Gold has again reached new heights, exceeding expectations and analysts' forecastsSince October 2022, the increase in gold prices has surpassed 50%, showcasing the metal's potential as a haven asset amidst economic uncertaintiesSuppose we trace back to 2016, during a period marked by financial turbulenceIn that case, gold has skyrocketed from a mere 1046 dollars to over 2500 dollars in value—a staggering increase of more than double its original price.

The logic behind gold's rise is not surprising to those who have followed the financial markets closelyIn numerous analyses I have published since the beginning of 2023, I have attempted to dissect the reasons fueling this bullish trendAt the core of it lies a single statement: gold serves as a reflective lens to the US dollarWhen gold prices climb, it indicates a collective expectation regarding the depreciation of the dollar in the future.

Investor sentiment is shaped largely by economic conditions, and Warren Buffett’s perspective offers valuable insights into asset classes available to investors

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According to Buffett, three primary asset categories exist: cash and equivalents, which include deposits and money market funds; assets that generate cash flows, such as real estate and stocks; and finally, non-cash-flow-generating assets, including antiques and goldAlthough non-cash-flow-generating assets may carry an allure, they are often less desirable since returns depend solely on price appreciation, which is risky, especially considering the cost of capital.

The turning point for gold came after the US detached its currency from the gold standard in 1971. This monumental shift allowed gold to emerge as an asset comparable to the S&P 500. So long as currencies remain unanchored, there seems to be no end to gold's appreciation potentialThe current sudden spike in gold can be traced back to the recent decline in unemployment claims in the United States, a signal that may point to a weakening economy

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Meanwhile, European banks have lowered interest rates and adjusted their GDP growth forecasts downward, which unfailingly affects market sentiments globally.

Diving deeper into the factors influencing current gold prices, it becomes evident that gold's movement is intricately linked to the fate of the US dollarThe dollar's outlook hinges on America’s economic growth rate and its budget deficit scenarioThe budget deficit represents the current financial shortfall and debt burden of the country, while the economic growth rate reflects its ability to service that debtTo simplify, the surge in gold prices is largely a response to fears surrounding reckless money printing in the US, given the alarming levels of national debtThe negative repercussions of increasing budget deficits manifest as market apprehensions regarding possible currency devaluation.

In recent reports, it has come to light that the US federal government is grappling with a staggering budget deficit nearing 1.9 trillion dollars as of August 2024—the highest it has been outside of pandemic-related spending

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This figure represents a 24% increase compared to the previous year, driven in large part by skyrocketing interest costs, which have risen 30% to a record-breaking 1.05 trillion dollarsConcurrently, the cost of servicing this debt has surged to an interest rate of 3.35%, a peak not seen since 2009. The continuation of this trend paints a worrying picture for the US economy.

A consistent strategy appears evident among US policymakers: despite slight variations in economic policies, a shared goal of expansion remains at the forefrontTariffs on Chinese products have soared to 60%, while a 10% tariff is imposed on goods from other countriesSuch decisions aim to stimulate domestic oil production and significantly lower energy prices, driving capital towards favorable economic outcomes.

Vice President Harris has proposed the construction of three million new housing units, supplemented by incentives and tax deductions for first-time buyers while reinstating the pandemic-era child tax credit

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Such moves indicate a political landscape intent on pushing further fiscal stimuli; regardless of which party occupies the White House, expansive fiscal policies are likely to strain the treasury and accelerate the growth of the budget deficit.

This situation poses a conundrum: should American leaders reduce interest rates, it is likely to lead to further dollar depreciationConversely, failing to lower rates means grappling with significant annual interest payments, especially when US investments are lagging in returnsThis precarious balance could lead to unsustainable levels of debt.

Currently, the Biden administration is aggressively pursuing a course that involves tax reductions and subsidies—essentially a strategy to leverage debt levelsThe urgency is underscored by the growing recognition that traditional areas where America was once dominant are now threatened by China, which is rapidly catching up

If the US doesn't act decisively, it risks falling behind, leading to a scenario where the balance of power shifts dramatically.

What, then, is the path forward for the US? In one approach, leaders are encouraged to increase liabilities by betting on the next technological revolutionReflecting on history, the competition during the Cold War with the Soviet Union showed that periods of intense rivalry spurred innovation and economic expansionIf the US can successfully anchor itself in the information technology revolution, it might reclaim its position as a formidable competitor globally.

On the other hand, the US may also opt to intentionally devalue the dollar to bolster its export competitiveness while undermining adversariesIn the wake of the Plaza Accord in 1985, the swift appreciation of the Japanese yen had devastating repercussions on the country's exports marking a significant economic downturn