Gold Price Outlook: Inflation, Debt, and Currency Devaluation Fuel Demand

Even though the U.S. core CPI for July showed a 3.1% annual increase, suggesting consumers continue to face significant inflationary pressures, one market analyst believes this represents only a small part of a larger picture: the declining purchasing power of fiat currencies, a trend that is expected to continue supporting long-term demand for gold.

In a recent interview, Thorsten Polleit, honorary professor of economics at the University of Bayreuth and publisher of the BOOM & BUST REPORT, stated that gold and silver are on the verge of a major structural breakout because of the unbridled growth of fiat currency systems.

"People are desperately looking for safe havens," he said. "People are casting doubt on the purchasing power of all fiat currencies, and we can see that in the global gold markets."

Gold has not only risen firmly above $3,300 an ounce, but has also made all-time highs against the Japanese Yen and is approaching record highs against many other major currencies, including the British Pound, Euro, Canadian Dollar, and Swiss Franc. He further stated, "Global debt is rising everywhere, and that is pushing inflation. Not just in the U.S., but Canadian government debt is rising, the U.K. is rising, Europe is rising as well."

Polleit points out that in this environment, it is impossible for central banks to raise interest rates, because doing so would increase the debt service costs of all that debt, and thus stifle economic growth.

But that's just the beginning, says Polleit, who anticipates that not only will central banks have to cut interest rates this year, but he also foresees a return of financial repression and potential yield curve control.

Financial repression is an indirect way for governments to use private sector funds to pay off public debt. Governments use subtle tools like zero interest rates and inflation policies to reduce their debt burdens.

Polleit’s dovish comments come as the Federal Reserve has diverged from most major central banks, maintaining a neutral monetary policy stance in the first half of this year.

The market is currently pricing in expectations of a 25-basis point rate cut next month and believes there is a 60% chance of two more cuts before the end of the year. Despite the uptick in easing expectations in recent weeks, the 10-year U.S. Treasury yield remains relatively elevated, holding key support above 4%.

Polleit says that keeping yields elevated is not surprising, because investors need to see a bigger return for the risk of rising debt. However, he added that he believes there is a cap on 10-year Treasury yields, and he expects yields will not go above 5%.

Polleit says that the Fed might want to cut interest rates to bring down the short-term yields, thereby also bringing down the longer end of the yield curve.

"If that doesn't work, if you can't get long-term interest rates down, I think there is good reason to assume that central banks will start (bond) buying again," he said. "Once yields come down, you will see an additional appreciation in the price of gold. Gold has so much potential and momentum that I expect that we will see higher prices by the end of the year."

Looking longer term, Polleit says he would not be surprised if the price of gold doubles in the next five to ten years.

Understanding the Forces Behind Gold's Potential Rise

Beyond Polleit's analysis, several other factors could contribute to a potential rise in gold prices. Geopolitical instability, such as escalating tensions between nations, often drives investors toward safe-haven assets like gold. Economic uncertainty stemming from unexpected recessions or market crashes can also trigger increased gold demand. Furthermore, the increasing adoption of cryptocurrencies, while offering alternative investment options, could indirectly benefit gold as investors diversify their portfolios with a mix of traditional and digital assets. It is important to note that while these factors can influence gold prices, they are subject to change and should be considered alongside other market indicators.