Global debt threat will grow in 2020 and that is good for gold prices -- Incrementum AG
(Kitco News) - While geopolitical uncertainty will add volatility to the gold market, investors should be paying attention to a much bigger factor: growing global debt, according to one fund manager.
In a telephone interview with Kitco News last month, Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said that gold prices have much further to go in 2020 as central banks and governments around the world continue to pump liquidity into financial markets.
Ronald-Peter Stoeferle, fund manager at Incrementum AG
“Debt is going to be a big issue in 2020,” he said. “We are actively talking about Modern Monetary Policy (MMP); it’s becoming a main stream topic and I think that is telling us what we can expect for global debt.”
Not only does gold look good in a growing debt environment, but Stoeferle explained that the only way to pay for all this debt is to promote inflation.
In this environment, Stoeferle said that he could see gold prices pushing above $1,800 an ounce by the end of the year. The comments come after the gold market saw its best gains in nearly a decade in 2019.
Last year, the gold market broke a six-year trading channel in early summer as global central banks loosened monetary policy, and debt growth pushed negative-yielding bonds to $17 trillion.
The world finally realized the threat of negative yields in 2019, but Stoferle said that nothing is being done to fix the issues. He said that he sees negative bonds and negative real bond yields as a significant threat for investors.
“When will people finally lose total trust in the financial system? It’s hard to predict but I think [when] you have real rates at -2% or -3%, that will be the breaking point,” he said. “Right now, everything on the surface looks fine but it wouldn’t take much to push markets and investors into a panic.”
But it’s not just Stoeferle that is looking at the threat of growing debt. The Institute of International Finance noted that global debt hit a record high of $253 trillion in the third quarter of 2019. The analysts added that economic growth is seeing diminishing returns on the new debt.
“By sector, general government and non-financial corporates saw the biggest increases, helping bring the overall global debt-to-GDP ratio to a fresh high of over 322%,” the IIF said in a report Tuesday. “Preliminary data for full year 2019 suggest that the global debt-to-GDP ratio grew at its fastest pace since 2016—even as global growth fell to its slowest pace since the 2008-2009 financial crisis.”
Looking at 2020, the global advocacy organization said that it sees debt growing even bigger.
“Spurred by low interest rates and loose financial conditions, we estimate that total global debt will exceed $257 trillion in Q1 2020, driven mainly by non-financial sector debt,” the analysts said.