U.S. debt risk is not priced in, and gold prices could skyrocket once investors do the math

NEW YORK (August 14) Gold continues to benefit from strong and steady central bank demand, and the more recent pivot of North American and European investors into gold-backed ETFs could have a major impact once markets digest the implications of the U.S. debt situation, according to Ryan McIntyre, managing partner at Sprott Inc.

In an interview with Kitco News this week, McIntyre discussed the various factors that are driving the gold market – some longer-running, some more recent – and the impacts each is likely to have over the coming months.

Bedrock central bank demand 

The first of the longer-term factors that have helped push gold prices to record highs are bullion purchases by central banks, which rose considerably since Russia’s full-scale invasion of Ukraine in February 2022.

McIntyre said central bank demand is still exerting significant influence on the market, both in terms of providing a floor for prices, but also by signaling to other market players.

“I think it's still a bit of a bedrock, like it has been over the past three years,” he said.

But what’s really changed over the past year or so has been the increased buying on the retail side. “To me, that's the story in terms of incremental demand,” he said. “You've seen it mainly reflected in the amount of physical gold held by gold-backed ETFs. We've seen that actually increase for the first time in many years after bottoming out in May of last year.”

Gold ETF holdings are rising

McIntyre noted that gold holdings are up about 11% year-to-date, but they're still down about 17% from their peak back in October of 2020. “Still plenty of room to go before we hit an all-time high of gold held by gold-backed ETFs,” he said. “But you have seen the institutional and retail investor come along a little bit. To me, that's a new story.”

The shift has been global, but also regional: Asian investors have been buying steadily for years, but Europe and then North America jumping in is what turned global flows positive overall.

“Absolutely,” McIntyre said. ”And to me, I think it really is all about people's feelings of uncertainty.”

He said that much of the world has been worried about the future for the past decade, if not longer – but not so much in the United States.

“They've been pretty comfortable with their existing holdings, S&P 500-type stocks, that type of thing,” he said. “And I think for the first time in a while, they started to reassess a little bit on the risk side in terms of how much risk they're taking and how much they're willing to take.”

Americans grow apprehensive

McIntyre said that with all the turmoil going on in the US government, he thinks Americans are finally starting to question what they have as a safety net. “Gold obviously has great history as a safe-haven asset, and people have gravitated towards it,” he said. “I think it's really as simple as that.”

When asked about the potential for a ‘stagflation’ scenario, in which the U.S. economy sees rising inflation in the midst of low or negative economic growth, McIntyre said he could see inflation playing out both ways.

“I could see it being higher, but I can also see it being lower as well,” he said. “I'm not convinced one way or the other, due to the economy. But what I can definitely say is that, from a currency debasement standpoint, you have to believe that's going to strengthen, no matter what the economy does or doesn't do.”

McIntyre said the fiscal position “particularly the United States, but this applies to several other Western countries as well, is in such a different place than it's been in a long time, and the fact that we're running 7% deficits relative to GDP here, and more than half of that just relates to net interest, is kind of crazy.”

Debt interest set to negate growth

“I think about it this way: The current forecast of [Sprott], and most people, including the Congressional Budget Office for the United States, they're basically forecasting the economy to grow about 4% a year, nominal,” he said. “If interest is three plus percent of GDP, it's basically consuming over three-quarters of the growth. We're not that far away from it actually consuming what the economy's going to grow at – just in interest alone, let alone new borrowing required – which is an absolutely scary proposition. Once you get to the point where interest is basically overwhelming the growth, that to me is an obvious signal that the debt cannot be repaid.”

“And not only that, but it's going to accelerate the worsening of the fiscal position,” he added. “That would literally be impossible to pay at that point. And even the Congressional Budget Office forecasts that net interest expense will be above 4%, so above the phenomenal growth rate that it’s forecasting now.”

McIntyre said that one of the biggest threats looming over the value of the dollar is that the United States will have to print a lot of extra money to cover these deficits, and ultimately to pay the debt itself.

“The government has taken on an inordinate amount of extra expense relative to GDP,” he added. “The government is actually supplementing the economy now, and has been since the COVID crisis, so that deficit we're running at 6% to 7%, could easily be close to 10% without that government support.”

“The sovereign risk is the most unpredictable element of the whole thing: When do people really start pricing it into the yields and everything else?” he said. “That's the biggest risk that is on the horizon – and it's not so far away anymore, in my eyes.”

