BCA upgrades gold to overweight to hedge fiscal crisis risk

Investing.com -- BCA Research has upgraded gold to Overweight from Neutral, citing the need to hedge against potential fiscal crisis risks in 2025.

“Gold would benefit in a scenario where there are concerns of fiscal sustainability in the US,” BCA strategists said in a Monday note.

The strategists highlight that while optimism about the US economy has driven asset prices higher, there is a risk that the bond market could shift from "raging optimism" to fears of a fiscal crisis.

"To be clear, in our view, such a surge would be short-lived, and it would certainly sink the economy into recession," the report notes. BCA draws attention to historical precedents, emphasizing that years like 2024, when long yields rose as short yields fell, were often followed by strong performance in Treasurys.

“Bonds also have an attractive carry thanks to their high coupon and the positively-sloped yield curve, which means rolldown is positive,” strategists led by Juan Correa continued. “Thus, instead of downgrading bonds, we think a better way to hedge the risk of a fiscal crisis is to buy gold.”

The upgrade also reflects political uncertainty surrounding President-elect Trump’s fiscal policies and market constraints that could limit aggressive deficit spending.

With long-term rates rising and inflation moderating, BCA warns that the economy may fall short of the growth expectations embedded in asset prices. "Markets are also acting as a constraint on Trump’s agenda. US manufacturing will not recover with a surging dollar," the report states.

Fears of inflation and debt sustainability have prompted moderate House Republicans to resist aggressive deficit spending, posing further challenges to the administration’s plans.

In 2024, US 30-year rates rose even as 1-year rates declined. According to BCA, this marks “a very rare occurrence that suggests that the very long end of the curve was being driven by factors outside monetary policy.” The market’s reaction has led the Federal Reserve to reconsider its rate-cutting trajectory.

In addition to fiscal crisis risks, foreign central bank reserve buying continues to provide a tailwind for gold prices, reinforcing its role as a safe haven. "The resurgence of geopolitical rivalry has propelled the share of global reserves into gold to their highest level since 1995," BCA highlights.

Overall, BCA’s shift to a more defensive portfolio stance reflects a broader expectation that economic growth and asset valuations may underperform consensus forecasts in 2025.

Source: Investing.com