Bank of America strategists released a report suggesting that the increased appetite for deficit spending by the world’s governments could make gold the last remaining safe-haven asset.
Despite the long-standing belief that U.S. treasuries are a solid place to store money, that notion could change as governments take on more debt.
“Gold appears to be the last ‘safe haven’ asset standing, prompting traders and central banks to increase their exposure,” the note released Wednesday states. “Ultimately, something has to give. If markets become hesitant to absorb all the debt and volatility rises, gold may emerge as the preferred asset.”
Gold prices have risen exponentially since the COVID-19 pandemic. (Source: TradingView)
The analysts reiterated a price target of $3,000 an ounce by the end of 2025, a target set earlier this year that predicts an 11% increase from current prices.
U.S. election outlook
The analysts claimed neither U.S. presidential candidate, not Donald Trump nor Kamala Harris, has focused on fiscal discipline or a platform that calls for a reduction in spending. To that end, regardless of the outcome, experts anticipate a continued rise in the national debt levels, which has now surpassed $35 trillion.
However, the analysts noted that higher government spending is not exclusive to the United States and pointed out that the International Monetary Fund expects new spending to reach 7 to 8% of global GDP annually by the end of the decade.
This chart shows U.S. deficit spending in each year since 2019. (Source: U.S. Department of the Treasury)
A continued increase in U.S. debt is expected to cause issues with treasury supply and growing interest payments as a portion of GDP will continue to increase gold’s appeal, the analysts said.
Central banks catching on
As deficit spending continues to grow, central banks have exponentially increased their global reserves in recent years. Gold now makes up 10% of total reserves, triple the amount reported 10 years ago.
Additionally, the Federal Reserve has continued to signal a reduction in interest rates planned for the upcoming months. The U.S. central bank began its cutting cycle with a sizeable 50-basis-point cut in September, and traders expect a further quarter-point drop at the next meeting in November.
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