Gold has jumped back above $3,300 per ounce this week on a weaker dollar, prompted by concerns over US debt levels.
Having dropped as low as $3,127 less than a week ago, gold has jumped over 5% to trade above $3,300 this morning. Although still short of the record $3,500, gold has so far traded in a range of $3,200 - $3,300 fairly consistently in the past month. In GBP, gold climbed 2% in the past 24 hours, reaching £2,470 this morning. In Euros, gold is back above €2,900 after falling to €2,790 last week.
The recent drop in the US dollar was initiated by credit ratings company Moody’s downgrading the US’s credit rating, citing the burgeoning debt level in the US as the reason for the cut. The downgrade has spooked investors, causing bond yields to rise and the US dollar index to drop 1.24% in the past five days. The credit rating cut has provided markets a reminder of the unsustainable path national debts are taking globally.
Markets are also concerned about the possible impact of the ‘big, beautiful’ bill President Trump is working to push through. The bill contains a number of tax cuts and it is estimated that it would add trillions to the US’s already significant debt burden, pushing it from 100% of GDP to 125%. This increase in debt would require even more bond purchases to finance it, but with yields already high it is unclear what kind of appetite investors will have for more US debt.
As was seen in the UK during the Truss mini-budget, bond ‘vigilantes’ will happily punish any government for any perceived looseness in their fiscal discipline. With trade uncertainty still present, many countries have been moving away from the dollar and the downgrade in credit rating and growing debt risks will only add further to the dollar’s woes.
Higher bond yields would technically be bearish for a non-yielding asset like gold, but there is a turning point in which a bond crisis would put significant pressure on markets and drive safe haven demand. In addition to the weakening dollar, there is plenty of potential for further gains for gold, which continues to find support at current historically high levels.
