World debt growth and the gold price

External debt stocks both in the low and middle – income countries as well as high income countries have increased over the past year. While external debt stock of low to middle income countries declined for the first time in two decades in 2015, this trend reversed back in 2016.

Low and middle income countries, excluding China, saw an average increase of 3% in the first half of 2016 as long term debt outpaced its short-term counterpart in most countries. Trends varied greatly by country with Middle East and North Africa recording the strongest upswing in external debt stock of 8.4%, driven strongly a spike in short term debt in Egypt. Conversely, the outstanding debt stock of low- and middle-income countries in the East Asia and Pacific region contracted 1.1%, largely on account of the 7% contraction in short term debt reported by China. The picture was very uneven in Latin America and the Caribbean particularly with regards to its short term debt stock- with Brazil recording a 25% spike and a 19% contraction in Mexico. Debt stocks increased  2.5% in Europe and Central Asia and only 1.1% in South Asia where external debt stock at end June 2016 for India was little changed from its end 2015 level.



Source: World Bank


The gross external debt position of high-income countries stood $70.2 trillion at the end of June 2016. This amounted to a 4.2% increase year on year – a rate of increase more than double than that of low and middle income countries. The countries who saw the largest increases in their external debt stock in the first half of 2016 were – Japan (20% up), Belgium (13%), Lithuania (13%) and Latvia (13%). Iceland continued with its public debt consolidation program and the implementation of rigorous public borrowing guidelines – posting a 16% decline in its external public debt position in the first half of 2016 as a result. Other countries which exhibited the declines in their external debt stocks during the same time period were – Uruguay (down 5%), Ireland (4%) and Croatia (3%).

The main driver of the overall increase in the gross external debt position of high-income countries was an increase in the external debt liabilities of deposit-taking corporations (except central banks), which rose by 5 percent to $22.2 trillion. Also adding to the increase was a rise in external debt liabilities of the General Government, Other Sectors and Direct Investment: Intercompany Lending which all rose by an average of 4 percent.



Source: World Bank

The United States saw a decline in its external debt – down from $6.3 trillion at the end of 2015Q4 to 6.2% trillion in 2016Q4. Similarly, United Kingdom saw a moderate decline in its external debt in the same time period – down from $787.3bn to $755bn.

Evaluation of this metric matters when looking at gold prices and investment. Heavily indebted countries generally experience slower long term growth than those that are not. As a result there tends to be more investment into gold flowing in as witnessed over the past 5 years. With a few exceptions the relationship between the price of gold and the accumulation of debt is nearly one-to-one as was evident by the recent dynamic of investments. Taking into account structural deficiencies plaguing many European as well as emerging economies and continued political uncertainty in the US it expected that the external debt levels will remain elevated over the medium term, with the potential to exert upward price pressures on gold.