RBC Suggests Gold as the “Best Hedge” Amid Growing Concerns over Debt Ceiling

In August 2020, gold reached its record-high price of $2,075 per ounce, though, in the last few weeks, it nearly broke the threshold. With blow after blow sending the economy into turmoil, gold continues gaining more momentum, allowing it to healthily sit above the $2,000-per-ounce line for the first time in years. One more blow could push the shiny precious metal to break its previous price record, and that push just might be a default. 

Gold currently remains 11% up year-to-date, with a whopping 25% increase in price since last November alone. As U.S. government officials debate over the debt ceiling, gold appears more attractive. With the U.S. national debt currently at 31 trillion, a default could shatter the economy and trigger a recession. 

Predictions over what may happen remain shaky because of how unprecedented the event is. As we enter this uncharted territory, many expect gold to become more of a safe haven than ever before. Investors want to latch onto something they can trust, unlike the U.S. government. 

“I wouldn’t be surprised if we had a $100 move in gold prices,” Edward Moya, a senior market analyst for Oanda, explained in an interview with Insider. “It’s a little too tough to call, but obviously, that is a historic moment that would unravel large parts of Wall Street.”

A $100 increase in gold prices could position the precious metal above its record price. Gold closed Monday, May 15, at $2,022 per ounce, meaning it could reach $2,122 per ounce if the U.S. defaults on its debt and Moya’s predictions play out. 

So far, U.S. lawmakers have struggled to make any progress on the debt ceiling decision, and they’re running out of time. According to Treasury Secretary Janet Yellen, the U.S. government will run out of money by June 1. 

RBC Capital Markets, a global investment bank with operations in 14 nations, believes the sheer lack of resolution and decision delay may set gold up to achieve a short-term performance rise. 

“Even assuming a deal is eventually reached, we wouldn’t disregard potential growing financial angst as the deadline approaches. In such a scenario, gold looks like one of the few likely candidates that would bear the burden of resulting market flows,” Christopher Louney, the global head of commodity institutional sales at RBC Capital Markets, explained. 

Analysts seem to predict gold rising in all potential scenarios. Gold prices may increase as we await the decision and tensions rise. After lawmakers reach the decision, gold prices still may strengthen whether the government chooses to raise the debt ceiling or default on debt as both scenarios may cause fear-based investments in safe-haven assets, like gold. 

“In the near term, we believe gold looks like the best hedge in the more immediate offing,” Louney added.

The primary consequences investors should consider here are the long-term ramifications. The government’s decision may spike gold prices immediately, though different actions can cause varying long-term performance rates. For example, a raised debt ceiling may cause high interest rates that reduce gold demand, while a debt default that triggers a recession could spike gold prices as it did during the 2008 recession. 

Quincy Krosby, LPL Financial’s chief global strategist, agrees that a default could give rise to gold, especially if the U.S. dollar weakens. 

Krosby also explained how credit default swaps might be a potential indicator correlating with gold. She noted how in April, one-year default swaps reached their highest point since 2008. 

It would not be surprising to see gold as a safe haven refuge for those who are concerned that a default could, in fact, ensue,” Krosby explained.

Even if a default doesn’t occur, gold gains its price from numerous complex demand sectors that still may allow it to achieve its record high level, according to Moya. For example, central banks, particularly China and India, have continued buying gold at excessive rates to combat the U.S. dollar, giving rise to the precious metal. 

“So, it seems that there’s a good reason to anticipate gold could still outperform,” Moya explained. “Will $2,100 happen this year? I think there’s still a good chance that that could happen, given the way the US economy — or the direction — the U.S. economy is headed. So gold is probably going to do just fine, given all the risks that are on the table.”

While the future of the U.S. economy may be up for debate, one thing is clear: gold should remain a stable, safe-haven asset. As always, investors should consult their financial advisors before making any portfolio decisions.

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