Gold’s Rally Reflects the U.S. Deficit. Neither Is Ending Soon.

Gold surged past the $4,000-an-ounce mark, a more than 50% vault since the beginning of the year. (Justin Sullivan/Getty Images)

The current boom in artificial-intelligence stocks has provoked more than a bit of déjà vu for those who lived through the dot-com bubble that burst around the turn of the 21st century.

But what is especially striking is the contrast between the current economy and that of the 1990s—a contrast most evident in the divergent performance of gold, which soured back then and is soaring now. Both moves correspond to the wildly different fiscal situations facing the U.S. in these two eras.

The yellow metal surged past the $4,000-an-ounce mark on Wednesday, a more than 50% vault since the beginning of the year. Gold has been moving up in a fairly straight line since breaking decisively above the $2,000 mark for the first time in early 2024.

That is a dramatic contrast with the 1990s, when gold fell from over $400 an ounce at the beginning of the decade to a low near $250 by 1999. Meanwhile, U.S. stocks enjoyed a giddy ascent, with the S&P 500 index increasing fivefold to its peak of more than 1,500 by March 2000. Then, gold truly seemed a barbarous relic, as John Maynard Keynes famously dubbed it, even more than greenbacks stuffed in a mattress.

You wouldn’t know it from the headlines of the past week about bullion’s record, but it’s just barely at a new high after inflation. In real terms, gold only recently topped its peak above $800 reached in the frenzied ascent of January 1980 (adjusted by the consumer price index, using the latest reading, for August).

So, by this criterion, the metal has only recently reassumed its status as a store of value. But from its 1990s nadir, gold has actually outpaced stocks in this century. Put differently, the S&P 500, measured against gold, is almost 70% lower than its peak 25 years ago, according to Morgan Stanley strategist Michael Wilson. To be sure that’s from gold’s deeply depressed levels and equities’ dot-com bubble peak.

But it doesn’t seem coincidental that gold’s reversal of fortune in this century has followed global central banks’ preference for the metal over U.S. Treasury securities for their reserves. Much has been made of the sanctions on Russia after its 2022 invasion of Ukraine, but Rosenberg Research points out that the process was under way long before.

A research report from the advisory firm this past week detailed the history of central-bank selling of gold, which peaked in the 1990s, and its accumulation in the past 20 years. The rekindled interest in gold reflected profound changes in both geopolitical and economic circumstances.

In the 1990s, gold fell as the U.S. budget moved from a steep deficit, peaking at 4.7% of gross domestic product in 1992, to a surplus beginning of 1998. The tax increases under President Bill Clinton and the spending cuts enacted later by the Republican Congress helped to turn the red ink to black. The fall of the Berlin Wall led to the peace dividend that cut military spending to 3% of GDP from 5% at the beginning of the decade.

“This was a time of real wage growth, high productivity, balanced budgets (i.e., smaller government), and a better affordability backdrop for everyday needs like housing, healthcare, education, food, and energy—largely the opposite of the past 15 to 20 years,” Morgan Stanley’s Wilson pointedly observes.

And after two major overseas wars, the 2008-09 financial crisis, subsequent sluggish growth, and a pandemic, the U.S. budget swung from surplus at the turn of the century to deficits previously seen only in wartime. The Committee for a Responsible Federal Budget last year apportioned 37% of the blame for the rise in debt relative to GDP since 2001 to major tax cuts, 33% to major spending, and 28% to recession responses. And even well into a recovery, the deficit was still $1.8 trillion in fiscal 2025 ended on Sept. 30, according to congressional budget data.

For gold, the turnaround occurred in 2010 as central banks became net buyers for the first time in decades, according to Rosenberg. Along with the U.S. fiscal deterioration, the firm noted that it’s hardly a coincidence that gold has increased fourfold since 2008-09, when the Federal Reserve under Ben Bernanke instituted quantitative easing. That is the polite term for the central bank’s massive purchase of bonds, the modern method of printing money.

The effect was summed up this past week by Ken Griffin, the billionaire head of Citadel, who expressed concern that gold was being viewed as a safer asset than the dollar. “We’re seeing substantial asset inflation away from the dollar, as people are looking for ways to effectively de-dollarize, or derisk their portfolios vis-à-vis U.S. sovereign risk,” he said in an interview with Bloomberg.

Gold has surged past $4,000 an ounce without a recession or a crisis in private equity or credit, things that would spur the Fed to flood the financial system once again, Rosenberg says.

Treasury Secretary Scott Bessent bragged this past week that the fiscal 2025 budget deficit-to-GDP ratio had a 5[%] number instead of 6[%] last year, even though such a shortfall once was associated only with deep economic downturns or wars.

The message from gold is that if the U.S. is still spewing red ink so profusely when the economy has full employment and inflation still is running above the Fed’s 2% target, what will happen when times get tough? And, especially, if the central bank becomes an appendage of the administration?

For the moment, there is a FOMO (fear of missing out) element to gold’s rally. But the fundamentals that have driven it this far remain firmly in place.

Write to Randall W. Forsyth at randall.forsyth@barrons.com