Rising Financial Stress for Consumers Could Spark Gold Rally

Expectations that the Fed will continue and perhaps even quicken the pace of interest rates hikes have created headwinds for gold. But there another side to the rising interest rate phenomenon that a lot of people in the mainstream seem to be missing. According to a recent Bloomberg report, the prospect of a higher interest rate environment is feeding signs of financial stress among debt-laden consumers.

This doesn’t bode well for the US economy and could spur safe-haven demand for gold. 

The yield on 10-year Treasuries has gone up by over 40 basis points this year and will likely climb further.  In order to finance the spiraling deficit, the Treasury Department plans to auction off around $1.4 trillion in Treasuries this year. And it won’t end there. The department expects that pace of borrowing to continue over the next several years.

Meanwhile, demand for US debt seems to be on the decline. The Fed is committed to a policy of quantitative tightening. It ostensibly won’t be buying bonds. Japan and China have both announced plans to reduce their purchase of US Treasuries. So, who is going to buy all of these bonds?

Basic supply and demand dynamics in the bond market indicate yields will continue to rise as the government tries to entice a reluctant market to buy its debt.

So, what does this mean for the average US consumer?

Well, it’s not good news, as the Bloomberg report points out. American households are already struggling to pay down record levels of household debt including credit card bills that have eclipsed pre-financial crisis levels. As bond yields rise, interest rates on credit cards, mortgages and auto loans will rise along with them. According to Bloomberg, with consumers already deeply in the red, rising rates are “dimming the outlook for consumer spending that helped fuel US growth. Those concerns have been widely overlooked by investors but will spur demand for haven assets like gold.”

Delinquency rates on credit cards and auto loans are already rising, providing a tangible sign of consumer stress. Sprott Inc. senior portfolio manager Trey Reik told Bloomberg rising rates could push even more people over the edge.

With as much debt as there is in the system, if you have a backup in rates, you’re going to see a default wave pretty quickly. You’re going to have personal bankruptcies flare up. Gold really does well when financial stress starts to take takes hold in the system.”

Consumer debt also erodes the benefits of rising wages. Obviously, if you’re paying more money to service your debt, you have less money left to buy stuff. We’re already seeing signs of this. Retail sales have dropped for three consecutive months. This does not bode well for a US economy that depends on consumer spending for growth. It makes up about 65% of GDP.

Reik said even if we see synchronized global expansion, consumer debt will significantly reduce any benefit from rising wages. This undercuts the argument from gold bears that an improving world economy will dampen haven demand for gold, Reik said.

So yes, US consumers are stressed. Peter Schiff put it another way. Americans are broke. Rising interest rates will exacerbate the situation. So, maybe this whole rising interest rate thing isn’t as bad for gold as the pundits would lead you to believe.

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