What's behind the gold rush?

The record hunt for the gold price and the decline in the dollar have attracted a lot of attention in recent weeks. Both things are inextricably linked.

Gold is an absolute winner in a year in which stock markets are in the grip of corona and savings rates at many banks have reached zero. The precious metal has already risen by more than 2020% in 30. This week the magic mark of $2.000 was reached. It remains to be seen whether rally ends here. Analysts at investment bank Bank of America are already predicting that the gold price will continue towards $3.000 within eighteen months.

The record hunt for gold cannot be separated from the decline of the US currency. As the dollar falls, the rise in gold prices looks even more impressive. Expressed in dollars, the precious metal has increased in value by 20% within two months. Converted to euros, less than 10% of that increase remains.

mega debt
In addition, the cause of the declining dollar is also the reason why the gold price is rising. more and more people are concerned about the rising US government debt. In the first 3 years that Donald Trump was in the White House, that debt has risen from less than 20 to more than 23 trillion.

As a result of unprecedented measures to get the economy back on track after the corona blow, that amount will grow to about 27 trillion this year. Net debt will soon be roughly 1,2 times the size of the US economy. By way of comparison: in the Netherlands this ratio will be 0,6 at the end of this year. Viewed in this way, it is no wonder that many parties in gold now see more as a safe haven than the dollar.

American Downgrade
Credit rating agencies also have their doubts about financial policy in the United States. A few days ago, Fitch revised the outlook for the country from neutral to negative. That is a first step towards a downgrading of the very highest AAA rating. In that case, investors will demand a higher interest rate than the 0,5% they currently receive on US 10-year Treasuries.

Of course, the United States is not waiting for that. There are several ways to keep the national debt under control. For example, by raising taxes and cutting spending. However, these are unpopular measures that also nip the economic recovery in the bud.

Inflation expectations
The fear is therefore that the Federal Reserve will allow inflation to rise considerably in the coming years. Inflation is the effect that you can buy fewer goods or services for the same amount of money. With an average inflation of almost 3%, the purchasing power of your money has decreased by a quarter after 10 years. That is annoying for those who, for example, counted themselves rich with the prospect of a certain pension income.

But this is beneficial for everyone with debts: the purchasing power of the amount they have to repay in the future also decreases. The currency world is therefore keeping a close eye on US inflation expectations. If they rise further, the falling dollar and rising gold price will continue to dominate the financial headlines.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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