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$Barrick Gold Corp(GOLD)$ $SPDR Gold Shares(GLD)$ $iShares 20+ Year Treasury Bond ETF(TLT)$

Gold’s Breakout and Performance

At the start of 2024, gold broke out of a 13-year consolidation phase that had been forming since 2011. Since then, it has become one of the strongest-performing financial assets. Over the past 12 months alone, gold has surged by more than 35%, and when measured from its October 2022 low, the increase reaches 60%.

Gold as a Hedge Against a U.S. Debt Crisis

Many investors believe gold’s strength signals potential concerns about a U.S. debt crisis. Renowned investor Ray Dalio has suggested that investors should buy gold as protection against a possible debt crisis. Gold competes directly with U.S. Treasury bonds, both of which have traditionally been considered safe-haven assets for diversifying portfolios and hedging against stock market risk.

Gold vs. Treasury Bonds: A Diverging Trend

Historically, Treasury bonds have been the preferred hedge due to their stable interest payments. However, since 2020, their performance has been dismal. The ETF that tracks U.S. Treasury bond prices, TLT, has dropped by 37%, severely impacting investor portfolios. Meanwhile, gold has surged by 80% over the same period, raising questions about whether investors are shifting away from Treasuries due to growing debt concerns.

The Rising U.S. Debt Burden

Before the pandemic, in early 2020, U.S. government debt stood at $23.2 trillion. Fast forward to Q3 of 2024, and that number has skyrocketed to nearly $35.5 trillion. However, GDP growth has not kept pace with this massive increase in debt. Since GDP is directly tied to tax revenue collection, this disparity raises concerns about the government's ability to service its growing debt load.

Debt-to-GDP Ratio and Financial Risk

Historically, U.S. GDP always remained higher than national debt—until 2015, when debt surpassed GDP for the first time. Since then, the gap has only widened, pushing the debt-to-GDP ratio to alarming levels. Economic research suggests that a high debt-to-GDP ratio signals increasing financial risk, making it harder for a country to repay its obligations. As a result, this can lead to credit rating downgrades, higher borrowing costs, and even a potential default risk.

Investor Shift from Bonds to Gold

With rising concerns about U.S. government solvency, investors have been reallocating their portfolios away from Treasury bonds and into gold. The key question now is whether this trend will persist in the coming months.

Government Spending’s Impact on Gold vs. Treasuries

Examining historical data on U.S. government spending shows a clear pattern:

• When government spending increases, gold outperforms Treasury bonds.

• When spending decreases (austerity periods), Treasury bonds regain strength.

In the early 2000s, rising government expenditures drove gold’s outperformance until spending cuts in 2010 reversed the trend. Since then, government spending has steadily increased, fueling gold’s rally.

Government Spending and Its Impact on Gold vs. Treasuries

When government spending declines, gold tends to underperform Treasury bonds. A historical example of this occurred in the early 2000s, when rapidly increasing government expenditures led to gold outperforming Treasuries. However, this trend reversed in 2010, when government spending dropped significantly, putting downward pressure on the gold-to-Treasury ratio.

Since then, government spending has steadily increased, leading to consistent outperformance of gold. The most recent surge in spending has undoubtedly contributed to Treasury bonds’ poor performance relative to gold. The key question now is whether this trend will continue or if we are on the verge of a reversal, as the U.S. government attempts to rein in its expenses.

Trump’s Proposed Spending Cuts

One of Donald Trump’s major policy goals is to reduce government spending. To achieve this, he plans to establish the Department of Government Efficiency (DGE). This new department would focus on:

• Eliminating unnecessary expenditures

• Streamlining federal agencies

• Cutting ineffective government programs

Additionally, Trump aims to implement a federal hiring freeze and consolidate over 400 federal agencies into roughly 99, reducing the federal workforce and lowering administrative costs. Whether these measures will be effective remains to be seen. If successful, they could curb government spending and potentially end gold’s outperformance against Treasuries.

Challenges in Cutting Government Spending

However, reducing U.S. government spending may not be as simple as it sounds. Approximately 30% of total government expenditures go toward healthcare, a sector that has seen rising costs over the years. In 2009, U.S. healthcare spending was 5% of GDP, but today, that figure has risen to nearly 6%—and is expected to reach 8% within the next 30 years, according to the Congressional Budget Office. The primary drivers of this increase include:

• An aging population

• The growing prevalence of chronic diseases like obesity and diabetes

These challenges make healthcare a difficult area for budget cuts, as they require long-term policy solutions rather than simple spending reductions.

Other Uncontrollable Costs: Interest and Defense Spending

Beyond healthcare, interest payments on U.S. debt are another major expense that is largely out of the government’s control. These payments are projected to rise from 3% to 6% of GDP over the coming years.

Additionally, defense spending remains a significant portion of the federal budget, accounting for 13.3% of total expenditures. With ongoing global conflicts and rising geopolitical tensions, the U.S. may actually increase defense spending rather than cut it. For example, since Russia’s invasion of Ukraine in February 2022, the U.S. has already provided $66.5 billion in military aid.

The Future of Gold vs. Treasuries

While the new administration appears committed to reducing government expenses, achieving meaningful cuts may prove challenging. With healthcare, interest costs, and defense spending collectively making up over 50% of total government expenditures, it will be difficult to significantly reduce spending without addressing these areas.

If the government successfully cuts spending, investors could rotate back into Treasuries at gold’s expense. However, if spending continues at its current pace, gold is likely to maintain its long-term outperformance.

Historically, gold has served as a reliable indicator of market sentiment toward U.S. debt concerns. Its recent recovery suggests that investors remain wary of the U.S. fiscal situation—at least for now.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.