- Gold price are supported by increased safe-haven demand following Moody’s downgrade of the US credit rating.
- Moody’s projects US federal debt to surge to approximately 134% of GDP by 2035, up from 98% in 2023.
- A series of weak US economic indicators has strengthened expectations of further Federal Reserve rate cuts later this year.
Gold (XAU/USD) is recovering from recent losses, trading near $3,230 per troy ounce during Monday’s Asian session. The rebound is fueled by increased demand for safe-haven assets amid rising concerns over the US economic outlook and fiscal health.
Moody’s recently downgraded the US credit rating by one notch, from Aaa to Aa1, citing escalating debt levels and a growing burden from interest payments. This move follows previous downgrades by Fitch Ratings in 2023 and Standard & Poor’s in 2011. Moody’s now forecasts US federal debt to soar to approximately 134% of GDP by 2035, up from 98% in 2023, with the federal deficit expected to widen to nearly 9% of GDP. This is attributed to higher debt servicing costs, increased entitlement spending, and falling tax revenues.
Last week, Gold posted its sharpest weekly decline since November, falling over 3%, as easing global trade tensions boosted risk appetite. A preliminary US-China trade agreement includes tariff reductions—Washington will lower duties on Chinese goods from 145% to 30%, while Beijing plans to cut tariffs on US imports from 125% to 10%. Market sentiment was also buoyed by renewed optimism over a potential US-Iran nuclear deal and upcoming talks between US President Donald Trump and Russian President Vladimir Putin aimed at easing tensions in Ukraine.
Meanwhile, a string of disappointing US economic indicators has reinforced expectations of further rate cuts by the Federal Reserve later this year. The University of Michigan’s (UoM) Consumer Sentiment Index unexpectedly dropped to 50.8 in May from 52.2 in April, marking the lowest reading since June 2022 and the fifth consecutive monthly decline. Economists had anticipated an increase to 53.4.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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