Gold Emerging as a Safe-Haven Asset
Bank of America analysts have highlighted that gold is becoming a more attractive safe-haven asset compared to government bonds. This shift is driven by fiscal concerns and global economic dynamics. While traditionally falling real interest rates have been a driving factor for higher gold prices, BofA suggests that even higher rates may not necessarily put pressure on gold in the current macroeconomic environment.
Fiscal Pressures and Political Factors
One of the key drivers behind gold’s attractiveness, according to BofA, is the growing fiscal pressure, particularly in the U.S. where the national debt is projected to reach unprecedented levels. This increase in debt is expected to lead to higher interest payments as a share of GDP, making gold an appealing asset. The analysts at BofA have reaffirmed their bullish target of $3,000 per ounce for gold.
The bank also points out that both major U.S. presidential candidates, Kamala Harris and Donald Trump, are showing little inclination towards fiscal restraint. Policymakers globally are also leaning towards fiscal expansion, favoring initiatives such as climate action, defense spending, and addressing demographic challenges. This could potentially raise spending by a considerable percentage of GDP annually by 2030, as per IMF estimates.
Central Banks and Market Volatility
Should markets struggle to absorb the increasing debt issuance, volatility could rise, further driving demand for gold. Central banks, in particular, may look to diversify their currency reserves with gold, as holdings of the precious metal have seen a significant increase over the past decade. Despite a recent decrease in China’s gold imports, Western investors have been increasing their participation in the gold market.
However, BofA warns that while there may be short-term gains, factors such as a no-landing scenario for the U.S. economy and a slower pace of rate cuts could limit gold’s immediate upside potential. The bank suggests that gold prices could find support around the $2,000 per ounce mark, even if there is a temporary pullback in the market.
