【MACRO Insight】Gold boom and deficit concerns , dual signals from the financial market

The modern gold rush is gathering pace, with gold prices setting records almost weekly. Last week, spot gold soared above $2,700 an ounce for the first time, extending its gains this year to 31%. “I have to say, it's a little crazy,” said Henry Jennings, senior market analyst at Marcus Today. “It's certainly one of the best performing assets this year by a long shot.” Driving factors behind the gold rush include geopolitical events in the Middle East. Central banks continue to hoard gold, but the pace of purchases has slowed after “record-breaking” demand at the beginning of the year, according to the World Gold Council.

Investors around the world also appear to be trying to stockpile commodities ahead of the U.S. election. Jennings noted that the market is concerned that neither candidate has really addressed the growing U.S. deficit: The U.S. government debt has already topped $33 trillion and is still rising. “Gold is being viewed as one of the safe haven assets right now. And the sentiment is really extraordinary.” What he meant by “sentiment” is that many investors are enthusiastically buying gold in the market.

Andrew Hauser, deputy chairman of the Reserve Bank of Australia, said that global financial markets, especially stock markets, are very optimistic about the soft landing of the economy, especially in the post-epidemic period. Hauser believes that some of these assets have reached perfect pricing, which may be true, or may eventually prove to be true, but it has to be said that this is an extreme situation.

This has brought a kind of paradox to the financial market: on the one hand, the soaring gold price is seen by some as a sign that investors are preparing for a so-called hard landing or global recession; on the other hand, people believe that the world's largest economy will continue to perform well. Jennings said: “The market will not always go up in a straight line. When everyone focuses on a particular view, that view often fails. But which view may be overturned remains to be discussed.”

Meanwhile, billionaire hedge fund manager Paul Tudor Jones warned that the bond market could force the government to address the fiscal deficit after the election. “Unless we get serious about spending, we're going to be broke pretty quickly,” Jones said. He worries that government spending could lead to a big sell-off in the bond market, sending interest rates soaring. Jones plans to own no fixed-income bonds and will short long-term bonds.

“The question is, after this election, is there going to be a Minsky moment for the U.S. and the U.S. debt market？” Jones said, using the shorthand term for a sharp drop in asset prices. “Are we going to have a Minsky moment where all of a sudden people realize that what they're talking about is fiscally impossible, financially impossible？” He continued, The federal deficit in fiscal 2024 will soar to more than $1.8 trillion, 8% higher than in fiscal 2023, according to the Treasury Department.

Jones noted in the interview that the budget deficit has increased under both Trump and Biden, and said Trump and Harris are “the least suited for the job at hand” when it comes to the budget, saying both candidates are worrisome. He also said he remains concerned about inflation, especially if Trump wins. Jones holds gold, Bitcoin and commodities as a hedge against inflation, as neither presidential candidate has a plan to address the U.S. debt problem.

He said inflation risks will loom large after the November election as each candidate promises tax cuts and spending proposals that turn a blind eye to deficit problems in Washington. “All paths lead to inflation,” Jones said. “I'm long gold. I'm long Bitcoin. I think commodities are under-owned, so I'm long commodities. I think most young people have found a way to hedge against inflation through the Nasdaq, which is great, too.”

Chris Beauchamp, chief market analyst at IG London, believes the gold rush “shows no signs of slowing down.” “The recent early October decline has been kind to bulls, who see renewed upward momentum in this strong trend,” he wrote in a note. He did express some caution, however. “A close below the September high of $2,685 could spark some short-term weakness.” Silver prices are also strong, up more than 30% this year and at their highest level since 2012.

Jones, who once warned of a “debt bomb,” is firmly pessimistic about the US fiscal trajectory. The Congressional Budget Office expects the debt ratio to reach 122% of GDP by 2034, but Jones believes this is a very conservative estimate. Jones predicted that once the election is over, the next president will have to solve this problem, otherwise he will face a rebellion from the bond market. Last year, the so-called “bond guards” had already “made a big fuss” about this and refused to accept US debt, causing the 10-year US Treasury yield to hit 5% in October last year.