The Modern Gold Rush

The price of gold has now increased by +70% in 16 months with a new record market capitalization of 20.75 trillion dollars. In fact, gold is valued at MORE THAN 1.25 trillion dollars compared to the COMBINED value of the 10 most valuable remaining assets. What is gold telling us?

It's hard to believe that in October 2023, the price of gold has dropped to a low of $1,820/oz. This week, we witnessed gold prices surpassing $3,100/oz for the first time in history. Gold prices have increased by +16% since the beginning of the year, while the S&P 500 has decreased by nearly 10% from all-time highs. So, what is the price of gold telling us?

First, let's review the topic we have been discussing for over 12 months. The RELATIVE strength of gold has been unparalleled in the past 2 years. Even when the US dollar, 10-year bond yields, and the S&P 500 rise, gold still outperforms. This does not happen in "normal" markets.

Gold can be priced in USD and gold is a non-yielding asset. If you want to buy gold with USD, you have to convert it to USD and gold does not pay interest because it does not generate profit. Therefore, a stronger USD and higher interest rates will cause gold prices to drop. But that hasn't happened. In fact, the activity of purchasing physical gold has skyrocketed during the trade war, according to ZeroHedge. The amount of gold imported by the United States reached a record high of 30.4 billion dollars in January, marking the second consecutive month of strong increases. This number is DOUBLE compared to the amount recorded during the pandemic in 2020. Once again, it is not "normal".

The fact is that gold has become the ONLY safe-haven asset globally. Historically, U.S. Treasury bonds have been an important safe haven. However, the interest cost for U.S. bonds alone has reached a record level of $1.2 trillion in 12 months and will exceed $1.3 trillion by 2025. This has changed the mindset.

In the 4 months after the start of interest rate cuts, the yield on 10-year bonds has increased by 115 basis points. This is the first time such a situation has occurred in the past 40 years, including 11 cutting cycles. Why? The U.S. deficit spending has gone out of control ( exceeding 1.8 trillion dollars ) to the point where the bond market is being flooded with supply.

Meanwhile, inflation has risen again. Core PCE inflation and headline year-on-year in the last month have just exceeded 4.0%. Moreover, even the core and headline PCE inflation is currently at 3.1% annually over the last 6 months. When inflation reduces purchasing power, gold shines even brighter.

As inflation recovers and deficit spending forces investors to seek safe havens in gold, we are witnessing HISTORICAL price action. Gold prices have reached the highest level in 50 months, the best streak in 12 years. This is the third longest streak after the historic bull run in the late 1970s.

And much more. Geopolitical tensions in the Middle East and between Russia and Ukraine continue to escalate. This has attracted more safe-haven investors to pour capital into gold. The geopolitical risk index remains historically high with several spikes since 2022.

In summary, we have:

1. The relative strength of gold
2. The U.S. debt crisis and $1.8 trillion deficit spending
3. Core inflation rises in the United States
4. Record physical gold purchases
5. Trade war instability
6. Geopolitical tensions increase Gold has almost never seen a better context than this. Finally, let's not forget the upcoming debt ceiling crisis in the United States. As illustrated below, the US debt ceiling has capped total debt at over $37 trillion, according to ZeroHedge. In the coming months, we will be facing the debt ceiling crisis for the first time since 2023.

On Wednesday, the U.S. Congressional Budget Office indicated that the United States could face default as early as August 2025. They stated that the risk of default is increasing without an increase in the debt ceiling. The year 2025 is set to become a historic year in the market.