It Might Be Good to Hold Some Gold after US Debt Downgrade
The comments below are an edited and abridged synopsis of an article by Neils Christensen
Fitch has downgraded the US Long-Term Foreign-Currency Issuer Default Rating to AA+ from AAA.
The last time US sovereign debt was downgraded was in 2011, and it sparked a rally that drove gold above $1,900 an ounce, which was then an all-time high.
Gold has not seen a surge in safe-haven demand as Fitch’s downgrade comes at a much different time; fear in the marketplace is not as palpable. In 2011 the economy was recovering from the 2008 Great Financial Crisis, growth was anemic, the labour market was weak and the Fed was pumping billions into the economy.
In 2023, after years of pandemic-related turmoil, growth has been robust, with near full employment even as the Fed has been raising interest rates and reducing money supply to bring inflation down.
However, just because gold hasn’t reacted, doesn’t mean it won’t. John LaForge, head of real asset strategy for Wells Fargo Investment Institute, said that he expects gold to rally as more investors focus on US debt.
Michele Schneider, director of trading education and research at MarketGauge, said that Fitch’s downgrade is just another step in gold’s long-term path higher.
The gold market is still in pretty good shape. The World Gold Council has noted that healthy physical demand supported the highest average quarterly gold price during the second quarter.
The biggest hurdle for higher gold remains the Fed, and despite the growing threats to the economy, there is still no definitive answer on when this current tightening cycle will end.
So, the market will remain stuck in neutral until the economic picture becomes clearer.