Groundhog Day

As so often in recent decades, the US is slowly but surely approaching the debt ceiling. The debate between the two main protagonists in Washington - the Democrats and the Republicans - is already in full swing. This summer, the limit to which the US government is allowed to incur maximum debt will be reached again. 

The media attention is already palpable and investor nervousness is likely to increase. The danger for the capital markets can best be compared to 2011, when the United States was on the verge of national bankruptcy and was also downgraded by the S&P rating agency. At that time, a comparable political setup prevailed in Washington with a Democratic president and a narrow majority of Democrats in the Senate and the House of Representatives.

The financial markets remain calm, but some unease remains as US one-year credit default swaps (CDS) have risen in recent weeks but are not (yet) at worrying levels.

High structural deficit

For investors, the question is why this situation keeps repeating itself in the US. It can be said that for the most part it has not mattered much who was in charge in Washington. The political elite in the White House and in the Capitol (Senate and House of Representatives) have not given priority in recent times to whether the US has incurred less or more debt, as long as their own agenda could be pursued. Both parties have blamed each other for the ever-growing mountain of debt. This has now grown to over 31 trillion US dollars and will continue to rise massively over the next ten years. Estimates by the Congressional Budget Office (CBO) and the International Monetary Fund (IMF) assume that the US will run a structural deficit of 5-7% of gross domestic product (GDP) over the next ten years. While the US has so far needed less than 10% of its budget to service outstanding debt, the share will increase to up to 15% in the coming years.

Potential brake on growth

The US economy is already experiencing sluggish growth and on the brink of a potential recession. Uncertainty around the debt ceiling could be a classic dampener of sentiment and could literally be the straw that breaks the camel's back. Therefore, politicians in Washington are playing a very dangerous game with an uncertain outcome - also in view of next year's elections. Moreover, the situation for the US Federal Reserve (Fed) is already complex enough with the challenge of restoring price stability and the recent regional banking quake. So, the room for manoeuvre is getting tighter.

Gold as a safe haven

In this environment with a "tail risk" of the US debt ceiling, we consider gold not only a safe haven, but also a good hedge against increased equity market volatility. We therefore continue to overweight gold in our asset allocation.