Gold Plunges

Key Points

• Gold is trading at $4,230 per ounce, having breached primary support at $4,400.

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Gold breached primary support between $4,400 and $4,600 per ounce, triggering further stop-loss selling.

There are two primary reasons for the current sell-off:

1. Gulf states are expected to liquidate reserves, including gold bullion, to support their finances as oil export revenues are curtailed.
2. Long-term interest rates are rising in anticipation of an inflation spike caused by high energy prices from the Iranian blockade. High interest rates make bonds more attractive and reduce demand for gold.

Bullion sales will likely cause a temporary increase in supply, driving down gold prices until reserves are exhausted or Iran’s blockade of Gulf shipping ends. Demand is likely to increase thereafter as reserves are replenished.

Long-term Treasury yields are rising. Breakout of the 10-year yield above 4.3% indicates another test of resistance between 4.8% and 5.0%.

However, rising inflation and long-term interest rates will likely have less influence on gold demand because the two forces tend to offset each other. High inflation increases demand for gold as an inflation hedge, while high interest rates increase the opportunity cost of holding gold and suppress demand.

Our long-term bullish outlook for gold is based on the belief that precariously high US debt levels will eventually force the Fed to suppress long-term interest rates.

US federal debt jumped to $38.5 trillion at the end of 2025.

The ratio of federal debt to nominal GDP is at an unsustainable 122.5%.

Moreover, the fiscal deficit will likely exceed $2 trillion for the current fiscal year. The deficit for the 5 months to February 2026 is at $1 trillion, but the next few months are about to blow a big hole in the budget.

First, the US Supreme Court has ruled that tariffs implemented by the Trump administration exceed the President’s constitutional powers, and most of the $144 billion in Customs Duties collected will need to be refunded.

Second, the newly renamed Department of War is about to present Congress with a $200 billion bill for the US war on Iran, so far. The war is only three weeks old, and the final bill will likely be a lot higher.

Third, rising energy prices threaten to crash the stock market. A crash would substantially reduce capital gains, a major component of Individual Income Tax revenue.

Finally, rising interest rates will further widen the ballooning deficit, with accelerating government debt-to-GDP ratios raising risk premia, which in turn drive interest rates even higher.

The Federal Reserve would be forced to prioritise the faltering US Treasury over the Dollar, thereby sacrificing its mandate to maintain price stability. Long-anticipated fiscal dominance would mean the Fed suppresses long-term yields to improve the Treasury’s ability to service its debt. The resulting sharp rise in inflation would undermine the Dollar and boost demand for gold and other inflation hedges.

Conclusion

We expect gold to test support at $4,000 per ounce.

However, our long-term outlook for gold remains bullish, with ballooning budget deficits and fiscal dominance likely to cause a steep rise in inflation and erode the purchasing power of the Dollar.

 

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• Yardeni Research: Developed Economies Government Debt to GDP
• US Treasury, Bureau of the Fiscal Service: Monthly Treasury Statement, February 2026