Gold Prices May Hit $4,000 as U.S. Deficits Rise

Analysts at Bank of America predict that gold prices are set to reach $4,000 per ounce within the next year. This projection is primarily influenced by the anticipated impact of U.S. budget deficits, which are expected to overshadow the geopolitical tensions stemming from the Israel-Iran conflict. While gold is commonly viewed as a safe-haven asset during periods of global uncertainty, analysts note that wars and geopolitical conflicts do not typically serve as long-term drivers for gold prices. In fact, gold prices have slightly decreased in the week following Israel's airstrikes on Iran, suggesting that the conflict may not sustainably boost gold prices.

The trajectory of U.S. budget negotiations is seen as crucial in determining the future of gold prices. If fiscal shortfalls persist, the resulting market volatility and concerns over the sustainability of U.S. debt could attract more buyers to gold. The ongoing trade war and the potential for increased U.S. deficits have already weakened the U.S. dollar, traditionally seen as a safe-haven asset. This weakness provides additional upside for gold, as investors seek alternative safe-haven assets.

Central banks globally have been reducing their holdings of U.S. Treasuries, selling off $48 billion since late March. Simultaneously, these central banks have been increasing their gold holdings, a trend that has been ongoing for several years. According to a recent survey, geopolitical instability and potential trade conflicts are driving central banks in emerging economies to shift toward gold at a faster rate than those in advanced economies. Bank of America estimates that central banks' gold holdings are now equivalent to just under 18% of outstanding U.S. public debt, up from 13% a decade ago. This shift serves as a warning for U.S. policymakers, as ongoing apprehension over trade and U.S. fiscal deficits may divert more central bank purchases away from U.S. Treasuries to gold.

Despite the Israel-Iran conflict drawing attention away from Trump’s tax-and-spending bill, the bill’s fiscal impact is expected to add trillions of dollars to U.S. deficits in the coming years. This has raised fears about the sustainability of U.S. debt and global demand for the flood of Treasury bonds that will be issued to finance all the red ink. Regardless of how Congress ends up rewriting the budget bill, analysts predict that deficits will remain elevated, keeping market concerns over fiscal sustainability alive. Rates volatility and a weaker U.S. dollar should then keep gold supported, especially if the U.S. Treasury or the Federal Reserve are ultimately forced to step in and support markets.

Investors have allocated just 3.5% of their portfolios to gold, indicating that the market is not overexposed to the precious metal. This relatively low allocation suggests that there is room for increased investment in gold, particularly as concerns over fiscal sustainability and market volatility persist. According to the analysts' forecast, the combination of elevated U.S. deficits, a weaker U.S. dollar, and ongoing geopolitical tensions will continue to support gold prices, potentially driving them to $4,000 per ounce within the next year.