Gold’s ongoing rally could signal a warning about the rapidly rising national debt. A glance at history highlights the similarities between today’s economic climate and the 1990s. Overconfident stock markets and aggressive interest rate policies mark both. However, today’s situation is distinguished by the looming $35 trillion debt crisis. Unlike in the late 1990s, when gold was largely overlooked, the rapid accumulation of debt is now a key driver behind gold’s surge to unprecedented heights.
1999 vs 2024
Despite being 25 years apart, these periods share significant economic parallels. In the mid-1990s, under Alan Greenspan’s leadership, the Federal Reserve initiated sharp quantitative tightening policies, nearly doubling short-term interest rates. This occurred alongside the dot-com boom, which catapulted the fledgling tech sector to new heights.
Fast forward to today, Jerome Powell’s Fed has raised interest rates from near zero to over 5%. The influx of easy money into the economy has once again flowed into the stock market, with today’s tech-driven catalyst being the AI revolution, pushing the Magnificent 7 and the broader market to record levels.
The Debt Factor
That’s where the overlap between these economies ends. The X factor in today’s market is the unchecked debt growth. In 1999, U.S. debt stood at $5.6 trillion, with a debt-to-GDP ratio of 58.9%. For reference, most economists consider anything below 60% to be manageable and sustainable, including the International Monetary Fund (IMF).
A quarter century later, the national debt has exploded to over $35 trillion. Meanwhile, the country’s ability to service that debt has plummeted, with the debt-to-GDP ratio nearing a record high of over 120%. This burden weighing on today’s economic health is already producing negative side effects. While the consequences are numerous, they’re all reflected in a market-wide shift from the dollar to gold.
The Golden Divergence
The economic overlap between 1999 and 2024 doesn’t extend to gold’s performance, either. Following the stark interest rate intervention of the 1990s, gold entered an extended period of net selling. At the time, Great Britain shed over half of its reserves. Gold prices fell to a relative low of $260, falling more than 67% from its previous peak of $800.
The story reads nearly the opposite today. In 2024 alone, gold prices have surged over 30%. Over the past few years, central banks have been buying gold at record rates. Demand from nations across the globe reaches peak levels in 2022, 2023, and the first half of 2024 — a trend that the World Gold Council (WGC) expects to continue.
What’s Driving Dollar Weakness?
Dollar weakness is a core driver of gold demand as everyone from retail investors to central banks seeks out more stable assets. However, that doesn’t explain why the dollar is being thrown by the wayside. Here are some of the key components behind the weakening USD:
Fiscal Mismanagement — Domestic fiscal policies have a massive impact on how the dollar is perceived abroad. The past decade of Modern Monetary Theory (MMT) has burnt a $35 trillion-sized hole in Uncle Sam’s pocket, leading many countries to reconsider the dollar’s dependability and value.
Dollar Weaponization — Economic sanctions are one of the principal ways the US penalizes foreign actors. Recently, recipients of these financial barriers — namely, Russia and China — have purposefully offloaded USD reserves to reduce the impact of these sanctions. This has led to record amounts of international trade being conducted in local currencies.
De-Dollarization — Across the globe, countries are deciding that a debt-laden and threat-backed dollar simply isn’t worth it. Led by the BRICS block, dozens of emerging economies are proactively reducing their dependence on the greenback. Instead, they’re stacking gold to pad local currencies and strengthen domestic economic foundations.
Investors Should Take Note
Gold’s strength is sending a clear message to investors: US debt isn’t sustainable. Barring a 180-degree transformation in fiscal policies, the federal government is going to drive the economy off a cliff. This threatens to leave the dollar at the bottom of the heap of valueless paper currencies. Central banks – the most well-informed and experienced investors – are turning to gold to gain protection from the incoming volatility. Savvy investors are following suit, using gold as wealth insurance.
