$10,000 Gold: A question of when, not if

Gold is on the path toward $10,000 an ounce. It’s not a matter of if, but when.

That’s the view of State Street Investment Management head of gold strategy Aakash Doshi. In an interview with Kitco News, he said investors should be thinking beyond $5,000 gold to $10,000. He sees that milestone as “ultimately a question of timing rather than possibility” in the current global economic environment.

Doshi argued that the debasement trade drove gold to record highs earlier this year, and it never went away. It simply went dormant as the Iran war oil price shock created an environment of elevated inflation worries, rising interest rates, and a stronger dollar.

“At State Street, we never thought it was dead; we just thought it was on pause. And now I think it’s alive again.”

The debasement trade is an investment strategy that emphasizes holding tangible assets such as gold, silver, and other commodities to protect against monetary debasement.

We see this trade playing out in the struggling Treasury market.

Treasuries have been selling off because many countries are increasingly wary of holding U.S. debt. With the national debt eclipsing $40 trillion and U.S. policymakers giving no hint they intend to address the borrowing and spending problem, America’s fiscal situation doesn’t exactly inspire confidence.

On top of the fiscal problems, the U.S. has weaponized the dollar as a foreign policy tool. This has made some countries even more wary about holding greenbacks.

Doshi said gold holding $4,000 during the correction and later rallying to $4,700 before last week's Fed rate hike strengthened his conviction that the broader gold bull market remains intact despite continued headwinds from the Iran war oil shock.

He also noted an uptick in ETF gold inflows in recent weeks as a bullish indicator.

“We started to see inflows rebound aggressively from Western ETF investors. I think there’s plenty of firepower here to go.”

Doshi said State Street’s base-case gold forecast is now $4,700 to $5,000 an ounce by early this winter. A dovish Fed shift or a macroeconomic shock could put $5,000 in play even faster.

While all eyes are glued to the Fed, Doshi said he thinks the sustainability (or lack thereof) of sovereign debt is the bigger issue. And it’s not just a U.S.A. problem. He pointed out that fiscal deterioration and rising long-term borrowing costs are a global problem. The United Kingdom, the Eurozone, and Japan continue running substantial deficits, driving debt higher.

“There is just a concern about the sheer level of debt, the amount of fiscal spending that’s happening during non-recessionary periods.”

Doshi also pointed out an apparent fundamental shift in investor thinking. Historically, higher yields have created headwinds for gold – a non-yielding asset. However, investors are starting to look beyond the mere existence of rising yields and question why interest rates keep moving higher.

When yields rise due to strong economic growth and corporate optimism, that bolsters the case against gold. However, when yields rise because investors demand a larger term premium to compensate for inflation in an environment of excessive government borrowing and deteriorating fiscal credibility, “the implications are significantly different.” The argument becomes less about gold’s opportunity cost and more about protecting your purchasing power over time.

“It becomes more, ‘I’m owning gold because of debasement and purchasing power risk and debt monetization risk'," Doshi said.

Doshi noted that while easing yields could give gold an even bigger boost, rapidly rising yields could also become bullish indicators if investors believe they reflect deteriorating confidence in sovereign debt and are accompanied by a weaker U.S. dollar.

“I think right now it’s a little bit of a confidence game. Gold has no creditor, it is a scarce natural resource, and it has history behind it.”

That opens the path to $10,000 gold.

He cautioned that the yellow metal won’t get to that level “in a straight line,” but the long-term direction is clear.

“I do think $10,000 is a question of when, not if.”