Last week, I discussed bonds, but today I'd like to delve a little deeper.

Let's go back to basics: how does a government bond work exactly? Suppose a country like the United States 'sells' a 10-year government bond (US10Y) to investor A. In return, investor A receives (currently) 4.48% interest per year. At the end of the term, investor A receives back the original invested amount.

In this way, the United States receives borrowed money in exchange for a percentage of annual interest. But how much interest did investors receive in 2023?

The numbers tell the story. Last year, investors received nearly $900 billion in annual interest from U.S. government bonds, twice the average of the past decade. That amount will rise because almost all government bonds now offer yields of 4% or more. In mid-2020, none did.

Investors in 10-year U.S. government bonds are finally earning a decent return on a 'safe investment.' On the other hand, this situation is costing the United States an enormous amount of money, something that doesn't seem sustainable in the long run.

U.S. statistics:
Budget deficit: $1.8 trillion
Government debt: $34.7 trillion
GDP: $28.4 trillion
Gold reserves (May 9, 2024): $605 billion

With high interest rates, the U.S. is running dry, causing debts to soar even further. How are these debts financed? Tax increases? No, the money is simply borrowed (printed!) again. Borrowing to pay off debts seems like a bad idea, but it has always worked so far. Is this merely postponing the inevitable? 'Kicking the can down the road,' if you ask me.

As long as the U.S. (the FED) can print dollars, debts can continue to be paid off. But printing dollars doesn't come without consequences. For instance, it has led to an enormous inflation rate of 21.1% since April 2019! Moreover, other countries seem to be becoming aware of the declining value of the dollar. China and India, for example, no longer want to settle oil transactions in dollars. Although the dollar is still the world's reserve currency, this cannot be changed in the short term. However, this may change with the rise of the BRICS countries and their plans to introduce a new global reserve currency.

Invest in Gold

As you can see in the statistics above, the United States has a substantial gold reserve of 8,133,000 kg, representing a value of $605 billion. This puts them at the top of the list of countries with the largest gold reserves.
 
The only real money, gold, represents only 33.6% of the budget deficit, meaning it's not enough to straighten out the financial situation in one go.
 
However, if interest rates fall, the budget deficit will also shrink, as government spending, including interest payments, will decrease.
 
Additionally, tax revenues are likely to rise because companies will find it more attractive to borrow and invest, leading to more jobs and thus more taxpayers.
 
A nice bonus for the American budget is that gold, traditionally, increases in value when interest rates are low. The biggest concern with not raising interest rates is that inflation could flare up again, which would erode the purchasing power of the average American.
 
Want to preserve your purchasing power?

Consider a purchase of physical gold.

The FED's mandate has two components: price stability (2% inflation) and full employment. Jerome Powell and the other FED governors face a tough decision that will ultimately impact the entire world.
Ready to make the most of these insights? Open an account at GoldRepublic today and start securing your investment in gold.

Ready to make the most of these insights? Open an account at GoldRepublic today and start securing your investment in gold.

Open Account

Disclaimer: The information on this webpage is not considered investment advice or an investment recommendation.