Why gold above $3,000 is the new normal

Despite gold prices consolidating above $3,300, new bullish momentum is proving elusive as investors adjust to these elevated levels. 

Nevertheless, one fund manager asserts that the current valuation is entirely warranted.

Gold is holding steady, with no significant weakness expected, as US debt continues to spiral, according to Robert Minter, Director of ETF Strategy at abrdn, in an interview with Kitco News.

US debt

US debt recently reached an unprecedented $37 trillion, a new milestone.

This surge in spending isn't unique to the US; Minter observed that Europe has also significantly increased its expenditures in recent months.

“I went back to 1993 and looked at the amount of US Treasury debt outstanding. Since then, it's up about 900%—which is roughly the same as gold’s increase over that period,” he said. 

Minter observed that currency devaluation isn’t immediately apparent because nations worldwide are engaging in deficit spending at a similar rate. 

Nevertheless, he pointed out its manifestation in gold, as the precious metal consistently trades near record highs against all major global currencies.

“Gold is the only currency that is not someone else’s debt. Gold’s value above $3,000 is completely justified by the level of debt around the world,” he said. 

At the time of writing, the most-active gold contract on COMEX was $3,360.22 per ounce, largely flat from the previous close. 

Last week, gold prices had fallen to a one-month low as safe-haven demand was affected due to a ceasefire between Iran and Israel.

However, growing expectations of interest rate cut by the US Federal Reserve have spurred buying among investors. 

Short-term hazards

Minter is optimistic about gold in the long run but recognises increasing short-term hazards. 

He noted that economic pessimism has reached its peak, and a shift in this outlook could diminish gold's appeal as a safe-haven asset.

However, Minter suggested that investors view any short-term corrections as a chance to buy. 

He also advised them to monitor the Federal Reserve for indications that could trigger a new gold rally before year-end.

Fed to cut rates

Minter suggests the Fed will eventually be compelled to cut interest rates, despite their current hesitation. 

He points to two-year yields, at approximately 3.78%, as significantly lower than the prevailing Fed Funds rate, indicating an impending need for action.

“The bond market is telling us that interest rates are too tight by about 80 basis points, so there is a strong case that the Federal Reserve could be forced to cut rates by at least 50 basis points this year,” he said. 

“The next leg of gold’s rally will come from traditional investment demand as the Federal Reserve begins to ease interest rates.”

Although a rate cut by the Federal Reserve this month is still considered unlikely, the CME FedWatch tool indicates a rising probability. 

Nonetheless, markets are already fully anticipating easing measures in both September and December.

Further gains possible

Minter suggests that gold's potential in the second half of the year could mirror last year's performance. 

Should the US Fed resume interest rate cuts, gold prices could see a $300 per ounce rally, potentially reaching $3,700 per ounce.

“Between June and September last year, there was a decent-sized uptick in ETF demand ahead of the Federal Reserve’s expected rate cut. We also saw a pretty good rise in price, from $2,300 to $2,600,” he said.