Gold is experiencing its best start to a new year since 2023 and is on track for its strongest monthly performance since September. Last week, gold priced in euros, British pounds, Canadian dollars, and Swiss francs hit new all-time highs, signaling that the safe-haven metal’s bull market is ready to continue once again.
This week, stubborn inflation and growing economic uncertainty, as government debt continues to rise, are helping to push gold prices towards fresh all-time highs above US$2800 per ounce.
A major catalyst for the gold price breaking out of its recent consolidation has been the uncertainty surrounding incoming president Donald Trump. Trump’s policies on trade, tax cuts, deportations, etc. all give rise to this uncertainty, which is positive for the safe-haven metal.
During a powerful inaugural speech on Monday, the newly elected president laid out a confrontational policy, both domestically and internationally. Trump also declared the beginning of a new “Golden Age” in America.
Gold Futures were fueled by safe-haven inflows and moved above pivotal technical resistance at $2750 after Trump confirmed he intends to impose 25% tariffs on Canada and Mexico as early as February 1, as well as tariffs on both silver and gold.
Trump also threatened to launch an economic war internationally, with sweeping and across-the-board tariffs on all imports coming into the United States.
The new administration has notably refrained from implementing the campaign-promised universal tariff, though it remains under consideration. Trump has ordered a comprehensive trade policy review due April 1, examining potential pathways for action under several different U.S. trade laws.
Meanwhile, the bond market is looking at the U.S. debt ceiling and the potential for another fight, with $2 trillion+ deficits that the U.S. continues to issue every year and expectations that Trump could make it worse.
America's reliance on government debt has reached dangerous levels, with $2 of new debt needed to generate just $1 of GDP growth. Treasury Department data shows the U.S. federal deficit hit $710.9 billion for the quarter ended Dec. 31, a 39% jump from the year-earlier period.
For a returning President who promised to pay down the government debt load during his first campaign in 2016, Trump grew the National Debt the most in absolute terms by any President in a single term until Biden usurped this dubious record.
During Trump’s first presidency from 2017–2021, the U.S. added $8 trillion to the Federal debt. Under the Biden administration, another $8.2 trillion was added, caused initially by spending for the COVID pandemic.
A conservative figure is that another $8 trillion in debt could be added over the next four years, with some forecasts projecting up to $12 trillion. The Federal debt to GDP ratio could go from 123% to 147% by 2029. Consumer and corporate debt are also astronomical.
Total debt (governments, corporations, households) to GDP today stands at 342% but by 2029 it could be 413%. The U.S. is also now paying out more than $1 trillion for interest on the debt, which is one government expenditure that cannot be cut.
Tariffs, mass deportations, and income tax cuts all are potentially inflationary, sending the already astronomical and exponentially rising U.S. debt higher.
According to the latest economic outlook released last week by the Congressional Budget Office (CBO), federal debt projections indicate that U.S. debt is expected to rise significantly in the coming years.
After Trump took office again this week, concerns over "bond vigilantes" in the United States have resurfaced. The term, coined in the 1980s, refers to debt investors who seek to impose fiscal discipline on governments they perceive as profligate by raising their borrowing costs.
But this time, the U.S. economic indicators are even more alarming. The Fed controls the short end of the market, but the bond dealers control the long end and the bond market is not merciful.
Traders' decisions to buy or sell debt reflect a range of factors, such as what they think of a country's growth prospects, inflation trajectory, and the supply and demand for bonds.
Once they see trouble and perceive that U.S. bonds are becoming too risky, they will sell. After all, the S&P has already cut the U.S. debt rating from AAA to AA+.
Adding to the bond market woes is the $6.7 trillion of bonds coming due in 2025. Trump’s anointed Treasury Secretary Scott Bessent must decide how to roll the $6.7 trillion in Treasury bonds, and will soon be faced with a choice.
Do they refinance with short-term treasury bills or longer-dated notes and bonds? Normally, it is funded only 15%-20% with T-bills. But T-bills are also cheaper, given that the yield curve has returned to normal which has historically signaled a coming recession after a previously prolonged inversion lasted 2 years.
"With this amount of debt, it’s a very fragile equilibrium that we sell bonds in," Bessent said when testifying at his confirmation hearing in Congress this week, saying he would want to survey market participants before taking any steps to eliminate the U.S. debt ceiling, which Trump had called for in December. "The United States is not going to default on its debt if I'm confirmed."
The U.S. federal debt currently sits at $36.4 trillion, while government of the world’s largest economy is highly dependent on foreigners buying up their debt. While the amount held is up $1.1 trillion over the past year, former big buyers such as Japan and China have recently become the largest sellers, with China selling U.S. Treasuries to buy gold.
