Where is gold heading? Jefferies turns bullish as US, Japan face fiscal strain

Jefferies has shifted its stance on gold, becoming increasingly bullish, due to deteriorating fiscal conditions in the US and Japan, constrained monetary policy, and improved cash generation among gold-mining companies, according to its latest GREED & Fear report. The brokerage highlighted the US government's debt reaching $40 trillion and the country's fiscal deficit surpassing the full-year deficit of the previous year, with the July deficit reaching $432 billion, the highest since March 2021.

The report also noted the rising Treasury yields and the Federal Reserve's reluctance to raise interest rates, as it could jeopardize government debt servicing. Geopolitical risks, such as tensions surrounding Iran and the Strait of Hormuz closure, add to the bullish outlook for gold. Additionally, the price gap between crude oil and refined products is widening, making oil and energy stocks the best hedge, with gold ranking second.

Gold-mining companies are generating rising free cash flow, which outperforms the S&P 500's deteriorating free cash flow trends. The Philadelphia Stock Exchange Gold and Silver Index's free cash flow yield has improved significantly compared to the S&P 500's yield. Overall, Jefferies sees a compelling investment opportunity in gold and select gold-mining equities, driven by fiscal deterioration, constrained monetary policy, geopolitical uncertainties, and improved fundamentals for gold miners.