But while some of gold’s major drivers are relatively steady, incremental, and linear, others are far less predictable. Chief among these are two that have dominated the conversation in financial market circles since Trump took office: Trade tariffs and the Fed’s independence.

Markets tuning out tariff talk

McIntyre acknowledged that gold’s recent run-up to an all-time high of $3,500 per ounce happened against the backdrop of extreme tariff uncertainty, but the market has since built up some immunity to the administration’s announcements and threats.

“I think people have gotten more comfortable with announcements versus reality,” he said. “It just changes so frequently, I just think people are discounting it to a degree – rightly or wrongly, I don't know – but it's so hard to keep up with just in its own right. There's so many tariffs, whether it's on specific products or products from different countries. There are so many nuances.”

“Some of it's misinformation, some of it's real,” he added. “You get all these different crosswinds. Just even in the Trump administration, conflicts get resolved between different people over Truth Social and other social media within hours. One person says one thing, someone else has to correct it or adjust it. I think people are somewhat desensitized to a degree.”

“From an investment standpoint, from our side, focused on commodities and precious metals in particular, the only thing we know is the more that there's uncertainty, the better it is for gold,” McIntyre said. “It obviously has been very good for gold prices and will continue to be. To me, it's whether people can really live with the amount of uncertainty given what they own as investments. If you're a gold investor, it's neutral to positive depending on exactly what it is, but it's likely not a negative.”

Attacks on Fed independence 

Trump’s recent attacks on Federal Reserve chair Jerome Powell and the FOMC’s wait-and-see monetary policy have been much more difficult to tune out, as unlike trade policy, they strike at the heart of the credibility of the U.S. dollar, both domestically and internationally as a reserve currency.

McIntyre said part of the problem is that markets are so fixated on the Fed these days, because they’re desperate for lower rates to bail them out.

“Currently, I would say a lot more people focus on the Fed and what interest rates might be doing rather than what the economy's doing,” he said. “The only reason people care about the economy is how it impacts rates because everyone's so leveraged, including the government.”

“To me, one of the most fearful things was removing that person from the BLS last week due to the labor numbers [being] theoretically manipulated, which of course is very unlikely,” he said. “But again, it's an eroding of confidence in institutions. And you don't know when the psyche changes, but when it does change, it's so hard to reverse. You never want to get close to having people switch to that kind of fearful mindset, on a sovereign level, because it's pretty tough to reverse.”

Investment case for gold

“That's why ultimately I think all roads lead to gold for people looking for a safe haven,” McIntyre said. “This doesn’t mean it should be their only asset, obviously. But we definitely think it should be at least 10% of people's net worth. It's a very small market, physically, so to the extent, you actually do get some move en masse – particularly from the United States because they tend to be lower participants in the gold market versus the rest of the world – it could mean big changes for the gold price.”

“From an investment standpoint, you should be looking at this through the lens of opportunity cost,” he added. “If you do one investment, it's obviously precluding you from doing other investments, and if there are a lot of great other opportunities, it might be a tough call. But because there are a lot of pockets of extreme overvaluation, to me, it's such an easy call to move into gold versus other things.”

“Let's say everything stays the same,” he suggested. “Then it's all good. You don't have to worry; 90% of your portfolio will be fine. And then conversely, if it goes a bit the other way, reverts back a little bit more towards normalcy, then you're going to be really happy that you have gold. It's such a small market physically, it doesn't take a lot of money to move into that area to really move the price up, as we've seen, by central bank buying initially, and now ETF buying over the past year or so.”

McIntyre said that one of the things that confirms we’re not in a frothy market is the continued outflows from gold mining equities. “Usually when people are really excited about gold, you usually see big inflows into that area, and you're actually seeing the opposite,” he noted. “To me, that's another great indicator that it's not frothy in this area.”

Silver also set to outperform

And while Sprott remains firmly bullish on gold, McIntyre said he sees equal upside in silver despite the gray metal lacking much of gold’s safe haven appeal.

“I think gold is the ultimate safe-haven asset, full stop, and silver is the little sibling, if you will,” McIntyre said. “I think you should definitely have gold in your portfolio, and silver on more of a tactical basis. We still think silver will do very well. If gold's going up, silver will go up. It tends to be a little bit more volatile than gold, so people should be aware of that.”

“Typically, when people move into silver, because it's an even smaller space than gold, you tend to get some exaggerated moves upward as well,” he added. “It wouldn't surprise me at all if silver did at least as well as gold over the next 12 to 24 months.”

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