(Kitco News) – Rising debt and inflation levels are repricing markets while the constraints on available policy responses favor hard assets, and the recent price pullback and subsequent consolidation of gold and silver hasn’t violated this thesis, according to Paul Wong, managing partner and market strategist at Sprott Inc.
In a new in-depth analysis published Monday, Wong pointed out that while gold prices have been rangebound since the mid-March selloff, with futures anemic and ETFs seeing outflows, central banks – including China’s – appear to be treating dips as buying opportunities.
“Despite persistent geopolitical and macroeconomic volatility, gold’s price action is consistent with a consolidation phase rather than a breakdown,” he wrote.
Meanwhile, equities extended their AI-driven rally in May. “The S&P 500 Index gained 5.15%, led by a surge in semiconductor stocks, which in turn followed strong gains in April,” Wong noted. “In contrast, global bond markets experienced a sharp sell-off. Yields across the curve rose to levels not seen in nearly two decades before stabilizing somewhat toward month-end. The market was reacting to resurgent inflation pressures, initially energy-driven but increasingly broad-based, and rising concerns about fiscal sustainability and debt issuance.”
Wong pointed out that annual PCE inflation has held consistently above the Fed’s 2% target over the past five years, and it’s now accelerating.
“Bond markets have responded with a synchronized global repricing,” he noted. “Yields have risen across both the front and long ends of the curve, reflecting not only cyclical inflation dynamics but also a structural increase in term premia. Short-end rates have moved higher as markets reprice the path of monetary policy, with U.S. two-year yields exceeding the Fed funds rate, implying renewed risk of monetary policy tightening. At the same time, long-end yields have climbed sharply, with the 30-year yield reaching levels last seen in 2007.”
“This simultaneous rise across the curve points to deeper structural concerns about inflation, rising sovereign debt supply, and diminished confidence in fiscal discipline.”
Wong said that this repricing of sovereign debt “is the result of post-pandemic fiscal expansion, persistently high debt levels and a transition away from the low-inflation regime that defined the prior decade.”
“Elevated deficits, combined with supply-driven inflationary pressures, particularly in energy, have forced markets to reassess the trajectory of interest rates,” he added. “Term premia (the extra return investors demand for holding long-term bonds) are rising as bond buyers seek compensation for inflation uncertainty, increased bond issuance and concerns over long-term debt. As shown in Figure 4, after the GFC (global financial crisis), the term premia declined amid the Fed's QE and ZIRP policies. Post-COVID, term premia have risen steadily as inflation returned, QE and ZIRP ended, and debt and deficits accelerated.”
“Until the cycle of higher inflation, rising debt and deficits ends, term premia may continue to climb.”
And even as this has happened, traditional policy tools to respond to it appear to have weakened, with long-term bond yields continuing to rise despite the 2024-2025 Fed rate cuts.
“This is different from past cycles, and it suggests markets are increasingly focused on structural risks rather than central bank guidance,” Wong said. “In some cases, developed markets are beginning to look a bit like emerging economies, with rising bond yields alongside weaker currencies, pointing to a decline in the credibility of official policy and a re-rating of sovereign risk. The UK and Japan are recent examples.”
Wong said policymakers are increasingly constrained by this dynamic. “If they tighten policy, they may trigger fiscal instability and cause financial stress,” he said. “If they ease policy, they could entrench inflation and weaken currencies. As a result, markets are beginning to anticipate a bias toward official intervention, particularly if bond market stress grows. However, such interventions, whether they involve providing liquidity or controlling yields in some way, effectively monetize debt and can reinforce an inflationary bias.”
And as the real and perceived risks in bond market continue to rise, investors are turning to gold as a store of value.
“Even if policy adjustment remains orderly, the underlying shift is toward a regime in which real yields are difficult to sustain at positive levels,” Wong wrote. “The rising supply of sovereign debt, coupled with structural shifts in demand, is eroding the effectiveness of bonds as a store of value. As a result, it will become more difficult for financial assets to preserve purchasing power, and the likelihood of further monetary expansion will grow.”
“This reinforces gold’s role not as a yield competitor but as a store of value in a system where policy increasingly prioritizes bond market stability (via monetization) over inflation control.”
Wong acknowledges that in the near term, gold is facing a cyclical headwind caused by the Hormuz crisis and its broad effects. “The surge in oil prices has increased demand for U.S. dollars among energy-importing economies,” he said. “In some cases, it has forced the liquidation of reserve assets to fund imports. This has temporarily dampened demand from certain central banks and sovereign entities, particularly those most exposed to rising energy costs, even as overall structural buying remains intact.”