The current debt ceiling remains at $31.4 trillion. Since 2021, the debt ceiling has remained the same but deals have always been cut to allow bills continuing to be paid. Previous deals have been cut using extraordinary measures, to avoid a showdown over the debt ceiling and allow the bills to be paid. But proliferate debt will rear its head once again here in the first quarter of 2025.
Outgoing Treasury Secretary Janet Yellen has warned that a debt ceiling crisis could soon be upon us. With the debt ceiling suspension ending on January 1, Yellen stressed that without immediate congressional action, extraordinary measures again will be required to prevent a catastrophic default.
Extraordinary measures, which include delaying investments in government worker savings plans and postponing certain payments, are temporary fixes. While these accounting maneuvers could buy the federal government months of financial breathing room, they do not eliminate the risk of default.
Ironically, during Yellen’s tenure as Fed Chair and Vice Chair, U.S. debt surged by $8.2 trillion, and an additional $8.5 trillion accumulated while she served as Treasury Secretary.
Since U.S. President Richard Nixon ended the dollar’s convertibility to gold in 1971, gold has risen in lockstep with sovereign debt and the ever-increasing debt limit. The debt represents fiat money, while gold represents real money.
With time running out, lawmakers face immense pressure to act. Failure to address the debt ceiling could push the U.S. into uncharted economic territory, testing the resilience of its financial systems and global leadership.
Much rides on how bond markets respond to the Trump administration. A surge in interest rates in the United States – the world's largest economy and the lynchpin of the global financial system – would also send shockwaves globally and take gold prices much higher.
Both gold and interest rates surged in the late 1970s, when the Fed lost control of the economy and ushered in a stagflationary recession.
Gold has been sniffing out sovereign debt markets already becoming jittery. While U.S. government debt has risen to historic levels, the U.S. is not alone as governments worldwide continue to engage in deficit spending.
In recent days, the UK has come under pressure from bond traders who at one point pushed the yield on 30-year British government bonds to a 26-year high. The additional yield France pays for 10-year debt over Germany rose in November to the highest since 2012 when Europe was engulfed in a sovereign debt crisis.
Higher borrowing costs for governments trickle down to consumers and companies, curtailing economic growth, increasing debt defaults, and leading to sell offs in stock markets that send investors into safe-havens.
During Trump’s previous presidency, gold prices moved up over 70%. When Trump took office in January 2017, gold was trading at less than $1200 per ounce. Before the end of his term in January 2021, the safe-haven metal had registered a high of $2089 per ounce by mid-2020.
Bond markets are waiting to see the impact of Trump's spending cuts and tax reductions, with disappointments possibly triggering the vigilantes.
Persistent wrangling over the U.S. debt ceiling, further downgrades to the U.S. credit rating, or a fall in foreign demand for U.S. Treasuries due to reasons like sanctions and wars could take gold to its initial $3000 target quickly.
Next week will feature monetary policy meetings from both the European Central Bank (ECB) and U.S. Federal Reserve. The expectation is that the ECB will cut by 25 basis points, while the Fed will keep rates steady in the current 4.25%-4.50% range after reducing the Fed Funds Rate by a full percentage point since September.
Yet, Trump said Thursday, when speaking virtually at the World Economic Forum in Switzerland, that he will demand interest rates drop and “likewise they’ll drop all around the world. They should follow us.” Trump later suggested he knows more about monetary policy than Powell, in comments made to reporters in the Oval Office.
After testing support at $2750 earlier during yesterday's Comex session, Gold Futures quickly moved back up towards key resistance at the $2802 all-time high reached in late October directly following these comments.
Trump has fought with Federal Reserve Chairman Jerome Powell in the past and recently threatened to again challenge the independence of the Fed. Powell's mandate expires in May 2026 and the Fed Chair has stated he will not resign.
An open battle between Powell and Trump could bring more uncertainty into the marketplace, which would benefit precious metals as the new administration could usher in a new era of government stimulus and easier monetary policy.
Meanwhile, both silver and the miners have continued to lag the gold price coming into Fed Week, with lackluster volume being featured in the mining complex. Gold is nearing its all-time high but sentiment remains muted as the historically overvalued U.S. stock market continues to post all-time highs as well.
Precious metals equities are not only historically undervalued relative to the gold price, but miners are also in better financial shape as they continue to improve their balance sheets and control spending.
A recent positive development has seen beaten down sector bellwether and largest global gold miner Newmont Mining (NEM) showing relative strentgh to begin 2025 by outperforming both gold and the miners.
Nevertheless, gold stocks remain a long way from their 2011 high, when gold was trading below $1900 per ounce. If gold manages to breach the recent all-time high above $2802, this low sentiment coupled with historic undervaluation suggests room for further gains in the beleaguered mining space.
Moreover, the CDNX weekly chart shows an uber-bullish inverse H&S base pattern and a breakout above the 640 neckline could create a powerful rally and technically cement a strong accumulative 2-year base in the junior sector.
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