Has Fitch's US credit downgrade brightened gold's long-term outlook?
4 min read 03 Aug 2023, 04:42 PM ISTGold prices have remained subdued despite the recent downgrade of the US credit rating by Fitch Ratings. However, experts believe that gold is still poised for gains in the long term, as the downgrade highlights growing debt burdens and fiscal deterioration in the US.
PremiumIn contrast to expectations, gold prices have been subdued after Fitch Ratings downgraded the US credit rating to 'AA+' from 'AAA' on Tuesday. On Wednesday, gold and silver settled on a weaker note in the international markets. This happened, as experts pointed out because the dollar index jumped to three-week highs and the US 10-year bond yields hit 4.10 per cent, weighing on gold's demand.
On Thursday, gold prices held near three-week lows in international markets due to a strong dollar and hardening bond yields as strong US private payrolls data bolstered expectations that the US could avoid a recession and the Fed may go ahead with more rate hikes.
What US rating downgrade means for gold?
The Fitch downgrade of the US credit rating is a signal of weakness in the US economy. As Fitch Ratings said the rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance.
Read more: Explained: What is a rating downgrade? And six key reasons why Fitch Ratings downgraded US
The move has the potential to affect the overall economy and hit investor confidence, leading to negative market sentiment. Moreover, the downgrade can also impact the US dollar in a negative way which is positive for gold since the yellow metal is priced in dollars. Investors prefer gold for investment in times of economic uncertainty.
Read more: Fitch Ratings downgrade: Could a cut in US rating mean higher inflows to India, other EMs?
What is the long-term outlook for gold after Fitch's downgrade?
Gold is witnessing some volatility in the near term, reacting to macroeconomic prints and the movement of dollar and bond yields. However, experts believe the yellow metal is poised for gains in the long term after the US credit downgrade.
"The long-term view on gold remains bullish, especially after the Fitch Ratings downgrade of US government debt as the rating agency cited growing debt burden, fiscal deterioration and erosion of governance being major triggers for such a move," Ravindra V. Rao, CMT, EPAT, VP-Head Commodity Research at Kotak Securities pointed out.
"Caught in the current bullish optimism on the US dodging a recession, markets largely shrugged off the news. However, this is definitely not going to be good for the world's largest economy in the long term. Elevated inflation and higher rates in the US increase the interest expenses and the burden to pay back the debts. Paying off debts by printing dollars is not a solution in this high-inflation environment. A worsening fiscal situation coupled with de-dollarisation efforts might fare well for gold prices in the long term," Rao observed.
Read more: Gold to retain its sheen in August, Silver likely to outperform this month
Manoj Dalmia, CEO of Proficient Equities observed, “Fitch Ratings' downgrade has raised concerns about the health of the US economy and has led to a flight to safety. Gold has been one of the beneficiaries of the downgrade. The yellow metal is seen as a safe haven asset, and investors are buying it as a way to protect their wealth."
"The downgrade serves as a reminder of the weakening US economy, facing challenges like mounting debt, a trade war with China, and economic slowdown. These issues may lead to further credit rating downgrades, potentially propelling gold prices even higher," said Dalmia.
Saumil Gandhi, Senior Analyst (Commodities) at HDFC Securities pointed out that the recent downgrade of the US rating by Fitch has added anxiety to an already versatile financial market.
Gandhi believes in the shorter term, gold prices remain rangebound and may witness a minor correction as speculative and investment demand is still subdued. But in the long term, he believes investment in gold can be beneficial to investors.
"Gold has the potential to rally above $2,100 per ounce so investors should accumulate gold in a staggered manner. From the level specifics, Comex Gold has strong support between $1,870 to $1,900. Any dip towards this level is a good buying opportunity for investors," said Gandhi.
On the other hand, Praveen Singh, Associate VP - Fundamental Currencies and Commodities at Sharekhan by BNP Paribas, believes Fitch's downgrade of the US is likely to have a limited impact on gold in the long term because the US economy continues to grow steadily despite steep hikes in interest rates. Singh underscored the Q2 GDP has been reported at 2.4 per cent as against the forecast of 1.80 per cent and the prior quarter's figure of 2 per cent.
Singh said the US treasuries will continue to be safe instruments.
"No other market has got the depth that the US treasuries have, thus there is no risk to the US dollar as a global reserve currency. Fitch’s downgrading is rooted in partisan haggling over debt issues, too. Nonetheless, the US treasuries may be hurt a bit as some of the funds are mandated to invest in AAA bonds only, though it is unlikely to be a major long-lasting concern," said Singh.
"The Fitch step in itself may not impact gold prices in the long term. However, long-term issues like the large primary deficit, current partisan scenario, increasing cost of debt servicing, ballooning debt-to-GDP ratio (expected to be 185 per cent by 2040), etc., will be supportive for the yellow metal," said Singh.
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