The U.S. dollar’s longstanding status as the world’s reserve currency is at risk after the greenback's weakening by unprecedented government efforts to shore up the economy during the COVID-19 pandemic, according to Goldman Sachs Group Inc.
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Ballooning federal debt levels and a potential shift in favor of inflation at the Federal Reserve amid increased geopolitical hostilities, domestic unrest and an onslaught of new COVID-19 cases are among the headwinds the greenback faces, according to the firm’s strategists.
“Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge,” wrote a team of Goldman strategists led by Jeffrey Currie.
Those concerns may give an opening to an even older value-storage option, he said: "We have long maintained gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their currencies and pushing real interest rates to all-time lows.”
The strategists raised their 12-month price target for gold to $2,300 an ounce, or 19 percent above the record $1,931 where July futures settled on Monday.
Gold prices have rallied 29 percent so far in 2020 as stay-at-home orders designed to slow the spread of COVID-19 brought the global economy to a screeching halt in the first half of the year.
While governments and central banks have pumped liquidity into the global economy to support the recovery, no measures have been as aggressive as those taken by the U.S., where the Federal Reserve cut rates to near zero and printed $2.2 trillion while extending another $5 trillion through loans to banks. Congress has already passed $2.2 trillion of stimulus and is working to add at least $1 trillion more.
The effort to pull the economy from the clutches of deflation has already pushed real interest rates, or rates after factoring in inflation, to a record low.
The strategists expect them to fall further, making the future fight against inflation that much more difficult.
“The greater the deflationary concerns that policymakers must fight today, the greater the debt build-up and the higher the inflationary risks are in the future,” they warned.
All of the largesse has pushed the U.S. dollar index down by 2.7 percent this year; it's trading near its lowest level since June 2018.
“Today the risk is from debasement of fiat currencies that sows the risk for inflation, and gold is the best hedge against debasement,” the Goldman strategists said.