US Debt Crisis Could Ignite long-term Gold Rally – BCA Research

(Kitco News) - The gold market continues to struggle as the Federal Reserve maintains its hawkish monetary policies; however, one research firm expects that it's only a matter of time before the U.S. central bank becomes the buyer of last resort for Treasuries, which could ignite a long-term rally in the precious metal.

At the start of the month, Fitch Ratings surprised markets after it downgraded U.S. long-term debt. Although markets largely shrugged off the downgrade, it has brought attention to the U.S. government’s growing deficit.

In a recent report, commodity analysts at Montreal-based BCA Research said that gold remains an attractive hedge against an inevitable devaluation in the U.S. dollar as the U.S. debt-to-GDP ratio grows.

“Gold’s appeal as a safe haven and store of value will become apparent as fiscal dominance overtakes monetary dominance at the Fed. An emergence of fiscal dominance also would redound to the detriment of the USD, and governments’ and investors’ willingness to hold it. This risk of USD debasement also will support gold demand,” the analysts said.

The U.S. has already seen investors cut back on buying long-term U.S. debt following a disappointing 30-year bond auction. At the same time, the yield on U.S. 10-year bond yields have pushed to a 15-year high.

Many economists have dismissed the recent selloff in bonds, noting that investors are not interested in safe-haven bonds as the U.S. economy remains resilient with a robust labor market. The rise in bond yields has been difficult for the gold markets as prices dropped below critical support around $1,950 an ounce and recently hit a two-month low. The precious metal has recovered some of those loses; December gold futures last traded at $1,944.70 an ounce, down 0.17% on the day.

Although long-term bond markets remain roughly well anchored and well behaved, analysts at BCA said that the line in the sand they are watching is if debt rises to 97% of GDP.

“If government debt continues to increase in perpetuity, bond markets will eventually see the risk in continuing to lend to the government – i.e., purchasing treasury securities – and will thus demand higher yields,” the analysts wrote. “Once yields become too expensive for the government, it will need to assert fiscal dominance and lean on the Fed to conduct more fiscally favorable monetary policy, irrespective of the economic fallout. Fiscal dominance takes over at this point, and inflation starts to move higher.”

While The U.S. economy is not expected to hit this milestone in the near term, analysts said that the government’s commitments to the green energy transition, military spending and social entitlements will eventually push the economy to a breaking point.

Quoting the government’s own estimates, BCA said that the nation’s debt-to-GDP ratio could hit its 1946 all-time high by 2028. If government spending remains on the same track, the ratio could rise to 110% by 2030.

BCA has been bullish on gold since early November and looks for prices to push back to $2,000 an ounce by the end of the year.