This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Shares of Apple, Nvidia, and Microsoft have exploded in recent years, as investors poured money into stocks that were best positioned to take advantage of the rise in artificial intelligence (AI). These three stocks grew so popular that their combined market capitalization now exceeds $9.2 trillion (as of March 25).
Yet, as massive as these three names are, they pale in comparison to a hard asset that has done quite well in recent years -- and some analysts think the party has only just begun. According to one Wall Street strategist, this hard asset could eventually be worth $40 trillion.
Hedging a looming debt crisis
Gold has historically had an inverse relationship with the U.S. dollar. That's why many investors have been surprised to see it absolutely rip, despite the strength of U.S. dollar during the two-plus-year bull market. Incredibly, the price of gold has even outpaced the broader benchmark S&P 500 and has now surpassed a $20 trillion market cap.
Like other economic indicators, gold doesn't always move in a straight line and is often viewed by investors as a flight to safety during uncertain times. In recent years, investors have grown increasingly concerned about the ballooning U.S. debt, which now exceeds $36 trillion. The U.S. government is also running a fiscal deficit, where spending during a fiscal year exceeds revenue.
In fiscal 2024, the U.S. government had a fiscal deficit of $1.83 trillion. One immediate issue from the debt is that the government must make annual interest payments that now consume about 13% of the budget. This is concerning to investors who buy the debt in the form of U.S. Treasury bonds. Some worry investors may eventually demand higher yields on Treasuries to account for the riskier fiscal situation, a scenario that may have a very sobering effect on the market.
And it's this issue that has led Luke Gromen, the founder and president of the market research firm Forest For the Trees, to believe that all roads lead to gold. Gromen elaborated on his thoughts in a recent On The Tape podcast hosted by Danny Moses of The Big Short fame: "Once sovereign debt, in particular sovereign debt of the global reserve currency issuer in this case the United States, gets so high that the math very obviously ... lays out the fact that the United States ... cannot nominally pay the interest and entitlements on their debt ... without printing money then you have to [say] what's the point of holding a sovereign bond if [the United States government] can't not default without printing money. Gold's going to go up regardless of what inflation does."
Central banks seem to have recognized this a while ago. According to Gromen, central banks have net sold $400 billion of U.S. Treasuries since 2014, while purchasing $600 billion of gold. Gromen also said that while Americans may not recognize a situation like this, if you talk to someone following financial markets in Argentina and Brazil, they would easily see what's happening. "Hey what's it mean when gold goes up even though your interest rates are going up fast? They go, 'Oh you're moving toward a debt crisis,'" he explained.
Can gold continue to surge?
At over a $20 trillion market cap, the price of gold per ounce is around $3,040 (as of March 25). Gromen thinks this trade is still in the early innings. In years past, other market watchers told him there would be zombies on Earth before gold hit $3,000 an ounce, but it's happened and he thinks the world will continue to be OK if gold hits $4,000 per ounce or $5,000 or $6,000. At $6,000 per ounce, gold would have a roughly $40 trillion market cap.
A key factor in Gromen's bullish outlook is his assessment that the Trump administration's pursuit of a weaker dollar to repatriate businesses aligns with policies that would raise gold prices.
While I am no expert on gold, I think it's fair to say that the country's fiscal situation is a concern that is not going to have an easy fix. If the situation worsens or simply remains at the status quo, I suspect gold will remain an attractive asset. It's certainly not a bad idea for investors to think about allocating some of their portfolio to this hard asset, so they are somewhat hedged against a worsening fiscal situation or some kind of debt crisis.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
