the financial crises facing his government.

For all G7 nations caught in this trap it is a novel situation, and markets are unsure how to react. Government regulators, macroeconomists, and accountants all say the risk-free non-investment position is cash in your currency of account. The risk-free investment position is said to be 10-year US Treasury notes, because government bonds are deemed low risk and the dollar is the reserve currency to which the others refer. These assumptions are now being challenged by events. 

The chart below compares the daily close of gold, oil, and the 10-year US Treasury yield over the last eight weeks. The reason for showing it is that higher bond yields and oil prices are seen conventionally as headwinds for gold. Yet, with bond yields rising and the oil price soaring gold is up 8% even in the depths of its own correction having peaked at up 16% on 25^th August. The assumptions that cash and government bonds are risk-free and the lowest investment risk respectively are being disproved by current events.

You don’t have to be a chartist to understand that oil prices are going higher still. The cracked components of a barrel of oil are currently over $70 above the price of crude which itself is at $100, giving a true value of $150—$160 per barrel allowing for normal refinery margins. These prices feed into every consumer product, if only through increasing logistical costs. Add to this factor impending food shortages due to a combination of a European drought cutting cereal yields up to half and vital Ukrainian harvest exports closed down by the closure of its Black Sea ports, and the impetus behind rising global wholesale and consumer prices is still badly underestimated.

The outlook is for a different type of crisis from any seen before. In the past, it has been the private sectors which have had to be rescued by governments. This time, it is governments in trouble, but with no one to rescue them. And when government funding runs into the brick wall of ever-rising bond yields, it takes down private sector activities with it.

It should become increasingly clear in the coming weeks that gold is the escape from escalating problems and rapidly rising risks associated with the global fiat currency regime. Higher bond yields are the wake-up call for complacent investors who fail to understand that rising gold and commodity prices reflect the decline in their own currency’s purchasing power and not speculation.

 As an end note, our final chart shows what happened in the last significant oil crisis, which was in 1973—1974 when OPEC raised its reference prices in two steps:

There’s every reason to believe that this pattern is in the early stages of repetition today; in which case the dollar price of gold will probably double from here in a matter of not many months.