With the U.S. national debt ballooning to over $35 trillion, analysts are starting to question whether traditional investments, like Treasury bonds, can still provide stability.
The answer, according to Bank of America’s latest report, is simple. Gold is now the ultimate safe bet. The metal has already shot up more than 30% this year thanks to a variety of factors.
Interest rates are falling, central banks are buying up gold like it’s going out of style, and U.S. retail investors are jumping on the bandwagon. It’s a gold party all over.
U.S. debt crisis
In a note titled “Is Gold a Safer Investment Than Treasuries?” Bank of America’s Commodity Strategist, Michael Widmer, said that fears over debt levels will be gold’s key driver.
The debt situation has gotten so bad that neither of the two leading U.S. presidential candidates (Kamala Harris and Donald Trump) has a plan to fix it. Certainly not one they’ve shared with the public.
Trump’s tax proposals alone could add about $7.5 trillion to the debt, while Harris’s plan would tack on another $3.5 trillion, according to the Committee for a Responsible Federal Budget.
Widmer pointed out that other countries are in the same boat. Climate change, aging populations, and rising defense costs are forcing governments everywhere to borrow more money.
Widmer explains that this is turning investors away from traditional safe havens like Treasury bonds. In his words:
“With lingering concerns over U.S. funding needs and their impact on the U.S. Treasury market, the yellow metal may become the ultimate perceived safe haven asset.”
Bank of America has set a price target of $3,000 for gold.
Can gold really replace Treasury bonds?
Of course, not everyone is convinced. While there’s always been a group of investors who prefer gold over Treasuries, their numbers could grow as debt concerns continue to rise.
But even with the U.S. debt now exceeding 120% of GDP, gold’s volatility makes it unlikely to fully replace Treasury bonds in the minds of most investors.
JP Morgan is warning investors against overreacting to gold’s perceived potential. The bank’s analysts wrote that:
“The most likely scenario for the next few years is the status quo: Deficits remain wide, and debt levels continue to rise.”
Gold’s rally is perplexing many market analysts. For one thing, it is climbing even though consumer sentiment and employment data don’t indicate major fear in the market.
Historically, gold peaks when people feel insecure about the future. That’s not happening right now. A chart from the American Association of Individual Investors shows that sentiment is actually pretty strong, yet gold prices are still climbing.
Sentiment among fund managers has jumped to its highest level since June 2020. At the same time, allocations to bonds and cash are dropping, making room for gold to take center stage.
Another oddity in this rally is that gold mining stocks aren’t following the metal’s rise. Schroders reports that the ratio of the gold price to the VanEck Gold Miners ETF is at an extreme level.
Meanwhile, the gold mining industry’s all-in sustaining cost margin is at a record high. This means investors in gold miners don’t believe the current price of $2,700 is sustainable.
So, who’s buying all this gold? Central banks have been adding gold to their reserves since 2022, but demand seems to have flattened out this year.
Jewelry demand, especially from key markets like China and India, has also fallen off a cliff. One theory is that sovereign wealth funds and hedge funds are quietly buying gold behind the scenes. Quantitative funds, which follow momentum-based strategies, could also be driving the price higher.
Whoever the buyers are, they’ve pushed gold from $2,000 to $2,700, and Bank of America thinks there’s still room to grow. Gold might also be reacting to geopolitical concerns. Wars in Europe and the Middle East, combined with America’s electoral uncertainty, are probably part of the reason why gold is hitting new highs.
But that doesn’t fully explain it. If fear was the main driver, we’d expect to see stocks falling and bond volatility rising. That’s not happening.
How bad is the national debt?
Right now, the U.S. national debt is sitting at $35.75 trillion. The Congressional Budget Office estimates the federal budget deficit for 2024 to be around $1.834 trillion, an increase of $139 billion from the previous year.
Net interest payments on the debt have jumped by $240 billion, driven by 2 years of steady higher interest rates.
Social Security and Medicare are also pushing up spending, with increases of $107 billion and $25 billion, respectively.
Looking ahead, economists expect the debt to hit $50 trillion by the end of the decade if nothing changes. They also predict annual deficits will top $2 trillion and could reach nearly $2.9 trillion by 2034.
