The U.S. dollar’s reign as the world’s reserve currency is coming under threat, as evinced by the recent surge in gold prices, according to Goldman Sachs Group Inc.
The greenback faces several risks, including that the U.S. Federal Reserve may shift toward an “inflationary bias,” a rise in political uncertainty and growing concerns surrounding another spike in coronavirus infections in the country, according to Goldman strategists. They added that the debt buildup as a result of the pandemic may lead to debasement fears.
“Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge,” wrote Goldman strategists including Daniel Sharp. “Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows.”
Gold’s record-breaking rally highlights growing concern over the world economy. The bank raised its 12-month forecast for gold to $2300 an ounce from $2000 an ounce previously. That compares with a value of around $1930 currently.
Meanwhile, the Bloomberg Dollar Spot Index is on course for its worst July in a decade. The drop comes amid renewed calls for the dollar’s demise following a game-changing rescue package from the European Union deal, which spurred the euro and will lead to jointly-issued debt.
| BREAKDOWN OF RETURNS |
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| Of the 18% returns forecast for gold over the next year, Goldman estimates 9% will be driven by five-year real rates going to minus 2%, and the remainder from the “15% increase in the EM dollar GDP.” |
Ballooning Debt Pile
For Goldman, the growing level of debt in the U.S. — which now exceeds 80% of the nation’s gross domestic product — and elsewhere, boosts the risk that central banks and governments may allow inflation to accelerate.
“The resulting expanded balance sheets and vast money creation spurs debasement fears,” Goldman strategists said. This creates “a greater likelihood that at some time in the future, after economic activity has normalized, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden,” they said.
The Fed is set to deliver its latest decision Wednesday. The bank sees U.S. real interest rates continuing to drift lower, boosting gold further.
“The uncertainty over outlook for the virus and by association the economy, suggests that the Fed will aim to keep interest rates toward the lower end of the fed funds target band ‘for as long as it takes’ – one of the phrases used last time,” Rhona O’Connell, head of market analysis for EMEA and Asia at StoneX Group Inc., said in an emailed note.
While prices wavered on Tuesday, most market watchers are predicting more gains for both gold and silver. There’s a long list of bullish drivers: the dollar remains weak, geopolitical tensions are rising, real rates have tumbled, and governments and central banks worldwide have unleashed vast stimulus measures to resuscitate economies.