Last week, rating agency Fitch downgraded the U.S. long-term foreign currency rating from AAA to AA+.
Fitch forecasts that the deficit of the U.S. public sector will reach 6.3% of GDP in 2023, compared to 3.7% in 2022. It is assumed that in 2024 and 2025, the deficit will increase to 6.6% and 6.9% of GDP, respectively.
The last time the U.S. sovereign debt rating was downgraded was in 2011. This prompted a rally in precious metals, with gold prices surpassing $1,900 per ounce, marking a historical high at the time.
Currently, gold hasn't experienced a significant surge in demand as a safe-haven asset, given that the Fitch downgrade occurred in a completely different period. Presently, market fears are not as pronounced as before.
In 2011, the global economy was recovering from the Great Financial Crisis of 2008. Growth was sluggish, the labor market was weak, and the Federal Reserve was pumping billions of dollars into the economy.
Now, economic growth is stable, and even though the Federal Reserve has aggressively raised interest rates and reduced the money supply to bring inflation down to the target level of 2%, the economy is nearing full employment.
However, the fact that gold didn't react now doesn't mean it won't do so later. As more and more investors focus on U.S. debt, there's a growing likelihood of gold prices rising by the end of the year.
The Fitch downgrade is another step toward long-term price increases for the precious metal. Debt relative to GDP with high-interest rates poses significant stress for the economy.
This week, the U.S. CPI, set to be published on Thursday, could be a pivotal moment for gold as prices seek direction.
Last week, the World Gold Council noted that healthy physical demand supported the highest quarterly average price for the yellow metal in the second quarter. Demand was driven by the physical over-the-counter market.
According to the report, global gold demand, excluding OTC, fell by 2% from the previous year to 921 tons. Including limited data from over-the-counter markets, global demand increased to 1255 tons, 7% higher than in the second quarter of 2022.
The reports show that interest in gold is significant. However, the market lacks the spark that could push prices above $2,000 per ounce.
The Federal Reserve has become the most significant obstacle to rising gold prices. And despite the growing threats to the U.S. economy, there's no clear answer yet to when the current tightening cycle will end. Until the economic picture becomes clearer, the market will remain neutral.
