Introduction to US Treasuries and Gold
US Treasuries have been considered a Tier 1 asset by the Bank for International Settlements for decades, with the US being the largest economy and having the world reserve currency. This makes US Treasury bonds one of the safest and most liquid assets for nations to invest in, with a guaranteed percentage return. However, the use of Treasuries goes beyond just buying debt, as they are recirculated back into the system and used as collateral by institutions such as insurance and pension funds to hedge what has been classed as a "risk-free" asset.
Historical Context and Changes in Holdings
Historically, China and Japan were the two largest holders of US treasuries, but this has changed in recent years. The UK has overtaken China in holdings of US debt, while countries in the East have started to shun US debt due to fears of sanctions and tariffs. This shift in holdings is significant, as it reflects a worldwide loss of faith in the dollar. The US debt held in foreign reserves has started to decline, while Gold has become a more preferred reserve asset.
The Rise of Gold as a Central Bank Reserve
Following the great financial collapse in 2008, interest rates have been below 1%, and the world has been able to finance business on cheap money. However, this all changed after the lockdowns of 2020, and the macro horizon adjusted, resulting in QE programs creating persistent inflation and global debt levels skyrocketing in high-interest-rate environments. A recent chart confirms that Gold has now overtaken US Treasuries as the preferred global Central Bank reserve for the first time since 1996. This shift is a worrying sign for the US, as it reflects a loss of faith in the dollar.
Technical Analysis of Gold’s Price Movement
The chart showing Gold’s price movement reveals a large Cup and Handle Pattern that was broken through last year. This pattern is similar to the chart showing the shift in Central Bank reserves from US Treasuries to Gold. If we place a representation of where we are in relation to the Treasury/Gold chart, it would suggest that we have a lot more central bank buying to come, just to revert back to the mean. The annual central bank net purchases of Gold have been on a scale not seen before, with big money buying physical Gold.
Forecasting Gold’s Path Higher
To get an idea of what this means for Gold and its projections into the future, we need to compare today’s price action with the two most prevalent bull runs where inflation and confused monetary policy caused the price of Gold to significantly increase. These occurred in the late 1970s and the mid-2000s. Using the percentage increases and timeframe of these bull runs, we can gauge what the price of Gold could look like in the future. If we take a baseline of $2,000/oz, which Gold based around and eventually broke out from, and use the same metrics as the previous bull runs, this puts Gold’s price at between $14,700 – $17,600/oz when the run ends as potential targets.
Present-Day Gold and the Future Price Targets
While these targets may seem far-fetched, there are significant reasons why they could become a reality. Gold has been inflation insurance and a protector of wealth for centuries, and its price has increased by 9900% since it was fixed at $35/oz. The levels of inflation and currency debasement mean that the purchasing power of fiat currency is at the mercy of worldwide governments that want and need inflation. The bull runs in Gold outlined above and the fundamental reasons for them do not compare with today’s conditions, which sit massively in favor of the yellow metal.
Conclusion
In conclusion, the world is facing a debt crisis, and the shift in Central Bank reserves from US Treasuries to Gold is a significant sign of the times. The technical analysis of Gold’s price movement and the forecasting of its path higher suggest that Gold’s price is set to increase substantially over the next few years. With the world debt at over $330 trillion and climbing, stock markets at record highs in the mania phase without the fundamentals to support it, the yellow metal has never looked so appealing. As big money continues to load up on Gold, it is clear that it has acted as sound money and a hedge against the debasement of fiat currency for years.
