Geopolitical uncertainty caused by the chaos in the Middle East has sparked safe haven demand for gold. This development was the spark that pulled prices up from seven-month lows. But there is another factor in the market that is helping to support gold prices at the $2,000 level, according to one portfolio manager.
The gold price is not only supported by geopolitical risks!
Sprott Inc. managing partner Ryan McIntyre mentions the potential for a credit risk event. This, he says, provides solid safe-haven demand for gold. He also notes that it will likely help push prices well above $2,000. McIntyre’s bullish view on gold comes as the precious metal maintains initial support this week, holding above $1,950 despite bond yields hovering near 5%, the highest level in the last 16 years.
Ryan McIntyre points out one of the reasons why the gold price’s negative correlation with bond yields has broken down. This, he says, is because more and more investors are becoming concerned about the U.S. government’s fiscal outlook and its mounting debt, which stands at more than $33 trillion. But McIntyre adds that it’s about more than the size of the U.S. government’s debt. In this context, McIntyre makes the following statement:
The scariest thing for me is the budget deficit. I’m more focused on where things are going. The increasing budget deficit means that the United States cannot get its finances under control.
“That’s why investors turn to gold!”
High interest rates lead to higher borrowing costs. This creates a need for more capital. Therefore, the US economy faces a potential debt spiral. McIntyre states that higher gold prices reflect this increased risk.
One reason markets are currently focused on rising US debt is the sharp rise in interest rates. cryptokoin.comAs you follow from , Fed Fund rates are between 5.25% and 5.50%. That’s why the U.S. government is spending more money paying off its $33 trillion debt than it is spending on national defense. McIntyre also states that the Fed is shrinking its balance sheet along with aggressive interest rate hikes. He also emphasizes that M2 significantly reduces the money supply, that is, the amount of money in the hands of the public. In this regard, McIntyre makes the following assessment:
As the money supply decreases, asset values naturally decrease. You now need more assets to support your credit requirements at higher levels. This is absolutely the last thing you want. Because it can quickly get out of control. I think that’s why investors are turning to gold. Because they see it as a stable existence. Unless you just want US government bonds, there’s only one safe-haven asset out there: gold.
Until this time, the rise in gold price will continue!
While the Federal Reserve continues to focus primarily on inflation, they need to be aware of a potential risk that bond yields are not tied to monetary policy, says Ryan McIntyre. While it may be a bit premature, the scenario McIntyre is looking for is one in which the Fed maintains its hawkish stance but begins buying bonds to keep yields in line. He also adds that increasing the M2 money supply will also help reduce tension in the market. However, McIntyre also underlines that the Fed is in a difficult situation. It is possible to see that the Fed has increased its balance sheet too much due to increasing deficits. In this context, McIntyre comments:
Maybe it will have the desired effect in the short term. But I think it will make people even more uneasy. That’s the problem when you lose control. With all this uncertainty, I think gold will continue to perform well and remain in an uptrend until the government gets its spending under control. This doesn’t look like it will happen anytime soon.
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