(Kitco News) - While the government might manage to bring some of its spending under control, the growing fiscal deficit remains a concern and continues to contribute to the persistent inflation threat, according to one investment firm.
In its year-end outlook, Jan van Eck, Chief Executive Officer at VanEck, stated that his base-case scenario predicts the government will find $500 billion in savings next year. However, he noted this would not be enough to prevent the deficit from increasing.
"While this signals an attempt to address fiscal imbalances, the cuts are unlikely to eliminate the deficit entirely. In simple terms, we will be going from two feet on the gas pedal to one foot on the gas. However, failure to follow through would exacerbate inflation risks, leading to higher long-term interest rates and potential market volatility," he said.
Due to these risks, one of van Eck’s top recommendations for 2025 is to buy gold and Bitcoin.
"Gold and Bitcoin continue to stand out as robust hedges against inflation and fiscal uncertainty. Gold’s bull market is underpinned by foreign central bank purchases and a global trend toward de-dollarization," he said.
Taking a closer look at the gold market, Imaru Casanova, Portfolio Manager of VanEck’s Gold and Precious Metals Fund, said that while she remains bullish on gold, investors might want to consider the mining sector.
Casanova pointed out that although the gold market is seeing a 28% gain heading into 2025, the mining sector is up only 21%. Traditionally, the mining sector, due to its leverage, tends to outperform gold during a bull market.
"With gold producers enjoying record margins and generating substantial free cash flow, we believe this disconnect might not last forever," she said. "Investors looking to hedge broader market risks through gold exposure might consider allocating to the gold mining sector alongside gold bullion."
While VanEck is generally bullish on gold in the new year, the analysts warned that the market could experience some volatility as financial market uncertainty remains high.
"Investors should remain cautious about potential risks, such as unexpected shifts in central bank policies, geopolitical events that defy predictions, or inflation failing to materialize as anticipated. These factors could limit gold’s upside or result in increased volatility," Casanova said.
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