Bond markets don't make many headlines, but right now they're flashing a warning. Government bond yields are climbing across the world, and the US is leading the charge.
When governments are carrying debt loads this large, rising yields push them towards what's called a sovereign debt crisis. I think that's where the US is heading, and I think precious metals are one of the clearest places to be when it happens.
Here's why, and what Greece can tell us about how it plays out.
What a Bond Yield Is and Why It Matters
A yield is simply the interest rate a government pays on the money it has borrowed. When the yield on a country's bonds goes up, that country is paying more to service its debt.
Over the past five years, 10 year government bond yields have climbed in the US, the UK, Australia, France, Germany and Japan. The US 10 year yield is now above 5%, a level I can't find it reaching at any point since before the global financial crisis.
That matters because of the size of what's being borrowed. The US is around $40 trillion in debt and adding roughly $2 trillion every year. Put higher interest costs on top of that, and the numbers get very hard to manage.
What Is a Sovereign Debt Crisis?
It's a fancy way of describing a country that can no longer manage or pay its debts. We've talked about this at Liberty Bullion for a while, pointing at the US federal debt and saying I don't see how it gets paid off.
It has happened before. In the eurozone crisis around 2009, countries like Greece, Portugal, Italy and Spain faced massive borrowing costs and needed bailouts and debt restructurings to get out of it.
Greece Then, the US Now
Greece is the example I keep coming back to. Its debt was around $400 billion, and its debt to GDP ratio went from about 120% to 180% as the crisis unfolded.
For the US, $400 billion looks like pocket change next to $40 trillion. But going into the crisis, the two countries had very similar debt to GDP levels. With interest rates rising on a huge debt load, I think the US could reach 180% quite quickly, particularly if GDP drops or a banking system bailout adds to the debt.
Greece was bailed out by groups like the IMF. Who bails out the US government for $40 trillion, in a world where every government is struggling at once? I don't think the IMF can.
The Way Out: Inflation
If a bailout isn't coming, the other way to shrink a debt problem is inflation. And Donald Trump has said it out loud. In an interview with TIME, he said "certain levels of inflation will also pay off that debt very rapidly."
He also said high interest rates are hurting the country more than inflation is, and that the US should have the lowest interest rate in the world. To me, that's the playbook in plain sight.
The catch is who pays for it. Inflation tends to benefit people who own assets, at the expense of everyone else, and particularly people who save in US dollars or in US dollar assets like bonds.
Who Lost and Who Thrived in Greece
The Greek crisis shows how this plays out across asset classes:
- Property: house prices fell by up to 42%.
- Stocks: the Greek stock index fell around 90% from its 2007 high.
- Banks: the Greek banking index fell 99.6%.
In 2015 it got so bad that Greece shut its banks, limited cash withdrawals to €60 a day at ATMs, and closed the stock exchange for five weeks. I'm not saying that's about to happen here, and I'm not calling doomsday. But sovereign debt crises are huge events for financial systems, and what comes out the other side tends to be a very different system.
Gold in Greece: The Winner
So who came out ahead? Precious metals. Priced in euros, gold was about €475 an ounce in January 2007. By 2015, when the banking trouble really kicked in, it was over €1,000, more than double. Today it's over €3,500.
Looking back at periods of high inflation, I think that's the pattern. Precious metals have tended to outperform stocks, property and most other asset classes, including the assets your industry super fund is made up of. If you're curious how this has played out here, I compared 17 years of returns in Gold vs Australian Industry Super Funds.
This is not financial advice. This is insight into what I do with my own money, not a recommendation for what you should do with yours, and past performance is no guarantee of future returns.
What I'm Doing About It
For me, this is an opportunity to take some of the wealth I've built in other assets and move it into precious metals, so I'm better positioned for whatever comes next. You can follow both metals on our live metal charts.
If you want to hold physical metal, we stock gold bars and silver bars, with professional vault storage if you'd rather not keep it at home. And if you want it inside your super, a self-managed super fund can hold physical metal. Speak with a licensed adviser and an SMSF specialist about your own situation first.
What a time to be alive.
Sam from Liberty Bullion.
