Analysts point out that there are three long-term driving forces behind the record-high gold prices, and a turning point in incremental demand has already appeared.
Ryan McIntyre, Managing Partner at Sprott Inc., noted in an interview that there are three long-term driving forces behind the record-high gold prices: continuous central bank purchases providing support to the market, stable buying by Asian investors over the years, and recent large-scale entry of European and American capital through Efund Gold ETFs.
“For me, the last factor is the real turning point in incremental demand,” McIntyre emphasized. The global Efund Gold ETF hold positions, after bottoming out in May 2023, have seen their first sustained growth in many years. Although current hold positions are still about 17% lower than the peak in October 2020, he believes that once U.S. investors truly start to worry about debt issues, this relatively small market will experience significant volatility due to the influx of funds.
“This year, the Efund Gold ETF hold positions have increased by about 11%, but they are still far from the historical high.” He added, “The participation of institutions and individual investors is increasing, which is a new trend.”
It is noteworthy that this inflow of funds comes not only from the traditionally strong demand for Gold in the Asian markets but also from the participation of investors in Europe and North America, thereby making the global $Gold ETFs (LIST21038.US)$ "This is definitely a signal reflecting the increasing uncertainty people have about the future."
McIntyre noted that the U.S. fiscal situation has entered an unprecedentedly dangerous phase. In the 2024 fiscal year, the U.S. fiscal deficit as a percentage of GDP is expected to reach 7%, with more than half of it going towards net interest payments. “This is simply crazy,” he said.
He did the math: currently, the Congressional Budget Office (CBO) predicts a nominal GDP growth rate of around 4% per year over the next few years, while the ratio of net interest spending to GDP has already exceeded 3%. This means that three-quarters of economic growth will be consumed by debt interest. More worrying is that the CBO forecasts net interest spending may exceed 4% in the future, “at which point, interest payments alone will surpass economic growth, let alone the need for additional borrowing — this essentially amounts to declaring the debt unpayable.”
“Once interest payments completely overwhelm economic growth, the market will realize that U.S. debt cannot be repaid through normal means,” McIntyre warned. “At that point, the only option for the U.S. government will be massive money printing, which will further erode the credibility of the dollar.”
Recently, despite the frequent adjustments to tariff policies by the U.S. government, the market seems to have become desensitized to these changes. McIntyre believes that this actually reinforces the safe-haven logic of Gold: 'When policies change every hour, people instinctively seek more stable Assets.'
He is even more concerned about the weakening independence of the Federal Reserve. He cited the dismissal of the Bureau of Labor Statistics (BLS) commissioner over a dispute regarding employment data: 'Whether the data was truly manipulated or not, the market's trust in official Statistics is being eroded.'
'Once investors' perception of sovereign risk undergoes a fundamental shift, the rise in Gold will no longer be gradual but explosive,' he emphasized. 'History has shown that when the market loses confidence in the monetary system, funds will rapidly flow into Gold.'
While Sprott has long been bullish on Gold, McIntyre specifically pointed out that Silver might offer higher tactical returns. 'Silver is like the little brother of Gold, but its market is smaller and less liquid, making it more volatile.'
He predicts that over the next 12 to 24 months, Silver will at least match the performance of Gold, and may even outperform it. 'When funds start pouring into the precious Metal market, the increase in Silver prices is often more dramatic than that of Gold.'
McIntyre advises that investors should allocate at least 10% of their net worth to Gold. 'This is a small market, so even a small Inflow of funds can cause significant price fluctuations.'
'If everything stays the same, your other Assets will continue to grow steadily; but if the market shifts to a risk-averse mode, you will be glad to have Gold in your portfolio,' he concluded. 'In the current macroeconomic environment, Gold is not just a hedge, but a necessary form of insurance.'
Editor/kevin