With the Fed’s interest rate cut imminent and US debt overwhelmed, gold may become the biggest winner
2025-09-10 11:55:31
Paul Wong, market strategist at Sprott Asset Management, said spot gold prices broke through $3,500 an ounce last week and $3,600 an ounce shortly thereafter, as market participants began to connect the dots and realized that currency devaluation was the only way for the government to meet its debt obligations, which drove the rally.
On Friday, Wong listed various reasons why gold prices broke out of a multi-month channel and why this might just be the beginning of a rally.
“The immediate driver of last week’s breakout in gold was allegedly macro funds buying gold and selling long-dated bonds on top of that, which is why it broke through the $3,500 mark,” he said. “Gold has been consolidating in this four-month-long bullish consolidation pattern since about April, and there’s never been a real sell-off, nor any signs of central bank selling, but it’s mainly investment funds that haven’t been buying, but they’ve certainly not been selling.”
Wong said that technically, this extended period of consolidation is a very bullish pattern.
“Typically, when a move like this is good, it doesn’t sell off, can’t sell off, and won’t sell off, and that’s a sign of underlying strength and accumulation,” he said. “So, when gold breaks out higher, this bullish pattern tends to gap up, and this is what happened.”
He added: “The target on the chart is around $3,900, which is a direct prediction from the bullish breakout we’re seeing.”
Fundamentals are also very supportive of gold prices. Wong said the risks associated with soaring public debt (in the United States but also in OECD countries) are being reflected in bond yields.
"You can see a significant rise in 30-year bond yields, and that's happening across almost all of the G7 countries and all of the advanced economies," he said. "All of this is driven by the same theme, which is too much debt, and that's the bottom line. The bond market is losing confidence in the ability of governments to control spending and control debt levels. So you can also see that in the G7, the average two-year Treasury yield has been slowly declining over the last few years as most governments have been trying to stimulate their economies and keep the economy growing."
The problem, however, is that there is a lot of underlying inflation now beneath the surface. “You can see it in a lot of areas, both in the short term (two-year) and the long term (10-year), where inflation is rising,” he said.
Wong said the term premium has been sticky and continues to rise. “The term premium is what the market wants, to compensate for the risk of long-term holdings with extra yield,” he said. “So when you combine all of the above factors, the bond market really doesn’t like long-term bonds because of the inflation issue, and you need to get higher compensation for that.”
He added: "On the short end of the spectrum, it's doing better because it knows the central bank is going to cut rates. We're looking at the Fed right now and the futures curve is currently pricing in three rate cuts this year in September, October and December. Are there more?"
Wong said there was also a good chance the Fed would initially take a more aggressive approach than the currently expected 25 basis points.
"A 50 basis point rate cut is probably on the cards," he said. "The Fed has a dual mandate: employment and inflation. When you see signs of a stagflationary environment, which you're seeing now, and you can see it in the data, it's certainly there. The labor market has been weakening steadily since the summer. Services price inflation, which tends to lead the CPI by about three months, has been picking up. The question is: How much worse will it get?"
“That’s the challenge for the Fed, which has a dual mandate, and right now those two mandates are diametrically opposed,” he said.
By putting the Fed in a position where it needs to stimulate the economy to support employment, the administration is forcing the Fed to put its inflation mandate on the back burner.
Wong said: "The Trump administration wants to heat up the economy, so you will see a sharp drop in short-term interest rates and very stimulating fiscal policies. This is the direction we are facing. The BBB (Big Beautiful Act) will really start to take effect in 2026, and combined with tax cuts, it should be quite stimulating. The current interest rate cuts should also have a stimulating effect. The real breakthrough and rise in gold prices is because we are moving towards a fiscal-led phase, where monetary policy is subordinate to fiscal policy."
He added: "In an overheated economy, with inflation and high debt levels, the transmission mechanism concludes that the only way to deal with this problem is to devalue the dollar. More importantly, devalue any and all monetary assets, meaning U.S. Treasuries and the dollar itself. That's why gold prices are higher."
Wong said the reality is that the United States and developed countries are entering a period of sustained currency devaluation, and the gold market is sensing this.
“Gold is incredibly complex and unlike most assets, it spans currencies, fixed income, credit, economics, equities and geopolitics,” he said. “That’s easy to understand because gold has been around for thousands of years and everyone knows about it. At the same time, beneath the surface, it’s quite complex and you can see that in the price action.”
“It’s like a rocket because people realize there’s something serious going on beneath the surface. Again, one of the few assets you have in a general trend of devaluing financial assets is gold, which is why it’s going up like this.”
Another major factor supporting gold prices is trust, or rather the lack of it. He said: "People have lost trust in the entire financial system, they have lost trust in central banks, they have lost trust in institutions, they have lost trust in governments. When you lose trust in the value of monetary assets, you turn to gold. It is a non-financial asset, non-governmental. It is becoming a safe haven: it is not only a safe haven, it is a safe asset."
“The fundamentals basically say there’s a lack of trust in governments, institutions, central banks and so on,” he said. “If you’re a multi-strategy asset manager, you say, ‘Well, what asset do I have that’s a safe haven?’ It’s gold.”
Wong added: “Let’s lower the bar to, ‘What is security?’ It’s still gold.”
