Shaky US finances a boon factor for gold

Gold prices eased on Wednesday as the dollar halted its slide

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Published: Wed 21 Aug 2024, 8:31 PM

The rising gold price is almost certainly in part due to the US’ increasingly shaky public finances as global investors question the credit-worthiness of the issuer of US dollars, the global reserve currency, analysts said.

“Neither of the two US parties makes any real effort to suggest they plan on doing anything about the terrifying trajectory of the ballooning US national debt. Harris’ policy proposals unveiled late last week would pile on further debt if no off-setting tax revenues are found to pay for them. Trump’s huge tax cuts and Biden’s huge fiscal spending programs have brought the US national debt to 122 per cent of GDP. US finances can only worsen further regardless of the White House occupant in the next recession when spending to soften the impact of the economic weakness inevitably rises as tax revenues fall. If the US government can’t afford to service its debt, inflation and negative “real rates” (the difference between the interest rates and the rate of inflation) are the only way for the government to deleverage. This dynamic favours hard assets like gold in the long term,” John Hardy, Head of FX Strategy at Saxo Bank, said in a note.

Gold prices eased on Wednesday as the dollar halted its slide, while investors looked forward to the minutes from the US Federal Reserve’s latest policy meeting for more cues on interest rate cuts.

Spot gold was down 0.5 per cent at $2,501.79 per ounce as of 1343 GMT after hitting a record high of $2,531.60 on Tuesday, Reuters reported.

US gold futures had lost 0.4 per cent to $2,539.70.

“We’re just seeing a pause as there is some mild profit-taking pressure by the shorter-term futures traders with the market awaiting the FOMC minutes,” Jim Wycoff, senior analyst at Kitco Metals, was quoted as saying.

Analysts at ANZ said in a note that they see gold prices hitting fresh highs of $2,550/oz later this year.

The most traded gold bullion ETF, the SPDR Gold Shares, tracked the gold price to new all-time highs this week as it rose above $2,500 per troy ounce for the first time ever. The gold price this year is up over 21 per cent vs. 17.6 per cent for the US S&P 500 index. Note that a popular ETF of gold miners, the VanEck Gold Miners UCITS ETF (GDX – in grey), has risen as well but is nowhere near all-time highs. This could be due to challenges in yields at gold mines, forward selling of output by miners and rising costs of extraction, Saxo Bank data showed.

It is impossible to point to market developments that are fully and only linked to US election outcomes at this stage, Hardy said. “There was a flurry of market activity around the time of the assassination attempt on Trump that was arguably linked to the strengthening odds of his winning in the wake of that event. This included a sudden surge in cryptocurrencies, which Trump has spoken strongly in favour of, and a surge in small-cap stocks and financial stocks like large banks. Financials rallied as the market knows that Trump favours general deregulation. The market probably also recalled the surge in small-cap stocks when he was elected president in 2016 due to his promising the huge corporate tax cuts that he delivered in 2017,” he added.

— With inputs from Reuters