The Federal Reserve's recent decision to retain interest rates unaffected, contrary to previous forecasts of cuts, has aroused debate. Despite the Fed's caution, JP Morgan expects a large rate cut of 125 basis points in the second half of 2024. The discrepancy affected gold prices, which reached a record high of $2,426 per ounce in May 2024 in hopes of easing monetary policy and central bank purchases. Different opinions on future rate changes raise concerns about how they may affect financial markets, including gold demand and prices.
From geopolitical tensions to changes in the global economy, there are multiple reasons behind such spikes in the gold price. In this article, we will discuss the major economic challenges the US faces to control this price rise.
1. The National Debt ($32 Trillion)
When you get yourself a credit card and fail to pay the complete balance at the end of every month, the balance keeps accumulating as debt. Scale this up for a country, and you will have your national debt!
National debt refers to the total money a country’s federal government borrowed over time. Since its inception, the United States of America has carried debt that is yet to be repaid. This debt was $75 million during the American Revolutionary War. During the American Civil War, the national debt went from $65 million to $3 billion, registering a spike of over 4,000%
At the moment, the US stands with a national debt of $34.67 trillion. With such high debt, the fear of massive inflation and economic uncertainties rises, leading to an increase in gold purchases. This results in a subsequent increase in gold prices.
2. Inflation
Inflation refers to the rate of increase in the prices of goods and services in a country over time. It reflects itself in the lack of people’s purchasing power as things get more expensive. High inflation in the US results in a high cost of living, making it difficult for people to afford goods, services, and commodities like real estate.
Gold has always been considered an effective hedge against inflation. During inflation, the value of paper currency reduces. On the other hand, the value of gold increases. This makes individual investors and central banks invest in tangible assets like gold for better financial security and stability.
As inflation increases and alarms financial stability in the US, here are the most effective ways to beat it:
Adjusting Interest Rates – The central bank may choose to increase interest rates to cool down an overheated economy or reduce them to increase people’s purchasing power.
Changing Government Spending And Taxes – The government can reduce its spending and/or increase taxes to reduce the flow of public money in the economy.
Fixing Supply Chain Issues – A seamless flow of goods and controlled production costs can help an economy tackle inflation.
Strengthening The Dollar – As more and more countries use the US dollar as their chief currency reserve, the US economy remains safe from extreme inflation.
Boosting Productivity – A boost in productivity will increase the overall purchasing power of people.
Though inflation has dropped below its 2022 highs of around 9%, supply-chain disruptions and the robust US job market might cause a return. With inflation rising yet again, economists foresee a 50% gold rally through 2025. If inflation matches the 1970s, gold might hit $3,500 per ounce by 2025, according to experts.
3. The Impact of De-Dollarization
De-dollarization is the phenomenon characterized by countries moving away from using the US dollar as their chief currency reserve. For the longest time, many countries worldwide have been using the USD for conducting international trade and other globally important financial transactions. However, some of them have started moving away from it and adopting alternative chief reserve currencies.
The biggest impact of de-dollarization is seen with Russia switching to China’s renminbi as its chief reserve currency. This is mainly due to the sanctions imposed on the country for its conflict with Ukraine. China and other BRICS countries are also likely to embrace de-dollarization, leading to potential economic uncertainties.
While the US has navigated several such crises in the past, de-dollarization definitely has an impact on the price of gold as central banks worldwide have started purchasing more gold to ensure economic stability.
4. Reshaping the Economy (Not the End of Globalization)
Especially for a country like the US, it is not fair to say that globalization is nearing its end. Being a global leader, the country has a pivotal role to play in shaping trade and investment across the globe.
The major challenge the US faces while tackling high gold prices is balancing globalization. This includes increased market access, technological innovation, economic growth, environmental concerns, and much more. The country needs to navigate these areas through fair trade practices, protection of intellectual property rights, and encouraging sustainable development.
You should also know that the US has already started performing well in these areas, experiencing a significantly strong GDP recovery. The US economy has also stayed resilient as global labor markets strengthen.
This is what Jamie Dimon, the CEO of JPMorgan Chase, said about the future of the economy to the Wall Street Journal:
5. Long-term Economic Health
While the US continues to remain a global economic leader, the country’s long-term economic health should be assessed thoroughly. Here are a few important considerations financial experts should analyze to help the country tackle issues like sharp gold price rise:
The federal funds are on hold (at 5.25% to 5.5%) until mid-2024.
While the inflation trends are cooling down, they are still above the federal government target of 2%.
As mortgage rates increase, the housing sector activity has experienced a dip of 30% to 40% over the last eighteen months.
The lending standards in the commercial real estate sector have tightened.
Geopolitical risks are far from being resolved.
While the long term economic health of the USA is closely tied with the above factors in the country, high inflation rates and the raising or falling interest rates will continue to impact gold prices.
There are two possible outcomes: either the Fed be forced to maintain interest rates less for a longer period of time due to the increasing US national debt, which might lead to an upward trend for gold prices as the potential cost of keeping these non-yielding assets decreases. Or even the dollar strengthens and gold prices fall as a result of risk aversion. According to experts, the first possibility is more expected to occur in upcoming years. Yet, it's difficult to forecast exact gold prices.
The Final Word – Gold Investment: A Risk Or Opportunity?
While the US is trying its best to curb spikes in gold prices, gold remains a hedge against inflation. Looking at the gold spot prices over the last few decades, it is safe to say that people investing in gold have only profited from the same. Especially if you fear financial instability due to looming economic uncertainties, this is the best time to invest in gold to see handsome returns in 2025.
Commodity analysts expect gold prices to average over $2,000 in 2024 and likely beyond $2,300 in 2025.
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