Spot gold daily chart Source: Yihuitong
At 11:55 Beijing time on September 10, spot gold was quoted at $3,635.75 per ounce.
On Friday, Wong listed various reasons why gold prices broke out of a multi-month channel and why this might just be the beginning of a rally.
“The immediate driver of last week’s breakout in gold was allegedly macro funds buying gold and selling long-dated bonds on top of that, which is why it broke through the $3,500 mark,” he said. “Gold has been consolidating in this four-month-long bullish consolidation pattern since about April, and there’s never been a real sell-off, nor any signs of central bank selling, but it’s mainly investment funds that haven’t been buying, but they’ve certainly not been selling.”
Wong said that technically, this extended period of consolidation is a very bullish pattern.
“Typically, when a move like this is good, it doesn’t sell off, can’t sell off, and won’t sell off, and that’s a sign of underlying strength and accumulation,” he said. “So, when gold breaks out higher, this bullish pattern tends to gap up, and this is what happened.”
He added: “The target on the chart is around $3,900, which is a direct prediction from the bullish breakout we’re seeing.”
Debt is driving gold prices higher
Fundamentals are also very supportive of gold prices. Wong said the risks associated with soaring public debt (in the United States but also in OECD countries) are being reflected in bond yields.
"You can see a significant rise in 30-year bond yields, and that's happening across almost all of the G7 countries and all of the advanced economies," he said. "All of this is driven by the same theme, which is too much debt, and that's the bottom line. The bond market is losing confidence in the ability of governments to control spending and control debt levels. So you can also see that in the G7, the average two-year Treasury yield has been slowly declining over the last few years as most governments have been trying to stimulate their economies and keep the economy growing."
The problem, however, is that there is a lot of underlying inflation now beneath the surface. “You can see it in a lot of areas, both in the short term (two-year) and the long term (10-year), where inflation is rising,” he said.
Wong said the term premium has been sticky and continues to rise. “The term premium is what the market wants, to compensate for the risk of long-term holdings with extra yield,” he said. “So when you combine all of the above factors, the bond market really doesn’t like long-term bonds because of the inflation issue, and you need to get higher compensation for that.”
He added: "On the short end of the spectrum, it's doing better because it knows the central bank is going to cut rates. We're looking at the Fed right now and the futures curve is currently pricing in three rate cuts this year in September, October and December. Are there more?"
A 50 basis point rate cut in September is possible
Wong said there was also a good chance the Fed would initially take a more aggressive approach than the currently expected 25 basis points.
"A 50 basis point rate cut is probably on the cards," he said. "The Fed has a dual mandate: employment and inflation. When you see signs of a stagflationary environment, which you're seeing now, and you can see it in the data, it's certainly there. The labor market has been weakening steadily since the summer. Services price inflation, which tends to lead the CPI by about three months, has been picking up. The question is: How much worse will it get?"
“That’s the challenge for the Fed, which has a dual mandate, and right now those two mandates are diametrically opposed,” he said.
By putting the Fed in a position where it needs to stimulate the economy to support employment, the administration is forcing the Fed to put its inflation mandate on the back burner.
Wong said: "The Trump administration wants to heat up the economy, so you will see a sharp drop in short-term interest rates and very stimulating fiscal policies. This is the direction we are facing. The BBB (Big Beautiful Act) will really start to take effect in 2026, and combined with tax cuts, it should be quite stimulating. The current interest rate cuts should also have a stimulating effect. The real breakthrough and rise in gold prices is because we are moving towards a fiscal-led phase, where monetary policy is subordinate to fiscal policy."
He added: "In an overheated economy, with inflation and high debt levels, the transmission mechanism concludes that the only way to deal with this problem is to devalue the dollar. More importantly, devalue any and all monetary assets, meaning U.S. Treasuries and the dollar itself. That's why gold prices are higher."
Devaluation of the dollar is the only option
Wong said the reality is that the United States and developed countries are entering a period of sustained currency devaluation, and the gold market is sensing this.
“Gold is incredibly complex and unlike most assets, it spans currencies, fixed income, credit, economics, equities and geopolitics,” he said. “That’s easy to understand because gold has been around for thousands of years and everyone knows about it. At the same time, beneath the surface, it’s quite complex and you can see that in the price action.”
“It’s like a rocket because people realize there’s something serious going on beneath the surface. Again, one of the few assets you have in a general trend of devaluing financial assets is gold, which is why it’s going up like this.”
Another major factor supporting gold prices is trust, or rather the lack of it. He said: "People have lost trust in the entire financial system, they have lost trust in central banks, they have lost trust in institutions, they have lost trust in governments. When you lose trust in the value of monetary assets, you turn to gold. It is a non-financial asset, non-governmental. It is becoming a safe haven: it is not only a safe haven, it is a safe asset."
“The fundamentals basically say there’s a lack of trust in governments, institutions, central banks and so on,” he said. “If you’re a multi-strategy asset manager, you say, ‘Well, what asset do I have that’s a safe haven?’ It’s gold.”
Wong added: “Let’s lower the bar to, ‘What is security?’ It’s still gold.”
Spot gold daily chart Source: Yihuitong
At 11:55 Beijing time on September 10, spot gold was quoted at $3,635.75 per ounce.
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