Rising risk aversion sentiment in the marketplace is not providing much support for gold as investors continue to react to Fitch Rating’s announcement, downgrading the U.S. government’s long-term debt to ‘AA+’ from ‘AAA.
Analysts note that the U.S. dollar and bond yields have benefited from safe-haven flows, which has kept a solid lid on gold prices. The yield on 10-year bond yields has jumped back above 4%; meanwhile, the U.S. dollar index is trading at a four-week high back above 102 points.
With these headwinds, gold prices have dropped to a three-week low and are testing critical support. December gold futures last traded at $1,973.10 an ounce, down 0.29%. However, some analysts note that gold continues to outperform equity markets, with the S&P 500 down more than 1% Wednesday.
Michele Schneider, director of trading education and research at MarketGauge, said that she sees the price action in the marketplace as a liquidity event as spooked investors move into cash.
“The downgrade came as a surprise to many very invested traders as the market hit overvalued levels,” she said. “If there is a liquidity crisis, then even gold can get hit harder.”
While gold investors could see further volatility in the near term, analysts have said that it might be only a matter of time before investors see it as an essential store of value as the U.S. growing debt becomes a larger concern.
In its announcement, Fitch said it sees the U.S. general government deficit rising to 6.3% of GDP in 2023, up from 3.7% in 2022. The deficit is expected to grow by 6.6% and 6.9% of GDP in 2024 and 2025, respectively.
“At $30 trillion, it’s hard to imagine that is sustainable without some fallout. Debt to GDP with high interest rates is a huge stress on the economy,” said Schneider. “Once things stabilize, then gold can kick back in as a safe haven.”
Edward Moya, senior North American analyst at OANDA, said he sees potential for gold as markets digest the impact of Fitch’s downgrade.
“The gold market is going to struggle as long as re-steepening of the US curve continues,” he said. “The VIX is rising and it seems Wall Street is getting nervous here. Gold will eventually act like a safe-haven as stocks remain vulnerable given rising downbeat outlooks.”
As to what gold is capable of when sentiment shifts, in 2011, following the 2008 Great Financial Crisis, rating agency Standard & Poor’s surprised markets, downgrading the U.S. credit rating to AA+. That sparked a rally in gold that led to prices pushing to then-all-time highs above $1,900 an ounce.
Some analysts note that there are stark differences between 2011 and today. The first major difference is that the Federal Reserve is aggressively raising interest rates