The Dawn of $3,000 Gold: A Fresh Participant Has Surfaced That Could Propel Gold To $3,500
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Remember that November 2024 tale suggesting Trump's second term would harm gold prices?

It claimed that tariffs might trigger a U.S. dollar short squeeze, while tariff-induced inflation would force the Fed to implement stricter monetary policies.

This story quickly faded, but gold certainly experienced a sharp bull-market retreat during the two weeks after the November 5 U.S. election:

The Trump 2.0 gold pullback of November 2024 concluded on November 14 at $2,537/oz.

Gold has been climbing steadily since.

The U.S. dollar short squeeze did materialize briefly. However, it's becoming increasingly evident that the Trump Administration aims to weaken the U.S. dollar to rebalance U.S. trade deficits. Meanwhile, the de-dollarization trend continues steadily.

Regarding tariff-driven inflation, Fed Chair Powell clarified during last week's press conference that he considers inflation from tariffs as 'temporary.' He also stressed that the Fed is monitoring economic impacts from tariff uncertainty, ready to intervene if US employment conditions worsen. This suggests the Fed would more likely ease monetary policy due to tariff consequences.

Bank of America recently released a comprehensive research paper titled "Gold plating guns and cannons." The report outlined several positive catalysts for gold while also noting potential challenges to the optimistic gold outlook.

Positive demand drivers & economic factors boosting gold:

• China's Insurance Sector: New regulations permit insurers to allocate up to 1% of their assets to gold, potentially adding 300 tonnes of gold purchases (6.5% of the annual physical market demand).
• Central Banks (CBs): Currently maintaining 10% of reserves in gold, CBs might increase to 30% for greater portfolio efficiency.

• China's PBoC boosted its gold reserves to 5.5% of total FX reserves in Q4 2024; numerous central banks are actively cutting USD holdings in favor of gold. 

• U.S. Economic Strategy: Ambiguity surrounding tariffs, trade policies, and fiscal gaps is stimulating demand for gold.
• U.S. Dollar Decline: A softer dollar supports gold prices, as global diversification away from USD holdings persists.
• Geopolitical Tensions: Intensifying trade frictions and global policy uncertainty are enhancing gold's reputation as a safe-haven asset.
• Gold-backed ETFs witnessed 4% year/year expansion, reversing previous outflows. Retail investment continues to climb, especially in North America and Europe. 

• Multi-Polar Landscape: The global shift from U.S.-led unipolar dominance to a multi-polar world heightens gold's allure. If global CBs pivot away from USD holdings, gold will probably benefit as a reserve asset.

The blend of sustained global central bank gold acquisition, heightened retail investor enthusiasm in Europe and the U.S., and China's insurance industry emerging as a substantially larger force in driving physical gold demand could push gold to $3,500 by mid-2026. 

BofA identifies three primary threats to the bullish gold perspective:

• U.S. Fiscal Improvement: If the U.S. successfully shrinks deficits, it may dampen demand for gold.
• Robust USD & Interest Rate Increases: Higher real rates could diminish investor interest for gold.
• Enhanced Geopolitical Harmony: A return to stronger global cooperation could restrict gold's appeal.

The second and third points seem unlikely scenarios. The likelihood of reduced U.S. fiscal deficits remains an unpredictable variable — judging by the U.S. government deficit forecasts for the current fiscal year, prospects appear dim: 

In February alone, the US government posted a $307 billion budget shortfall! That accumulates to a $2,150,000,000,000 deficit over the past 12 months.

Perhaps the most significant immediate threat to gold's rally is the possibility of Trump retracting most tariff threats. While this doesn't appear highly probable currently, if it happens, we might see stocks surge and Treasury yields climb. Potentially subjecting gold to selling pressure.

Ultimately, Trump 2.0's "America First" approach might culminate in an "America Alone" outcome. By turning inward to address the twin deficits, the U.S. risks alienating trading partners and former allies. The possibility of U.S. withdrawal from NATO represents perhaps the most significant example of a potential "America Alone" scenario.

The consequence of growing American isolationism could be a further reduction of U.S.dollar holdings by foreign central banks and a weakened U.S. dollar. Gold stands to gain significantly in such circumstances.

Gold's future looks promising.