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(Kitco News) - Gold prices continue to cling to support around $1,950 an ounce as it struggles to attract bullish investor attention; however, one market strategist said that the precious metal remains well positioned to take advantage of the U.S. dollar's waning reserve currency status.
In an interview with Kitco News, Willem Middelkoop, creator and chief investment officer of Commodity Discovery Fund, said that last week's announcement from Fitch Ratings downgrading U.S. debt could be the spark that ignites a bigger fire in global financial markets.
Middelkoop added that the recent volatility in the bond market as yields on 10-year notes hold around 4% is a strong sign that investors are losing faith in the U.S. dollar.
"The bond market is always right. It is telling the story that the system is breaking down," he said. "The U.S. has a problem that they are clearly never going to fix. A growing number of nations no longer support the dollar system, and I think because of that the government will find it difficult to find enough buyers for U.S. Treasures. We could see the Fed step in soon and that will be interesting for gold."
Middelkoop said investors continue to see signs that the global bond market is breaking down from the weight of growing deficits. In October, the U.K. bond market saw a crisis of faith from investors after the newly appointed then-Prime Minister Liz Truss released a mini-budget that proposed the nation's biggest tax cuts in 50 years.
A new crack emerged two weeks ago after Japan saw the yield on its 10-year bonds rise to a nine-year high.
"We are seeing a breakdown in the bond market. Something is wrong," he said. "Gold might not react right away to these warning signs, but it will eventually react."
In this environment, Middelkoop said that he is not paying much attention to gold's short-term price action as the market remains well supported by long-term fundamentals. He added that gold's role as a monetary metal has just started to build as the de-dollarization trend picks up momentum.
Middelkoop noted that central bank gold demand continues to dominate the marketplace, which he expects will remain in place for years.
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While it's unlikely the world will see a new gold standard anytime soon, Middelkoop said that the issue is not black and white. He explained that central banks see value in gold as a liquid, convertible asset as they diversify away from the U.S. dollar. He said that currency may not be backed by gold, but it will remain linked to the precious metal.
"This trend is going to take years or even decades to play out," he said. "We can expect the U.S. dollar won't go down without a fight, but I don't think we can look for binary solutions anymore. It won't be the gold standard; it won't even be the dollar standard or the yuan standard. I see the development of parallel systems as we move away from the unipolar to a multipolar currency world. We'll have a multipolar world for quite a long time and that will be good for gold."
