FX.co ★ U.S. debt crisis could trigger long-term rally in gold

As the Federal Reserve continues its aggressive monetary policy, the gold market continues to face challenges. However, according to a statement by the research firm Fitch Ratings, it's only a matter of time before the U.S. central bank becomes the buyer of last resort for Treasury bonds, triggering a long-term rally for the precious metal.

In early August, Fitch Ratings downgraded the long-term debt rating of the U.S., surprising markets. And even though the markets overlooked the downgrade, the event drew attention to the growing U.S. government deficit.

Analysts at Montreal-based BCA Research said as the U.S. debt-to-GDP ratio grows, gold remains an attractive hedge against the inevitable devaluation of the U.S. dollar. They believe that once fiscal dominance in the Fed surpasses monetary dominance, the appeal of gold as a safe-haven asset will become evident. Fiscal dominance will also harm the U.S. dollar and the willingness of governments and investors to hold onto it. Such a risk of dollar devaluation will also support the demand for gold.

Following a disappointing auction for 30-year bonds, investors have already witnessed a reduction in purchases of long-term U.S. debt obligations. Meanwhile, yields on 10-year U.S. bonds reached a 15-year high. However, many economists dismissed the recent bond sell-off, explaining that since the U.S. economy remains stable due to a resilient job market, investors aren't interested in safe-haven bonds. The rise in bond yields was challenging for the gold markets, as prices dropped below the critical support around $1,950 per ounce and recently plunged below a two-month low.

BCA analysts believe that if national debt continues to grow indefinitely, it will pose risks to the bond market. Once yields become too costly for the government, they'll have to affirm fiscal dominance and, regardless of the economic consequences, rely on the Fed to execute a more financially favorable monetary policy. At that point, fiscal dominance will prevail, and inflation will begin to rise.

Although such an outcome is not anticipated by analysts, governmental commitments to transition to green energy, military expenditures, and social payouts will eventually push the economy to a tipping point. BCA stated that the country's debt-to-GDP ratio could reach the record high set in 1946 by 2028. If government spending remains at the current level, the ratio could grow to 110% by 2030.

BCA believes that gold will reach $2,000 per ounce from the beginning of November through the end of the year.