Asset Strategy, Market Insights

Should You Buy Gold to Protect You When Debt Causes the Next Stock Market Crash?

Gold Alliance disclaimer

Global wealth is rising—or is it?

Total global wealth increased by around 10% in 2019, which is the most significant increase since 2012. According to the eighth edition of Credit Suisse’s Global Wealth Report, total global wealth at the end of 2019, the latest data available, amounts to a whopping $399 trillion.

However, we should pay very careful attention to how the financial industry defines “wealth.” What they really mean is not wealth, but really assets, and there is big difference.

When you use the term “wealth” for “assets,” you can conveniently discount the debt behind the wealth: If I own a home purchased for $400,000 using a mortgage of $300,000. My asset is worth $400,000, but my wealth is really my asset minus my debt or $100,000. So, instead of being impressed by the trillions of so called wealth, we should make sure to look at net wealth, which is the only measure of wealth.


Now it is clearer why the financial sector prefers to focus on assets since they would like you to ignore the fact that global debt is increasing much faster than its wealth. In fact, global debt is projected to reach $277 trillion by the end of 2020!

Global wealth is surging but so is global debt. Let’s look at the development over the past 20 years: Since the late 1990s, we have witnessed an increase in global debt from $50 trillion to $277 trillion while global wealth grew from $120 trillion to $399 trillion. In other words, global debt increased by 454% while global wealth increased by only 233%.

There is a clear trend that has marked the global economy over the past 20 years. We are going broke.

What makes this worse is the fact that the debt mentioned is only the debt that has been reported. For instance, it doesn’t account for Foreign Exchange Swaps (a short-term debt instrument that is believed to be as high as $54 trillion). Let’s not think about how that affects the equation…

What are the dangers of rising debt?

No one knows how much debt, globally, is too much debt. However, history shows that high debt is associated with weakened economic growth. So, the debt that is accumulating across the world is dampening economic growth while increasing the risk of defaults, crashes, and other crises.

The problem that is facing world leaders is the fact that we need more debt (both government and private spending) to boost the economy. And increased debt means higher risks of triggering a financial crisis like the one we saw about a decade ago—which we are still recovering from.

The warning signs are there, and luckily some are watching. Chief economist at the IMF, Olivier Blanchard, has stated, “The post-crisis world is a world of high debt, and it doesn’t take much. It just takes a bad shock for the debt dynamics to go wrong.”

The financial sector played a big role in the crash in 2008, and it’s evident that it’s role in the global economy is important, yet comes with risks. Today, global markets are more intertwined than ever, and a wrong move in one end of the world can affect economies in the other end. Examples include Greece’s effect on Europe and the Lehman Bros. collapse in 2008, which played a role in kickstarting the global financial crisis.

How will the rising debt affect you?

A look at the US budget shows that we’re on a dangerous path: Spending and debt are both frighteningly high, and it doesn’t look like either is going to slow down, in particular because of the raging pandemic.

Advanced economies like the US economy may experience significant and long-lasting impaired economic growth when public debt reaches 90% of GDP, according to research. And the US has passed this threshold. In those situations, interest rates will be increased in order to reduce private investment and raise inflation.

If that happens, the implications will be significant for all Americans, especially the poor, the elderly, and the middle class. In times like those, precious metals have proven their value in protecting our wealth. That is why Bridgewater Associates, the world’s largest hedge fund, which makes its income mostly from stock market related assets, has recently recommended its clients to invest a portion of their portfolio in gold. When someone who is traditionally against gold, makes this kind of recommendation, make sure to take their recommendation to heart.