(Kitco News) - The gold market continues to see renewed bullish momentum, with prices rallying back to $3,300 an ounce as concerns over U.S. debt renew investor demand for safe-haven assets.
The government’s unsustainable spending levels were thrust into the spotlight late Friday after Moody’s rating agency downgraded U.S. sovereign debt to Aa1 from Aaa. At the same time, it revised its outlook on the U.S. to "stable" from "negative."
Gold has been the biggest beneficiary since the Moody’s downgrade, as U.S. equities, the U.S. dollar, and Treasuries have sold off. Spot gold last traded at $3,304.30 an ounce, up 0.45% on the day and 3% higher from Friday’s close.
Meanwhile, the yield on U.S. 10-year bonds has risen to 4.54%, up 1.5% on the day. At the same time, the U.S. dollar index has dropped back below 100, last trading at 99.58, down 0.58% on the day.
Analysts have said that gold will continue to shine as an important global monetary asset as investors and central banks look for U.S. dollar alternatives.
“After an initially muted reaction, it now appears that traders are placing greater weight on the recent downgrade of the U.S. credit rating by Moody’s,” said Ricardo Evangelista, Senior Analyst at ActivTrades, in a note Wednesday. “The shift in sentiment has triggered renewed demand for haven assets, benefiting gold as investor risk appetite retreats. Against this backdrop — and with the U.S. dollar weakening, which typically supports gold due to their inverse price correlation — the $3,300 level is likely to hold as a key area of support in the near term.”
Evangelista noted that Moody’s downgrade comes as the U.S. Congress tries to push forward a new budget bill that includes permanent tax cuts. While the government is also considering cuts to Social Security and Medicaid, those reductions won’t offset the revenue loss from lower taxes.
On Tuesday, the Congressional Budget Office (CBO) said the proposed budget and tax policies would add roughly $3.8 trillion to the national debt.
James Hyerczyk, Technical Analyst at FXEmpire, said that a weakening dollar and rising bond yields, driven by increasing geopolitical uncertainty, should continue to support gold prices. He added that gold’s push back above $3,300 puts $3,500 back into play.
“With political uncertainty in Washington and no near-term resolution on fiscal policy, investor appetite for safe-haven assets remains firm. Unless yields reverse sharply or the dollar stages a surprise recovery, the technical and fundamental backdrop points to further upside,” he said.
However, Rick Kanda, Managing Director at The Gold Bullion Company, said that in the current environment, investors might want to aim higher, as he sees renewed potential for gold to hit $4,000 an ounce this year.
"This situation may be a crisis for many assets, but it's a perfect outcome for gold. As Moody's downgrade signals growing concern over U.S. credit stability and inflation fears linger, investors are seeking safety in physical gold,” he said. “What the market is currently experiencing isn't new — it has seen similar scenarios during past financial crises — but this could evolve into a much larger-scale crisis. Investors currently have a high demand for tangible assets like gold, and central banks are pursuing gold-buying strategies, which is reinforcing this trend. Investors and banks are choosing physical gold over cash investments.”
David Morrison, Senior Market Analyst at Trade Nation, said that although gold has regained some momentum as a safe-haven asset, it is still too early to determine if prices will rally back to new all-time highs above $3,500 an ounce.
“As far as the bulls are concerned, they will be hoping that $3,250 holds as support on any pullbacks,” he said. “If so, that raises the probability that gold could experience another leg up in its multi-year rally.”
