U.S. Treasury bonds, historically considered the benchmark for secure investments, are supported by the full faith and credit of the federal government. During economic uncertainties, downturns, or crises, investors have traditionally turned to Treasuries for safety. However, current discussions suggest that gold might be emerging as the new standard for safe investments.
Bank of America analysts addressed this idea in a note issued on Wednesday. They argue that the outlook for U.S. debt may be favorable for investments in gold, anticipating record-breaking debt levels relative to GDP in the coming years. As the Treasury Department issues more bonds, it is expected that investors will demand higher yields. Typically, an increase in yields results in a decrease in bond prices on the secondary market.
This trend has contributed to a weakening of the historical correlation between bond yields and gold prices. While lower interest rates continue to be advantageous for gold, due to its lack of interest or dividends, higher rates no longer substantially affect bullion prices. Bank of America maintains a target price of $3,000 per ounce for gold. Analysts noted that persistent concerns regarding U.S. funding requirements and their impact on the Treasury market could propel gold to become the ultimate perceived safe-haven asset.
The price of gold has surged recently, increasing by over 30% this year and exceeding $2,700 per ounce for the first time in recent history. In contrast, bond yields have rebounded following the Federal Reserve’s initial rate cut last month. Recent budget data indicates a $1.8 trillion deficit for the fiscal year ending on September 30, with interest expenses on U.S. debt reaching $950 billion, surpassing defense spending and reflecting a 35% increase, primarily due to higher rates.
Projections indicate that the deficit will continue to expand under the leadership of either Donald Trump or Kamala Harris, with the Democrat potentially curbing the deficit to a lesser extent. This analysis is supported by both the Penn Wharton Budget Model and the Committee for a Responsible Federal Budget. Bank of America suggested that increasing funding needs, debt servicing costs, and concerns over fiscal sustainability may drive gold prices higher if interest rates rise.
With the expected surge in U.S. debt supply, apprehensions about demand and the ability of investors to absorb more Treasury bonds are growing. This situation encourages central banks globally to diversify their reserves away from U.S. debt and towards gold.
Although the U.S. is not alone in facing rising debt, its escalating debt and deficits are notable, especially as they occur during a strong economy without the strain of a world war or a pandemic. Concurrently, spending is likely to increase due to climate change, aging populations, and military requirements, further straining budgets.
In conclusion, Bank of America suggested that if markets become hesitant to absorb all the debt and volatility escalates, gold might remain the final perceived safe-haven asset for investors.
