Bank of America: Gold Surpasses Government Bonds as Safe-Haven Asset Amid Fiscal Concerns
In a recent note, Bank of America analysts made a compelling case for gold as a safe-haven asset, highlighting its attractiveness over government bonds due to fiscal pressures and global economic trends. Despite the traditional belief that falling real interest rates drive gold prices up, BofA noted that higher rates do not necessarily hinder gold’s performance, indicating a shift in its response to macroeconomic conditions.
One of the key factors driving this shift, according to BofA, is the mounting fiscal pressure, with the U.S. national debt projected to reach record levels in the coming years. As interest payments on this debt are expected to rise as a percentage of GDP, gold emerges as an appealing asset, prompting BofA to reiterate their bullish target of $3,000 per ounce.
Additionally, BofA pointed out that both major U.S. presidential candidates, Kamala Harris and Donald Trump, show little inclination towards fiscal restraint. With policymakers globally leaning towards fiscal expansion, future commitments such as climate initiatives, defense spending, and demographic challenges could increase spending by up to 7-8% of GDP annually by 2030, as per IMF estimates.
If the market struggles to absorb the escalating debt issuance, volatility may increase, further driving demand for gold. Central banks, in particular, could diversify their currency reserves, with gold holdings growing from 3% to 10% of total reserves over the past decade.
While Western investors have re-entered the gold market in recent months, BofA cautioned that short-term gains may be capped as markets factor in a scenario of no rate cuts in the U.S. and a slower pace of rate adjustments. Despite the potential for gold to retrace some of its recent gains, BofA believes that prices will find support at $2,000 per ounce.
In conclusion, Bank of America’s analysis underscores the increasing attractiveness of gold as a safe-haven asset in light of fiscal concerns and global economic dynamics. Investors may consider allocating a portion of their portfolio to gold to hedge against potential market volatility and currency devaluation.