In recent years, shares of Apple, Nvidia, and Microsoft have significantly increased in value as investors directed funds towards stocks well-positioned to benefit from the rise of artificial intelligence (AI). These three companies have become so popular that their combined market capitalization now exceeds $9.2 trillion as of March 25.
Despite their immense size, these three companies are overshadowed by a hard asset that has also performed well in recent times. Some analysts believe its potential has only begun to unfold. According to one Wall Street strategist, this hard asset could eventually reach a value of $40 trillion.
Hedging Against a Looming Debt Crisis
Historically, gold has maintained an inverse relationship with the U.S. dollar. Thus, many investors were surprised to see gold’s performance surge despite the U.S. dollar’s strength during a two-plus-year bull market. Remarkably, gold has outpaced the broader S&P 500 benchmark and currently has a market capitalization exceeding $20 trillion.
Similar to other economic indicators, gold does not always move in a linear fashion and is often viewed as a safe haven during uncertain times. Investors have grown increasingly concerned about the expanding U.S. debt, which now surpasses $36 trillion. Additionally, the U.S. government is operating with a fiscal deficit where annual spending exceeds revenue. In fiscal 2024, the fiscal deficit was reported at $1.83 trillion. A concerning aspect of this debt is the annual interest payments, which now account for approximately 13% of the budget. This situation is troubling to investors who purchase U.S. Treasury bonds, as some worry that higher yields may eventually be demanded to offset the risk, potentially leading to a sobering market effect.
Luke Gromen, founder and president of the market research firm Forest For the Trees, believes that these challenges ultimately lead to an increase in gold’s value. In a recent "On The Tape" podcast hosted by Danny Moses from "The Big Short," Gromen explained that when sovereign debt, particularly that of the global reserve currency issuer like the United States, becomes so high that it cannot meet interest and entitlements without resorting to printing money, the rationale for holding such bonds diminishes. He predicts that gold’s value will rise regardless of inflation.
Central banks appear to have anticipated this, with Gromen noting that since 2014, they have net sold $400 billion of U.S. Treasuries while acquiring $600 billion in gold. He suggests that financial market observers in countries like Argentina and Brazil would easily recognize this as a movement toward a debt crisis.
Can Gold Continue to Surge?
Gold’s market capitalization currently exceeds $20 trillion, with the price per ounce around $3,040 as of March 25. Gromen believes this trend is still in its early stages, suggesting that even if gold reaches $4,000, $5,000, or $6,000 per ounce, the world would continue to function well. At $6,000 per ounce, gold would have a market cap of approximately $40 trillion.
A crucial element of Gromen’s optimistic projection is his view that policies aimed at weakening the dollar to encourage business repatriation, as pursued by the Trump administration, align with factors that would increase gold prices.
Although not an expert on gold, it is acknowledged that the country’s fiscal situation poses a complex challenge that is unlikely to be resolved easily. If the situation deteriorates or remains unchanged, it is anticipated that gold will continue to be a desirable asset. Therefore, it may be prudent for investors to consider allocating a portion of their portfolio to gold as a hedge against a worsening fiscal scenario or potential debt crisis.
Disclosure
Bram Berkowitz holds no position in any of the mentioned stocks. The Motley Fool holds stocks and suggests investment in Apple, Microsoft, and Nvidia, in addition to recommending options for Microsoft. The disclosure policy of The Motley Fool is available for further information.
