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U.S. debt ceiling debate highlights U.S. fiscal imbalances and supports gold's push to $3,000 - CrossBorder Capital
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(Kitco News) - An impending resolution to the U.S. debt ceiling won't end the nation's fiscal woes, and gold is expected to benefit significantly, according to one research firm.
In a report published earlier this week, analysts at CrossBorder Capital reiterated their call for gold prices to push to $3,000 as deficit spending in Western economies, led by the U.S., continues to grow. Looking past the current debt ceiling debate, the analysts said the U.S. Treasury is expected to sell up to $2 trillion in debt over the next decade.
"If investors' concern over the often fraught and protracted debate between Treasury and Congress extends to a future failed Treasury auction, surely the US dollar would skid and gold prices soar? This is a key risk," the analysts said. "The bottom line is that rapidly deteriorating fiscal arithmetic, generally across the advanced economies, threatens faster inflation."
The analysts said that gold will remain an attractive investment asset as central banks will be forced to end their quantitative tightening measures and become buyers-of-last-resort to fund government spending.
"We are moving into a new era where Central Banks may have no choice but to create monetary inflations to fund future structural fiscal deficits. These deficits, in turn, result from escalating mandatory spending demands and tax bases ravaged by new technologies and the changing mix of the labour force," the analysts said. "At the same time, the luxury of being able to co-opt foreign savings to help domestic funding looks less likely given growing geopolitical tensions. In short, we face a world of permanent QE and secular monetary inflation."
Quoting data from the Congressional Budgetary Office (CBO), the analysts said that due to rising costs and lower revenues, government debt is expected to nearly double to $46.4 trillion by 2033, up from $24.3 in the 2022 fiscal year.
At the same time, the size of the Federal Reserve's balance sheet is expected to increase by 50% in the next ten years. In a worst-case scenario, the central bank's balance sheet could increase by 75%.
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"Using these simple extrapolations, a 75% increase in US monetary inflation would easily take gold bullion prices through US 3 000 /oz, even using the 2022 average price as a base," the analysts said.
Along with being an inflation hedge, CrossBorder also noted that gold remains an attractive diversification tool against the U.S. dollar. The analysts said that central banks will continue to buy gold as the U.S. deficit spending makes the U.S. dollar an unattractive reserve currency.
"Gold enjoys an implicit option that protects against the demise of the paper money standard. Although, we do not foresee this being realized anytime soon, further attempts to diversify away from the U.S. dollar and other Western units by geopolitical adversaries must surely reduce the supply of gold coming on to private markets," the analysts said. "Put another way, even if the U.S. dollar can appreciate against other paper monies, it is still likely to fall in value against gold."
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