Gold rallied despite risk appetite and firming rates, which is quite unusual. These correlations are difficult to understand and we must therefore ask whether other dynamics are at play.
The U.S. government is taking on debt at a breakneck pace, and procyclical deficit spending may be what’s keeping the job market and economy afloat despite such high interest rates.
The U.S. budget deficit as a percentage of GDP was 5.3% in 2022 and 6.2% in 2023, high by historical standards when the economy was normal. The debt-to-GDP ratio, which peaked post-COVID, appears to have stabilized around 120% of GDP.
Geopolitical shifts and global trade dynamics, coupled with concerns about US fiscal profligacy, may be responsible for the surge in gold prices we are currently seeing.
The talk of dedollarization has been around for a long time. We always thought that dedollarization would not happen overnight and would probably be a long-term process. One can’t help but wonder if this has started to manifest and if this is just the beginning. Comparing the US dollar to a basket of other major fiat currencies may not reveal the true picture, as other economies are not sailing in a very different boat. Therefore, the dollar may not weaken as much against other major currencies. Gold could be the main beneficiary of the dedollarization theme.
Additionally, as other central banks look to increase their gold holdings and buy fewer U.S. Treasuries, the Fed should consider ending its balance sheet deterioration sooner.
Besides the question of when and by how much the Fed would cut rates, the question of when it will stabilize its balance sheet is equally important.
US interest spending has climbed to 2.4% of GDP and is expected to rise further. This compares to an average of around 1.4% of GDP over the period 2015-2020.
The U.S. government will need help from the Fed to contain its interest spending, given the scale of Treasury issuance due to higher deficits and the refinancing of maturing debt.
We therefore prefer to maintain long positions in gold and also believe that the long duration of US Treasury bonds is a position that could pay off in the medium term.
(The author is founder and CEO of IFA Global)
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. They do not represent the views of The Economic Times.)
