Gold Price Outlook Amid Rising Debt and Economic Uncertainty
Amid the uncertainty stemming from the US government shutdown, investors are closely monitoring for signals from the Federal Reserve regarding monetary policy. Spot gold has seen an uptick, nearing the $3890 mark, and is on track to achieve gains for the seventh consecutive week.
Previously, gold prices experienced a streak of daily increases, reaching record highs before seeing minor profit-taking. However, technical indicators suggest that gold has been in overbought territory for the past month, increasing the likelihood of a short-term correction.
Jim Wyckoff, senior analyst at Kitco Metals, indicated that a prolonged government shutdown could be a positive factor for the gold market. Conversely, a swift agreement to reopen the government may act as a negative catalyst.
The US Senate will vote again on plans to end the government shutdown, which has entered its third day. However, there are currently no indications that either of the short-term funding bills will pass.
The US government shutdown has led to the delay of the non-farm payroll report, the first time in 12 years. In light of the current economic uncertainty, investors are relying on unofficial data to gain insights into the future trajectory of the economy, maintaining expectations that the Federal Reserve will continue to cut interest rates.
According to the CME Group's FedWatch tool, investors anticipate a 98% probability of a 25-basis-point rate cut in October, and a 90% probability of another cut in December.
UBS expects gold prices to climb to $4200 per ounce in the coming months, partly due to the decreased opportunity cost of holding gold as a result of lower real interest rates in the US, in addition to expectations of dollar weakness.
HSBC anticipates that gold will surpass $4000 per ounce soon, driven by geopolitical risks, fiscal uncertainty, and threats to the Federal Reserve's independence. Gold's rise is projected to continue through 2026, boosted by official sector purchases and strong demand for gold as an investment diversification tool. However, gold's rise may slow in the second half of 2026 as the Federal Reserve's rate-cutting cycle ends, physical demand weakens, and supply increases.
Will Gold Reach $7000 By The End Of Trump's Term?
For many traders, the resilience of gold's rise is easily explained by strong demand from global central banks and gold-backed ETFs.
But one veteran investor sees the real key as record debt levels.
"U.S. government debt stands at a staggering $37.5 trillion, about 124% of gross domestic product (GDP)," said Frank Holmes, CEO and chief investment officer at U.S. Global Investors. He pointed out that when then-U.S. President Richard Nixon decoupled the dollar from gold in 1971, U.S. debt was around $400 billion, less than 40% of GDP.
In a recent blog post, Holmes, who also serves as executive chairman of Bitcoin miner Hive Digital Technologies Ltd., wrote that the U.S. has gone in a little over fifty years from a "fiscal austerity regime to an unbridled state."
He cited data from the Institute of International Finance that global government debt has "ballooned" to $324 trillion, more than 253% of world GDP.
U.S. margin debt, that is, the money investors borrow from brokerages to buy assets, is up nearly 33% year-over-year, reaching a record $1.06 trillion, Holmes added.
Not only are governments "over-leveraged," he pointed out, but U.S. households are saddled with record debt as well, currently at $18.39 trillion.
"Investors are trading on unwise margin sizes to keep the market rally alive. In my opinion, now is the time to own gold," Holmes wrote in the blog.
Spot gold is up over 47% this year, hitting successive record highs, and is on track for its best annual gain since 1979. But the rally could last for years. Holmes expects gold to climb to $7,000 an ounce by January 2029, the end of a second Trump term. Back in 2020, he called for gold to reach $4,000 in the next three years, citing global economic stimulus and money-supply growth.
Now, he wrote in the post, "The debt size is so unimaginably large and growing. Fiscal imbalances are deepening, and monetary policy is constrained. The Fed cannot hike rates much further, or it will bankrupt the government, nor can it lower rates significantly, or it will crater the dollar."
"In my view, both scenarios will drive gold prices higher," Holmes added.
Meanwhile, he cited data from the World Gold Council that central banks continue to buy substantial amounts of physical gold, and North American gold-backed ETFs recorded the second-highest annual net inflows in history.
"Central banks are scrambling to add to their gold reserves. Central bankers understand that fiat currencies can be printed at will, but real money – gold – is finite," Holmes said.
He also pointed to retail demand in countries like India and China as remaining "robust," with a cultural preference for gold in both countries in gift-giving and displays of status.
"My previous prediction that gold would hit $4,000 is now close at hand. Looking ahead, I believe a $7,000 target is achievable," Holmes said.
He acknowledged that that prediction may sound bold, but added that in "today's high-debt environment," being bullish on gold may be "prudent."
PT
