The gold price has experienced a sharp reversal over the last three days. Gold has fallen by more than 3% since its peak last week, and hovers near its lowest level since July 17th. The decline of gold has been accompanied by other industrial metals such as copper, silver and platinum. The gold price will continue to rise for a number of reasons.
The US public debt is on the rise
Gold’s price is more likely to rise because the US public debt will be escalating in the coming years. The debt is now at over $34,95 trillion, and may even reach over $36 trillion in the next month. Debt to GDP increased from 52.6% to 122% in 1960.
In the US, debt repayments are also increasing. In this case the government will be spending almost $900 billion this year on debt repayments, which will surpass the defense budget.
The US has no plan to balance its budget and reduce the deficit. This is the biggest problem. Medicare and Medicaid expenditures are over $1.79 Trillion, while Social Security and Defense spending amounts to $1.45 Trillion and $909 Billion respectively. These parts of the budget are not being cut by any party.
Ideal solution to the debt crisis is to reduce spending and increase revenue. Both parties are in favor of keeping this spending, while Republicans want tax cuts. Trump has proposed to abolish the income tax in favor of tariffs on imported goods.
Analysts believe that in the coming years, the debt of the country will reach over $50 trillion. Gold is often viewed as an alternative to the US Dollar, which means that it will perform well if the US finds itself at the same place Japan is now.
The foreign central banks are buying
Gold’s price has also been driven up by central banks buying the metal in order to diversify their cash holdings. China has been the largest buyer of gold over the last few years.
Analysts expect the purchase to resume in the coming months. The trend of buying gold has continued this year. It purchased 7.23 million ounces in 2023.
China must continue to accumulate gold, as its reserves only represent 4.9% of the total amount it holds in currency. Gold accounts for an average of 16% in other large countries, so China has a way to go.
Not only China’s central bank is buying gold. Russia is also buying huge amounts of gold, now that the US sanctions its central bank. Other countries from Eastern Europe and Middle East have also been doing the same. An analyst from TD Bank stated:
“Last Year, after the Russian invasion in Ukraine, the US took the dollar reserves that Russia held. “I think it was a very strong catalyst for central bankers around the world to think about asset allocation.”
Demand and Supply Dynamics for Gold
Demand and supply dynamics are another reason for the likely continued rise in gold prices. The data shows that the gold production is 130 million ounces per year, while demand is over 169 millions ounces. This difference indicates that gold is likely to continue its upward trend.
The gold supply is becoming tighter. To access the metal the largest mining companies have to dig deeper, increasing their costs. It is because of this that most gold stocks underperformed the stock market, even though gold reached a record-high. Barrick Gold has only risen 1.6% in the past year.
In addition, new mines have not been discovered as often in the past. Environmental issues are causing approvals to take longer.
Federal Reserve interest rates
The Federal Reserve is a major factor in the gold price’s upward movement. Fed officials have stated in recent statements that the bank is likely to start cutting interest rates this year.
The bank finds itself in a tough situation because US inflation is still higher than the target of 2%, while the labor market continues to soften. Recent data shows that the unemployment rate is at its highest level since 2021, 4.1%.
There are therefore signs that the Fed is now focusing on the labor markets. Jerome Powell said in a statement that the Fed would cut rates before inflation reaches the Fed’s target of 2.0%.
The Fed will start cutting interest rates and gold will benefit for one simple reason. Because gold does not pay dividends, it has opportunity costs. This opportunity cost will disappear when rates begin to fall.
Gold Price Chart
All these tailwinds can therefore push the gold price higher. The monthly chart shows that gold is above all moving averages, while the Average Directional Index has moved near 40. This indicates a bullish trend.
This post Gold Price Forecast: 5 Reasons XAU Rally Will Continue may be updated as new information unfolds
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