(Kitco News) – Last week’s break above $3,500 per ounce in spot gold – with $3,600 following soon afterward – was driven by market participants beginning to connect the dots and realize that currency debasement is the only way governments can meet their debt obligations, according to Paul Wong, market strategist at Sprott Asset Management.
In an interview with Kitco News on Friday, Wong laid out the various reasons why gold prices broke out of their months-long channel – and why this is likely just the beginning of bullion’s rise.
“The immediate driver of [last week’s breakout] was supposedly that macro funds were buying gold, and they were selling long bonds on the back of that,” he told Kitco News. “That's what broke gold above that $3,500 level. Since about April, gold's been consolidating inside this four-month-long bullish consolidation pattern – never really sold off, no signs of any central bank selling – it was just mostly investment funds not buying, but definitely not selling.”
Wong said this protracted consolidation period is technically a very bullish pattern.
“Typically, you had such a good run in something like this, and it doesn't sell off, can't sell off, won't sell off, it's a sign of underlying strength and accumulation,” he said. “So that type of bullish pattern, when it breaks higher, tends to gap up, and this is the gap-up.”
“The target on the chart is about $3,900,” he added. “That's the immediate projection from that bullish breakout we're seeing right now.”
Debt is driving gold's gains
The fundamental picture is also very supportive of gold prices. Wong said that the risks associated with soaring public debt – in the United States but also across OECD countries – are being reflected in bond yields.
“You're seeing a big increase in the 30-year bond yield, virtually across all G7 countries, all the advanced economies,” he said. “And it's all driven by the same theme, just way too much debt, that's the bottom line. Bond markets are losing faith in governments to rein in spending and control debt levels. So what you also see is in the G7, the average two-year yields have been slowly heading down the last couple of years as most governments are trying to stimulate the economy and keep things going.”
The problem, however, is that there's now a great deal of potential inflation just beneath the surface. “You can see that in a number of areas,” he said. “The two-year swap breaks are carving up a big base; it’s breaking out. 10-year break-evens are also breaking out. So both on the shorter, two-year, and longer,10-year, inflation is rising.”
Wong said the term premium has been very sticky and is continuing to rise. “Term premiums are what the market demands in terms of extra yield to compensate for risk on the longer end,” he said. “So when you combine all the above, the bond market is pretty unhappy on the long end. It sees an inflation problem, and it wants higher compensation for that.
“On the shorter end, it's acting better because it knows that central banks are going to be cutting rates,” he added. “And here we are with the U.S. Fed, where the futures curve right now is pricing in three cuts this year, September, October, and December. Will there be more?”
50-basis-point cut may be in the cards
Wong said there’s also a real possibility that the Fed starts off more aggressively than the 25 basis points currently priced in.
“There could be a 50-basis point rate cut,” he said. “The Fed has a dual mandate, employment and inflation. When you see signs of a stagflationary environment – which you do right now, you can pick it up in the data, it's definitely there. The labor market's been weakening steadily since the summer. Services price inflation has been picking up, it tends to lead CPI by about three months. The question: how bad does it get?”
“That's the Fed's challenge; it has a dual mandate,” he said. “Right now, the two mandates are diametrically opposed.”
And by putting the Federal Reserve in the position of needing to stimulate the economy to support employment, the U.S. government is forcing it to place the inflation mandate on the back burner.
“The Trump administration wants to run it hot, so you're looking at much lower short rates and a very stimulative fiscal policy, and that's what we're gearing towards,” Wong said. “The [Big Beautiful Bill] will really start to kick in in 2026; with the tax cuts, it should be fairly stimulative. The rate cuts right now should be stimulative as well. And this is why gold is really breaking out and heading higher, is that we're heading to the point of fiscal dominance, [where] monetary policy is subservient to fiscal.”
“In a run-it-hot economy, with inflation and high debt levels, the transmission mechanism works out that the only way to go about this is to devalue the dollar,” he added. “And more than that, you are devaluing any and all monetary assets, i.e., treasuries and the dollar itself. And that's why gold is going higher.”
Dollar debasement is the only option
Wong said the reality is that the United States and the developed world are heading into a sustained period of currency debasement, and the gold market is sniffing this out.
“Gold is very complex,” he said. “Unlike most assets, it reaches across currencies, it reaches across fixed income, it reaches across credit, economics, equities, geopolitics. It's simple to understand because gold's been around for thousands of years, and everyone knows what it is. At the same time, under the surface, there is quite a level of complexity, and you can see it in the price action.”
“It's going on a rocket ride, because people realize there's some serious stuff going on under the surface,” Wong said. “Again, one of the few assets you have against this general trend of debasement of financial assets is gold. That's why it's going up like this.”
The other major component supporting this gold rally is trust, or lack thereof. “It's loss of trust in the entire financial [system], loss of trust in central banking, loss of trust in institutions, loss of trust in government,” Wong said. “When you lose trust in the value of monetary assets, you will go to gold. It's a non-financial asset. It is non-governmental. It is becoming the safe haven: It's not just a safe haven, it’s a safe asset.”
“The fundamentals are basically saying there is a lack of trust that's breaking across governments, institutions, central banks, et cetera,” he said. “If you are a multi-strategy asset manager, and you say, ‘Okay, what asset do I have that's a safe haven?’ It's gold.
“Let's lower the bar,” Wong added. “‘What's safe?’ Still gold.”
