BCA upgrades gold overweight to hedge fiscal crisis risk By Investing.com

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

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

Strategists point out that while optimism about the US economy has driven asset prices higher, there is a risk that the bond market may move from “rabid optimism” to fears of a fiscal crisis.

“To be clear, in our view, such growth would be short-lived, and would certainly sink the economy into recession,” notes the report. BCA draws attention to historical precedents, emphasizing that years like 2024, when long-term yields rose as short-term yields fell, are often followed by strong returns in Treasurys.

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

The update also reflects political uncertainty around President-elect Trump’s fiscal policies and market restrictions that could limit aggressive deficit spending.

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

Fears about 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 fell. According to BCA, this marks “a very rare event that suggests that the very long end of the curve was driven by factors outside of monetary policy.” The market reaction led the Federal Reserve to reconsider its rate cut trajectory.

In addition to fiscal crisis risks, foreign central bank reserve purchases continue to provide a tailwind for gold prices, reinforcing its role as a safe haven. “The revival of geopolitical rivalry has propelled the share of global reserves in gold to its highest level since 1995,” highlights BCA.

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.