Gold prices will benefit from soaring U.S. deficits and mounting fiscal instability, even if no near-term crisis occurs, according to analysts at the World Gold Council (WGC).
“With the passing of the One Big, Beautiful Bill, the US is staring down an additional US$3.4 trillion in debt over the next decade – and a US$5 trillion lift to the debt ceiling, unless the Trump administration can deliver on its lofty growth forecasts,” they wrote on Tuesday. “Add to that Elon Musk’s launch of the ‘America Party’ and a politically charged backdrop, and the risks, both fiscal and political, are stacking up.”
The analysts said that these uncertainties “have already triggered a global reallocation of capital” as the weakening U.S dollar has driven gold prices and Treasury yields higher. “As fiscal pressures mount, bond market volatility is likely to persist, ultimately supporting demand for gold as a safe-haven asset,” they wrote.
The World Gold Council outlined a detailed list of the potential impacts of this new fiscal landscape on the gold market.
“First there was ‘Liberation Day’, when Donald Trump’s initial tariff announcement set off alarms and an unprecedented sell-off in US Treasuries,” they noted. “The market has barely recovered from that turmoil and now it is pondering the potential impact of Trump’s ‘Big Beautiful Bill’ which the nonpartisan Congressional Budget Office estimates will add $US3.4 trillion to the nation’s $36.2 trillion debt.”
The analysts said that investors are watching to see what impacts the spending bill will have on asset allocation strategies. “With uncertainties everywhere, it is likely that gold will continue to be an attractive safe haven for investors navigating a volatile world in which fiscal concerns are adding to investor risk,” they wrote.
Rising interest rates would normally be seen as a significant headwind for gold prices. “Since 2022, however, this inverse correlation has again been counterbalanced by other factors,” they noted. “As real rates rose – currently sitting above 2% – gold prices also generally rose, supported this time by investors seeking to mitigate a variety of risks and by central bank buying.”
“Indeed, central bank buying and the acceleration of those purchases that we have witnessed since 2022 is a big factor in gold’s strength,” the analysts added. “The reasons for this increased appetite from emerging market central banks for greater gold reserves are multiple, e.g. diversification, geopolitical risks, and gold’s performance in periods of crisis.”
“More recently, consumer confidence and business investment intentions have been affected by economic and trade policy uncertainty,” they said. “This in turn has triggered a reallocation of global capital out of the US with global investors seeking out alternative safe-haven assets to US Treasuries.”
The WGC said the results of this reallocation among safe havens are “a weaker dollar, rising gold prices, and US bond yields widening versus other high-grade sovereigns, e.g. Germany.”
“More broadly, we believe fiscal concerns have been one of the factors supporting the gold market,” the analysts added. “For example, the difference between the yield on a US government bond and the fixed rate of an interest rate swap has been pushed up – a potential sign of fiscal concerns. In other words, we are witnessing investors’ inability or unwillingness to absorb debt issuance or sales by other bond holders at prevailing prices, in turn exerting upward pressure on bond yields, pushing the US Treasury swap spread higher.”
“Our simplified analysis points out that the differential between US Treasuries and swap rates, which we believe is at least partly linked to US fiscal concerns, is statistically significant in explaining movements in the gold price,” they said. “In practical terms, when fiscal concerns increase – reflecting worries over US government debt sustainability or deficits – investors may seek the relative safety of gold, driving its price higher.”
All of this puts the United States in a precarious fiscal position. “The gold market is likely to continue to be supported by US fiscal issues as the bond market will remain sensitive to US debt sustainability considerations,” the WGC noted. “Indeed, the last two decades of relaxed fiscal policies (Charts 5 & 6) and shifts in the demand structure have now put the US in a precarious position, and one which could be exacerbated by the passage of the ‘Big Beautiful Bill’.”
The analysts noted that demand for Treasuries from the Federal Reserve and foreign governments – the least return-sensitive buyers – is dropping. “By contrast, foreign private investors are now the largest non-official holders of Treasuries. They are also likely to be the most price-sensitive category of investors, given their global mandates and tendency to compare Treasuries with government bonds across multiple jurisdictions.”
The World Gold Council made a point of saying that they do not see a full-blown fiscal crisis in the U.S. as an imminent threat. “Such a crisis would require a short-term trigger – such as a debt-ceiling miscalculation resulting in a technical default – that exacerbates the existing long-term destabilising trends,” they said. “Rather, the more likely outcome is a series of rolling mini-crises as political objectives and bond market expectations collide. In fact, when it comes to fiscal sustainability, perceptions matter as much as policy.”
“If leaders give the impression that their commitment to long-term fiscal discipline is weakening – or that they are determined to force through policies that will weaken the fiscal position – then the reaction in bond markets is usually quick and severe,” the analysts warned. “But this is generally short-lived as the government backs down in the face of market pressure and central banks can also step in to prevent yields rising too quickly (and they will always do so if those moves in yields threaten financial stability).”
As fiscal concerns continue to rise, they expect that gold, as an alternative safe-haven asset, will remain well-supported.
“The interest rate environment and geopolitical tensions undoubtedly play a significant role in driving the gold price but they are not the sole factors,” the WGC concluded. “Fiscal concerns have also had a say. And while there is a strong belief that the US Treasury market will never lose its safe-haven status, a major crisis, while unlikely, is not impossible. The more likely outcome is a series of rolling mini-crises as highly indebted sovereigns like the US are confronted with market-imposed limits on fiscal largesse.”
“This uncertainty and resulting market volatility are likely to give additional support to the gold market.”
