Corporate Debt

Many investors focus on public debt. But investors should not overlook private debt. In a way, high private debt is even more dangerous. Just think about the global financial crisis which was partially caused by excessive mortgaging accompanied by offloading such securities into CDOs sold to unsuspecting investors.

Similarly, the corporate debt, which is  (the combined debt of corporate businesses) –can be also alarming. Indeed, as the chart below shows, the U.S. corporate debt as a share of GDP (understood just as debt securities and loans of large companies) jumped from 43 percent at the end of 2007 to 47 percent in Q1 2019, a record high (and total corporate debt is even higher, about 74 percent of the GDP).

Chart 1: U.S. corporate debt as a % of GDP from Q1 1952 to Q1 2019.

US Corporate Debt to GDP and Gold Chart

Corporate Debt and Gold
What is the link between the corporate debt and gold? First of all, the excessive corporate indebtedness implies an elevated risk of an economic crisis, which would boost the safe-haven demand for gold. This risk is not small – many U.S. companies are more leveraged now than before the Great Recession, as their debts have risen faster than their profits. Actually, many managers borrowed money just to buy back shares and thus goose corporate profitability, not to grow the bottom line.

Moreover, today’s universe of debtors includes a higher proportion of riskier companies. In thThe U.S., the BBB-rated bonds constitute now about half of all investment-grade bonds, up from 31 percent in 2000. They are just one downgrade away from becoming junk bonds, which makes them more sensitive to reduction in revenue, increase in interest rates, or any negative economic shock.

Such a fragile situation in a corporate world explains the dovish monetary policy. The Fed cannot significantly hike the federal funds rate without triggering downgrades and bankruptcies. The world of low interest rates should support the yellow metal.