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Gold prices surge! Is there more upside left in the yellow metal rally?

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Gold prices

:

Gold rates

have surged significantly in recent months, rising by 17% between February 12th, 2024, and the present. In comparison, the S&P 500 increased by 3.6%, the DXY remained relatively stable, and the US 2-year yield rose from 4.47% to 4.75%, marking a 28 basis point increase.
In a column in ET, Abhishek Goenka, the CEO of IFA Global has noted that gold prices have surged despite a ‘risk-on’ environment and rising

interest rates

, which is unusual.

These correlations are difficult to understand, prompting the need to investigate if other factors are influencing the rally, he says.
The US government is accumulating debt rapidly, and the procyclical deficit spending may be supporting the labor market and overall economy, even in the face of high interest rates.
The

US fiscal deficit

stood at 5.3% of GDP in 2022 and rose to 6.2% in 2023, notably higher than historical averages for normal economic conditions. Additionally, the debt-to-GDP ratio, which surged after COVID-19, appears to have stabilized at around 120% of GDP.

Moreover, changes in global geopolitics and trade dynamics, combined with worries about US fiscal profligacy, may be driving the current rise in gold prices, Goenka says. The narrative of de-dollarization has been present for some time. It has been commonly understood that de-dollarization would not occur suddenly and would likely be a gradual process. However, one might ponder whether this process has begun and if we are merely at the initial stages.

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Examining the US dollar against a basket of other major currencies may not provide a complete understanding because other economies are not in very different circumstances, he said. As a result, the dollar might not weaken significantly against other major currencies. In contrast, gold could emerge as the primary beneficiary of the

de-dollarization trend

, he added.
Furthermore, as other central banks aim to boost their gold reserves while reducing purchases of US Treasuries, the

Federal Reserve

may need to consider ending its balance sheet rundown sooner.
In addition to the timing and extent of potential rate cuts by the Federal Reserve, the question of when it will level off its balance sheet is equally significant.
The US interest expense has surged to 2.4% of GDP and is expected to increase further, compared to an average of around 1.4% of GDP from 2015 to 2020. Given the substantial treasury issuances due to higher deficits and refinancing of maturing debt, the US government may require assistance from the Federal Reserve to manage its interest expenses.
Therefore, Goenka believes it is advisable to maintain long positions in gold. He also sees potential rewards in holding long-duration US treasuries over the medium term.

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