Gold & Silver Stay Strong Despite 2026 Chaos

Hitting The Wall

The war in Iran has sparked fears of inflation and a selloff in sovereign debt around the globe. Slightly higher rates can be managed by global central banks, but sharply higher rates cannot. As such, a moment is fast approaching where central bankers will be forced to choose between greasing the monetary pump or fighting inflation. History suggests they'll choose the former, not the latter.

The approaching crisis was termed "hitting the wall" by former U.S. Secretary of the Treasury, Henry Paulson, when he appeared on Bloomberg television last month. At the time, it seemed odd that, after a decade plus of relative silence, Paulson would suddenly appear with this warning. Thirty days on, it doesn't seem so odd anymore.

Rising Interest Rates And Sovereign Debt Crisis

Rates globally are screaming higher at present with longer term bonds in Japan yielding an all-time high, while U.S. and U.K. debt is at levels not seen in over 20 years.

UK Bond Yields Reach Multi-Year Highs

So, is "the market" correct in assuming that inflation is worsening and interest rates will be rising as a result? Yes and no. Yes, inflation is worsening, and it's going to be a real problem for months and years to come as the impact of the ongoing Iran War is felt. But, no, there's a limit to how far interest rates will be allowed to rise due to that "wall" that Hank Paulson mentioned.

Debt Service Costs And The Great Deficit Spiral

And what is that wall? Interest on the existing and accumulating debt.

The U.S. Department of Treasury issues an accounting every month. Below is the most recent statement that was issued last week. The U.S. operates on a fiscal year that ends every September 30. As such, the report below shows cumulative numbers for the first seven months of FY26.

U.S. Debt Interest Payments Surge In FY2026

As you can see, interest payments on the accumulated $39.3T in U.S. government debt have so far totaled $616B in FY26 and are on pace to easily exceed $1.1T by the end of the fiscal year, making debt service the second largest U.S. government expenditure, behind Social Security payments.

Now let's do some math...

Interest payments of $1.1T on a debt base of $39.3T means that the average rate of interest paid on the debt is around 3.0%. That's a good deal. However, at present, there is nowhere on the U.S. treasury yield curve where rates are near 3%. Instead, everything beyond a one-year T-bill yields north of 4.0%.

Yield Curve Control And Central Bank Response

So just right now, with rates where they stand today, any refunding, refinancing, or new issuance of U.S. debt will bring a much higher debt service cost. At current levels alone, the debt service cost for FY27 rises to north of $1.5T. But what happens if rates shift another 100 basis points higher? What happens at 200 basis points higher, as some analysts suggest is possible as the Warsh-led Fed "fights inflation"?

Soon, the annual debt service cost would exceed $2T and head toward $3T! That's the process of "hitting the wall" that Paulson mentioned, and the Fed had better have a plan because not only would higher rates spike the U.S. debt service, but the ripple effect across the U.S. economy will be devastating as companies and consumers grapple with the economic impact. Tax revenues would plummet as the economy slows, exacerbating the budget shortfalls and driving the annual U.S. government deficit spending past $2T/year to $3T/year and beyond. This is the Great Deficit Spiral we've been predicting for years, and it will be upon us in full force.

To combat this, you must expect global central banks to ride to the rescue, not by hiking rates and reigning in inflation but instead by capping rates through Yield Curve Control and Quantitative Easing. Every crisis in the past has led central bankers to respond this way, and this new crisis will be the same. Short rates will be trimmed, and long rates will be managed, all in a desperate attempt to keep the global financial plates spinning.

Gold And Silver Outlook During Stagflation

What does this mean for gold and silver prices? It means that the current selloff and pull back in prices is wildly overdone. Instead of higher interest rates and austerity, the global central bankers will soon choose lower interest rates and Yield Curve Control. Once "the markets" finally realize this, the rally in gold, silver, and the mining shares will be something we've not witnessed since the late 1970s.

So the lesson this week? Do not let your heart be troubled by the nonsensical short-term reaction to the ongoing war in Iran. The coming global economic slowdown combined with rampant price inflation will produce stagflation and sharply negative real interest rates, a scenario not seen in nearly fifty years. You may not have been alive or perhaps you simply missed the precious metal rally  the last time conditions combined in this manner. Don't miss it this time.

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