“Higher energy prices have pushed inflation forecasts higher, prompting the market to shift from expecting rate cuts to the possibility of further tightening,” he added. “This has raised nominal yields, which in the short term can weigh on gold by increasing the opportunity cost of holding non-yielding assets.”
But Wong believes these pressures remain cyclical rather than structural, and the broader macro setup for gold remains intact. “That is, a rebuilding of the “debasement trade” as investors shift from fiat currencies like the U.S. dollar into hard assets to protect against the loss of purchasing power caused by inflation and government debt.”
He said that policy constraints and rising fiscal dominance will limit the system’s ability to sustain positive real returns. “In this setting, monetary policy becomes constrained as tightening exacerbates growth risks, while easing reinforces inflation,” Wong said. “Fiscal dynamics further limit the scope for real rates to rise meaningfully because higher interest costs strain government budgets.”
“Historically, gold’s performance has been closely tied to this imbalance between nominal rates and inflation,” he said. “When real returns on financial assets are compressed or turn negative, gold tends to outperform as a store of value. While rising nominal yields may present short-term headwinds, they are unlikely to remain sustainably positive in real terms, given the structural constraints policymakers face.”
And the continued demand for gold from central banks reinforces this view. “Over the past four years, official sector purchases have averaged over 1,000 tonnes annually, driven by diversification, geopolitical considerations and concerns over currency stability,” Wong wrote. “These purchases tend to occur during periods of price weakness, creating a durable floor under the market. While short-term fluctuations in demand may result from liquidity needs, the broader demand trend remains intact.”
Also, central banks are increasingly using reserve assets to manage external shocks – and what they choose to keep and sell is very instructive.
“Central banks continue to accumulate gold, buying a net 244 tonnes in the first quarter of 2026—higher than the quarterly and longer-term averages,” Wong noted. “At the same time, during the quarter, Turkey liquidated an estimated $14 billion (roughly 85-90%) of its U.S. Treasury holdings. To access liquidity, Turkey also sold 60 tonnes of gold via gold swaps rather than through outright sales.”
“This distinction highlights the functional hierarchy within central bank reserve assets,” he said. “Treasuries serve as transactional liquidity instruments, whereas gold is retained as core collateral, even in periods of stress.”
Wong said these actions were largely driven by the surging energy and fertilizer costs due to the closure of the Strait of Hormuz. “For import-dependent economies, it has created a need to raise U.S. dollars, often by selling liquid reserve assets such as Treasuries,” he said. “This heightens the potential for more central banks to sell sovereign debt, adds pressure to global bond markets and reinforces gold’s role as a strategic reserve asset.”
Meanwhile, structural factors are tightening the physical gold supply. “Mine supply growth remains limited, and steady official sector demand continues to absorb a significant portion of available supply,” he said. “This reduces the amount of freely tradable gold and increases the market’s sensitivity to incremental demand shifts. As a result, while we may see volatility in the near term, the underlying fundamentals resemble historical environments that have been supportive for gold, particularly those characterized by fiscal dominance, monetary expansion, and constrained real returns.”
Turning to silver, Wong is bullish on the gray metal’s prospects as well, and believes they also reinforce the case for gold.
“The silver market remains in a sustained structural deficit, a condition that has persisted for most of the past several years, according to the Silver Institute’s 2026 World Silver Survey, he noted. “Except for a brief surplus in 2020, the market has consistently undersupplied demand since 2021, resulting in a cumulative deficit of roughly 762 million ounces over the past six years.”
“When you include ETF flows, the imbalance is even more pronounced, exceeding 1 billion ounces,” he added. “This points to a prolonged structural shortfall rather than a temporary cyclical imbalance.”
Wong said the overall picture is of a silver market that is structurally constrained. “Supply growth is limited, industrial demand is structurally higher, and investment demand is returning,” he said. “Behind cyclical fluctuations in individual segments, the broader supply-demand balance continues to tighten. This suggests a sustained period of constrained availability and asymmetric pricing dynamics lies ahead.”
“For gold investors, silver continues to serve as a useful cross-check on the broader narrative of monetary debasement versus hard assets,” Wong concluded. “Gold serves as the monetary anchor and balance sheet hedge. At the same time, silver translates that macro impulse into a market where limited supply flexibility and industrial demand can amplify price moves. In this context, persistent silver deficits, especially with revived investment demand, are a sign that gold’s strength is not an isolated event. Rather, it is part of a broader attempt by investors to reprice scarce real assets amid fiscal dominance and fading trust in fiat systems.”
