Gold price has suffered a harsh reversal in the past three days straight. It has dropped by over 3% from its highest point last week and is hovering near its lowest point since July 17th. This retreat has coincided with that of other industrial metals like copper, silver, and platinum. Here are a few reasons why gold price is set to continue rising.

US public debt is soaring

The first reason why gold price has more upside is that the US public debt is soaring, which will lead to a crisis in the next few years. Data shows that the debt has now soared to over $34.95 trillion and could jump to over $36 trillion this month. The debt to GDP has moved from 52.6% in 1960 to 122% today.

The challenge for the US is that debt repayment is also rising. In this case, the government will spend almost $900 billion on its debt payments this year, a figure that will overtake the defense budget.

The biggest issue is that the US does not have a plan to reduce deficit and balance the budget. Medicare and Medicaid spending stands at over $1.79 trillion while social security and defense spending is $1.45 trillion and $909 billion, respectively. No party is willing to cut either of these parts of the budget.

Ideally, the solution to this debt crisis would be to cut spending and boost revenue. Both parties want to keep this spending while Republicans are interested in tax cuts. Trump has even proposed abolishing income tax and replacing it with tariffs on foreign goods. 

Therefore, analysts believe that the country’s debt load will jump to over $50 trillion in the next few years. Gold has often been viewed as a good alternative to the US dollar, meaning that it will do well when the US finds itself in a similar place where Japan is today.

Foreign central banks are buying

The other catalyst for the price of gold is that central banks have continued to buy the metal to diversify from cash. China has been the biggest buyer of gold in the past few years. 

While these purchases halted in May, analysts expect it to resume the purchases in the next few months. It bought 7.23 million ounces of gold in 2023 and has continued its trend this year. 

China will need to continue accumulating gold since its reserves are just 4.9% of its total currency reserves. Other large countries have an average 16% of their reserves in gold, meaning that it has a long way to go.

China is not the only central bank that is accumulating gold. Russia has also been buying vast amounts of gold now that the US has sanctioned its central bank. Other countries in Eastern Europe and the Middle East are doing the same. In a recent note, an analyst at TD Bank said:

“Last year, following the Russian invasion of Ukraine, the US confiscated dollar reserves that Russia was holding. And I think that was very much a catalyst for central banks globally to think about their asset allocation.”

Gold demand and supply dynamics

The other reason why the gold price will likely continue rising is the ongoing demand and supply dynamics. Data shows that gold production stands at 130 million ounces annually while demand has risen to over 169 million ounces. This difference means that gold will likely continue its uptrend. 

Gold’s supply is getting tighter, with the biggest mining companies having to dig deeper to access the metal, which has increased their cost. This explains why most gold stocks have underperformed the market even as gold soared to a record high. Barrick Gold’s stock has risen by just 1.6% this year.

New mines are also not being found as they did in the past. And when they do, approvals are taking longer because of environmental issues. 

Federal Reserve interest rates

Finally, gold price has more upside because of the Federal Reserve. In recent statements, Fed officials have noted that the bank will start cutting interest rates later this year, most likely in September.

The bank is in a difficult place because US inflation remains higher than the 2% target while the labor market is softening. The most recent data showed that the unemployment rate has risen to 4.1%, its highest point since 2021.

Therefore, there are signs that the Fed has now focused on the labor market. In a recent statement, Jerome Powell noted that the bank would be comfortable cutting rates even before inflation falls to the Fed’s 2.0% target. 

Gold will do well when the Fed starts cutting interest rates for a simple reason. Gold does not pay a dividend, meaning that holding it now has some opportunity costs. When rates start falling, this opportunity cost will be removed. 

(Click on image to enlarge)

Gold price chart

Therefore, all these tailwinds could push gold price higher. On top of this, on the monthly chart above, we see that gold has remained above all moving averages while the Average Directional Index (ADX) has moved close to 40, meaning that there is a bullish momentum.

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