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Gold prices are poised to continue their upward momentum and move “significantly” higher due to a confluence of macroeconomic and political dynamics, Sprott Asset Management says.
In its latest precious metals report written by market strategist Paul Wong, the firm specifically sees inflation risk as a primary driver of gold prices, as the full impact of US tariffs has yet to set in.
“With tariffs taking effect, the cost of goods is expected to rise, especially as post-tariff inventory reaches consumers. This inflationary pressure typically boosts demand for gold, which serves as a hedge against purchasing power erosion,” Wong wrote.
Additionally, the uncertainty surrounding US interest rates offers further support for gold, Wong said. The Federal Reserve, which is expected to deliver its first rate cut since January next week, is facing sustained pressure from US President Donald Trump to be more aggressive in cutting rates. These potential rate cuts — combined with inflationary pressure — would cause the real interest rate to decline, an environment that is historically favorable for gold, he explained.
A third and final factor is political instability, which has driven investors toward gold since Trump took office this year. His recent attacks on the Fed have introduced additional institutional uncertainty and risk, and gold tends to perform well in such climates, Wong wrote.
Eroding dollar
A potential end of US central bank’s independence would create the scenario that aligns with what Sprott’s analysts call a “debasement trade” — where a weakening dollar would drive investors toward hard assets like gold.
A cheaper dollar would boost inflation, inflate away debt and undermine the real return on US assets, while stablecoins backed by T-bills would dilute the currency’s scarcity premium, Wong said.
Under this condition, the current dollar-centric global financial system will likely become less sustainable. Using the dollar as a store of value forces the US to run persistent deficits, undermining its industrial base, a situation that is currently politically unviable, he added.
As a result, the store of value function could migrate to a neutral reserve asset like gold, evident in the rampant buying of bullion by global central banks.
Bullish technicals
The Sprott report comes just before gold prices set a new record of $3,674.27 per ounce. As of Sept 12, its year-to-date gains stood at almost 40% — on pace for its best year since 1979.
Its previous high was set in April during the tumultuous tariff-driven market stress. Since then, the precious metal went into a long period of consolidation, but according to Wong, it could be ready for another break out.
“Equity positioning is now reaching the upper end of likely allocations, in our view, and risk headlines building, gold has broken out of its consolidation range,” he said, noting that investors have been holding onto their gold positions even when risk-on assets rallied.
A key indicator, as Wong pointed out, is the 2s30s Treasury yield curve, which continues to steepen aggressively. “Markets are pricing in policy rate cuts even as long-term inflation and credibility premia rise on concerns about restrictions on Fed independence. Historically, when the Fed begins its rate-cutting cycle, long-end yields fall, but last year, when the Fed cut rates, long-end yields rose, which may repeat,” he wrote.
In this case, it may revive chatters about yield curve control (YCC) — an unconventional monetary policy targeting long-term interest rates, Wong speculates.
“Overall, the steepening yield curve is flashing bullish signals for gold: two-year yields falling on the prospect of lower policy rates ahead, while 30-year yields rise on the threats of persistent inflation risk, higher term premiums and potential fiscal dominance,” he continued.
Source: Sprott/Bloomberg
“If uncontrolled steepening pushes policymakers toward YCC, forcing nominal yields below inflation, we expect monetary assets (e.g., Treasury bonds and the US dollar) to erode in real terms, steering flows toward hard assets such as gold.”