US debt accelerates through $38 trillion: Has gold peaked?
NEW YORK (October 24) Gold has never seen a 10-week winning streak, and that record remains unbroken as the market was unable to recover from Tuesday’s colossal sell-off. Prices dropped more than 5%, marking their biggest decline in five years.
Although gold prices have managed to hold critical support above $4,000, they are on track to end the week with a 3% loss, with spot gold last trading at $4,111.30 an ounce.
Because of extreme market volatility, it’s difficult to believe that we’ve seen the lows in gold for now. According to some analysts, it could take time for the market to rebalance itself.
However, even if gold experiences a deeper technical correction, an important question investors need to ask themselves is: What has materially changed in the marketplace?
In the last few weeks, gold had become a momentum trade as investors finally started to jump on the bandwagon. Record ETF demand and record volume in smaller futures contracts on the CME are good indications that retail investors were a major factor behind gold’s last $1,000 rally. This speculative frenzy was never going to be sustainable.
However, let’s look beyond the short-term volatility. Before prices went parabolic, the gold market was already seeing its best annual gains since 1979. That does not happen by chance. Fundamental value has been created in the gold market, and that is not going to change anytime soon.
To give you just one example, this past week, U.S. government debt surpassed $38 trillion. Not only is debt at record levels, but this was also the fastest accumulation of a trillion dollars in debt outside of the COVID-19 pandemic. It was only in August that the national debt stood at $37 trillion. Some analysts note that the pace of U.S. debt growth is now double what it was in 2000.
The debt problem has also been exacerbated by the ongoing government shutdown, which is starting to impact economic activity.
The reality is that rising government debt will continue to weigh on economic activity and drive inflation higher. Investors are starting to recognize that gold remains one of the few assets that can protect their purchasing power in this environment.
While we single out the United States’ debt problems, it is not alone. Sovereign debt around the world remains on an unsustainably higher trajectory, which is the biggest reason gold has hit record highs against all major currencies this year.
Looking ahead, we can expect further volatility in the market. However, many analysts note that even at $4,000 an ounce, gold remains cheap compared to other assets like U.S. equities, which continue to trade at record highs.
Many analysts expect that with so much uncertainty, dips in gold will continue to be bought. If the price action follows a similar pattern to this three-year uptrend, we would expect the selloff to be relatively short and shallow. This week’s drop ranks only among the top five corrections and is surpassed by the selloff in May. The volatility made it a challenging period, but gold investors can still hold their heads high.
That’s it for this week. Have a great weekend.
KitcoNews
