When the gold price is soaring, we should all be afraid

America owes the world $US36 trillion ($57 trillion). Its national debt is bigger than the sum of all it produces each year by almost £10 trillion ($21 trillion), a number so large it defies public comprehension. The country spends more on debt interest payments than it does on defence – a historically unusual position. Medicare and social security outstrip resources focused on tanks and guns.

In 1984, after Ronald Reagan’s tax cuts spurred growth to 7.2 per cent, America’s debt-to-gross domestic product ratio stood at 38 per cent. It is now at 122 per cent, higher than during the Second World War and 50 percentage points above the figure the World Bank believes increases default risk, at least for lesser mortals. Only COVID-19 obliged the federal government to borrow more.

US President Donald Trump has sent sharemarkets into a spin.Credit: Bloomberg

The world economic system has traditionally supported America’s largesse – a country that saves less than it spends and consumes more than it makes. It has sucked in people and products from around the world so that its citizens could get rich buying manufactured products cheaply and flooding global markets with services and technology everybody wanted.

To gain such exalted status, the US used the global financial system as the bank of mum and dad. It could demand cheap credit because its currency was trusted, its entrepreneurial flair admired and its systems stable. All nations, where they could, obliged. Japan owns $US1.1 trillion of US debt, China $US770 billion and Britain $US765 billion. Paybacks were guaranteed.

No one was ripping off the bald eagle because everything worked in the country’s favour, including a global technology and banking system that has produced some of the most profitable institutions ever seen. Trade in tech and financial services – a sector that employs millions of Americans – creates significant surpluses for the US. Donald Trump scarcely mentions it.

In less than 100 days, the president has planted questions in investors’ minds no one expected. Is America too risky? Should we keep buying so much of its debt? What will Trump do next?

The president of the US may be the most powerful person in the world, but the credit markets are the most powerful force in the world – a delicate set of interconnected flows that politicians meddle with at their peril. Much of it relies on, to use Mark Carney’s phrase, the “kindness of strangers”. When those strangers are the countries you have just hit with growth-sapping tariffs, the downside risks are clear.

Just the tremor of evidence last week that some of America’s largest debt investors were cooling on US Treasuries led to spikes in borrowing costs. The VIX market volatility index reached levels not seen since the financial crisis as the White House was forced into a major reversal in its tariffs policy, from appallingly high to just very high. A 90-day pause to the most egregious would at least allow some room for deal-making.

If the president thought that with one leap he would be free, investors had other ideas – pulling out of less attractive and highly leveraged US debt structures as opaque to Trump as liability-driven investments were to former British prime minister Liz Truss. Markets jumped up and then fell again. The cost of servicing US debts remains at escalated levels.

Gold has been the winner in a world full of president-created risk – hitting record valuations over the weekend. The ultimate flight to safety, its ownership is a shelter against capricious politicians. As recession risk and inflation risk climb, demand for bullion grows, faith in an inert metal trumping gyrating markets.

Gold hit record valuations over the weekend.Credit: Trevor Collens

Traders – more fearful now of economic pain ahead – are pricing in three interest rate cuts in the US this year. “The next step is going to be, at some point, the Fed coming in – and that gives the next leg up for gold,” Dominic Schnider, of UBS Global Wealth Management, told Bloomberg. Gold and canaries in coal mines share more in common than their colour.

With the “bullion bounce” heading ever upwards, can Trump steady the ship? He continues throwing policies overboard, the US Customs and Border Protection agency announcing late on Friday that smartphones and computers would now be exempted from tariffs. The change means that 23 per cent of US imports from China will avoid the 145 per cent tariffs Trump insisted were necessary to stop the country “ransacking our factories”.

Unlike other nations that the president claimed were “kissing my ass”, China has responded to his tariff policies not with offers of negotiation, but with retaliation. Concessions have come all the same, the president’s advisers correctly judging that voters are more concerned about the price of their iPhones and laptops than they are about the intricacies of Trump’s Make America Wealthy Again trade policies.

“Expensive iPhones and other high-end consumer electronics purchased mostly by the well-off/affluent are exempted; but the 80 per cent of good Chinese cheap consumer goods purchased by [Trump’s] left-behind blue-collar base at Dollar Stores, Walmart, Costco and other low-price retailers are slapped with a 145 per cent tariff,” Nouriel Roubini, an economist, posted on X after the latest announcement.

“Most of them are low-end, low-value-added, labour-intensive, good-quality, cheap Chinese products that we never manufactured in the US in the first place, or that we stopped producing decades ago as it is not to our advantage to produce low-end cheap goods!”

As the internal logic of Trump’s tariff war collapses, memes of AI-generated Americans sitting at sewing machines stitching trainers have been viewed millions of times.

Major policy shifts made at the dead of night do little to engender confidence, even if Apple’s Tim Cook will be delighted. A note from Capital Economics, a think tank, reveals that the overall effective tariff rate on US imports has now gyrated from 2.3 per cent last year, up to 27 per cent this year and back down to 22 per cent. No wonder the world is feeling “a little queasy”.

Trump has a romantic idea of America’s past, in his first term telling his adviser Gary Cohn, once of Goldman Sachs, that he saw “parts of Pennsylvania that used to be big steel towns and now they’re desolate”.

“That may be true,” Cohn replied. “But there were towns 100 years ago that made horse carriages and buggy whips. They had to reinvent themselves.” The president is at war with himself: one part isolationist, one part freewheeling, free-market dealer. At risk is the very system that made America so successful and wealthy.

The Telegraph, London

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.