Gold is Beating Stocks and the US dollar as tailwinds rise

Gold has outperformed stocks this year as it faces numerous tailwinds. It has risen by 16% this year while the S&P 500 and Nasdaq 100 indices have risen by less than 10%. Gold has also done better than the greenback as the US dollar index (DXY) has risen by just 2% and Tesla, which is down by 20%.

Federal Reserve interest rate cut

The first main reason why gold has slumped is that there are rising odds that the Federal Reserve will join other central banks in unwinding high interest rates.

Several banks like the European Central Bank (ECB), Bank of England (BoE), and the Swiss National Bank (SNB) have already cut their rates. 

Recent US economic numbers have confirmed that the bank will start cutting rates as soon as in September. The data showed that the unemployment rate rose to 4.3% in July, the highest point since 2021. 

Additional data revealed that the country’s initial jobless claims rose to the highest level since August last year. The manufacturing sector is still contracting while wage growth has stalled.

Subsequently, analysts at Wells Fargo, Citi, and JPMorgan have predicted that the Fed will deliver a 50bps rate cut in September and a total of 125 this year. Gold does well when the Fed is slashing rates. For example, it crossed the resistance point at $2,000 in 2020 when the Fed slashed rates to zero. 

Soaring US public debt

The other bullish catalyst for gold is that the US public debt is soaring. It recently jumped to over $35 trillion for the first time ever and has now soared to $35.1 trillion. This debt means that Joe Biden and Donald Trump have added over $13 trillion in debt in less than 8 years.

This debt means that the US is in a difficult place, with the estimated interest for this year being over $912 billion. Altogether, the non-discretionary spending - Medicare/Medicaid, social security, defense, and interest - will total almost $5 trillion.

The challenge is that both parties are not willing to solve the debt crisis. Both of them want to increase spending, especially on war and welfare, without increasing revenue through targeted tax hikes. For example, the US could comfortably increase the corporate tax rate, which stands at 21%. China has 25% while the EU has 22%.

Therefore, the rising debt means that the US could find itself in a situation where Japan is. For years, Japan’s total public debt has risen to almost $9 trillion, more than double the GDP. In this case, many investors believe that gold is a good alternative to fiat currencies. 

US dollar and inflation

Gold has also done better than the US dollar, which has gone through substantial devaluation in the past few years. Data shows that that the dollar has lost its value by over 44% since 2010. In other words, an item you bought for $100 would now go for $144. Gold has held its value well in that period. 

The dollar has done better than other currencies. Zimbabwe is in its sixth currency now, with the rest falling because of overprinting. Its current currency, known as the ZiG, is backed by gold and has held steady since April.

Even popular currencies like the Japanese yen, euro, and the British pound have lost their purchasing power.

This trend will continue in the coming years. Even if the Federal Reserve achieves its 2% inflation target, it means that the dollar would lose 20% of its purchasing power in that period. 

How to invest in gold

There are a few approaches for investing in gold. First, you can buy gold bars and lock them in a safe at home. Costco has become one of the biggest gold sellers in the United States. 

Second, you can buy the so-called Gold IRAs, which are mostly sold online. This is one of the worst approaches since these companies sell the coins at a huge mark up. 

Third, and the best strategy is to invest in gold Exchange Traded Funds (ETFs) like the SPDR Gold Trust, which has over $65 billion in assets or the iShares Gold Trust (IAU), which has $29 billion in assets and a 0.25% in expense ratio.

Gold demand and supply dynamics

Meanwhile, gold has done well because of the ongoing demand and supply dynamics. Gold’s demand has been rising, with central banks like Russia, China, and Azerbaijan buying substantial amounts. 

Gold’s demand from central banks has risen after Russia invaded Ukraine, which pushed the US to sanction Russia’s central bank. As a result, many banks have embarked on a strategy to wean themselves from the US dollar. Indeed, countries like Saudi Arabia and China have sold a substantial amount of their US Treasuries to buy gold. 

At the same time, gold’s supply is not growing as it used to in the past. Gold mines have gotten deeper, with government approvals taking longer. Analysts expect that the current gold mines an sustain production for 14 years.

Therefore, a combination of interest rates, soaring US debt, geopolitical issues, and production challenges will keep gold at an elevated level for a while. As shown below, an analyst estimates that gold could soar by 450% now that the Stochastic Oscillator Relative Strength Index is crossing the neutral point of 50 on the monthly chart.

Besides, its price remains significantly above the 50-week and 200-week moving averages and has formed an inverse head and shoulders pattern, one of the most bullish patterns in the market.