U.S. Debt and Fed Policy Drive Gold's Long-Term Bullish Outlook, Says UOB Expert

The 2024 International Gold Industry Development Conference kicked off in Zhaoyuan city, Shandong province, on August 28. The two-day event brought together over 1,000 mining academicians, experts, scholars, and industry representatives to discuss trends in the gold market, smart mining, and mining technology exchanges.

During the keynote speech session, Yang Ruiqi, Vice President and General Manager of the Global Financial Department of UOB (China) Limited, delved into the factors influencing the gold price trajectory.

Yang noted that several factors, including U.S. debt levels, geopolitical conflicts, the Federal Reserve's rate-cutting cycle, and U.S. elections, significantly impact gold prices. In the long term, he expects the U.S. debt levels to continue rising, thus benefiting the long-term gold price. In the short term, actual rate cuts, the resolution of the Russia-Ukraine conflict, and easing supply constraints could have varying impacts on gold prices, creating trading opportunities at different points in time.

According to Yang, a critical factor influencing gold price fluctuations is global debt, especially the steady increase in U.S. debt. Gold prices are denominated in U.S. dollars, and when the U.S. economy or the dollar faces uncertainty, the price of safe-haven assets like gold typically rises.

Since the 1970s, the U.S. debt has steadily increased, now exceeding $30 trillion, a staggering figure given the U.S. GDP is about $27 trillion. Particularly during the tenures of Presidents Trump and Biden, national debt levels soared. Historical data indicates a correlation between rising U.S. debt and higher gold prices. Thus, over the long term, the U.S. debt burden suggests a favorable outlook for gold prices.

Additionally, the volatility in debt is mirrored by the instability in the Federal Reserve's monetary policy. Following the 2020 pandemic, the Fed rapidly slashed interest rates from around 3% to nearly zero, only to hike them back up to 5.6% by early 2022. Such dramatic rate fluctuations pose severe challenges to any economic system.

Given the unpredictable nature of the Fed's monetary policy, coupled with persistently high inflation rates in the U.S., gold has become a preferred asset for central banks. When faced with challenges to the stability of their foreign exchange reserves, many central banks have turned to gold. From 2000 to 2008, global central bank gold reserves decreased from approximately 33,000 tons to over 30,000 tons but have now climbed back to about 36,000 tons, reflecting a growing preference for gold amid global instability and concerns over existing financial systems.

Yang expressed confidence in the long-term prospects for gold, attributing this to rising U.S. debt levels and unstable monetary policies. He also mentioned that specific factors could influence gold prices in different directions over shorter periods, presenting trading opportunities.

Yang highlighted that geopolitical conflicts, such as the Russia-Ukraine war, often lead to short-term spikes in gold prices. Historically, gold prices don't react immediately to the outbreak of a war but tend to rise significantly within a month, staying strong until the conflict begins to resolve.

Additionally, Federal Reserve rate cuts have historically boosted gold prices. Lastly, U.S. election outcomes also impact gold, especially if political transitions lead to policy changes.

However, Yang noted that rate cuts happen at specific times. If the U.S. election concludes and Russia-Ukraine negotiations make substantial progress, different time points will present unique trading opportunities. Long-term, he believes the U.S. economy is not as robust as it appears, suggesting its debt levels will continue to rise.