Credit rating agency Moody’s has downgraded the sovereign U.S. credit rating from Aaa to Aa1 while changing its outlook from negative to stable. After the downgrade, the U.S. lost its only remaining top credit rating. 

After Moody’s rating cut, gold prices (GCM25) have risen. The precious metal had previously come off its record highs amid a lowering of trade tensions and has now received a new impetus after Moody’s action. In this article, we’ll look at gold’s outlook after Moody’s rating cut and examine whether it can continue to go higher.

Why Did Moody’s Downgrade the U.S. Sovereign Rating?

Moody’s downgrade did not exactly come out of the blue, given the U.S. federal government’s precarious finances. U.S. sovereign debt has been rising at an alarming pace since the COVID-19 pandemic, and the country now spends over $1 trillion a year just on interest payments for these burgeoning liabilities. Warren Buffett, Jerome Powell, Jamie Dimon, and Ray Dalio are some of the leading personalities who have issued caution on the unsustainable U.S. fiscal scenario. 

As Moody’s said in its rating cut rationale, the surge in the deficit is bipartisan. The debt started to soar under President Donald Trump’s first term as the U.S. opened its coffers to aid the economy amid the pandemic. However, the deficit continued to swell under Joe Biden’s presidency, and Moody’s believes that the Trump administration’s proposed policies for his second term won’t move the needle much on the pressing budget deficit situation.

“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher,” said Moody’s in its note. The credit rating agency added, “The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”

While Moody’s downgrade might be a bit behind the curve, it is yet another reminder of the economic uncertainty emanating from unsustainable U.S. budget deficits.

What Does a U.S. Credit Rating Downgrade Mean for Gold?

Over the last decade, long U.S. stocks (particularly tech names) and long U.S. dollar ($DXY) were the most popular trades globally. However, that equation is getting challenged in 2025 as markets question “U.S. exceptionalism.” A U.S. credit rating cut is theoretically positive for gold (GLD) (GCY00) as it increases its safe-haven appeal, specifically as the long dollar trade withers away. 

What Other Factors Can Drive Gold Prices Higher

Apart from the Moody’s downgrade, there are some other enabling factors for gold. A weaker U.S. dollar – and by extension stronger global currencies – makes commodities like gold cheaper in domestic currencies in other markets, which can fuel gold’s demand. Global central banks also continue to be big buyers of gold as they gradually increase gold’s share in their foreign exchange reserves at the greenback’s cost. The trend is only expected to gain traction as the U.S. loses its only top-notch credit rating.

Moreover, while we saw a “risk-on” rally in risk assets like stocks, the overall macroeconomic environment is still hazy, and it remains to be seen how the Trump administration progresses with trade deals.

What Could Go Against Gold in 2025?

Meanwhile, some macro factors work against gold, for instance, high U.S. interest rates. The Federal Reserve has signaled that rates might stay higher for longer and has held back on rate cuts despite Trump’s repeated calls for a rate cut. Notably, being a non-interest-bearing asset, gold has an inverse relationship with interest rates and tends to do well in periods of low interest rates. Secondly, if we see accelerated progress in trade deals, particularly with China, stock markets and other risk assets might rally while gold would come under pressure.

All said, I believe gold still is an asset worth betting on. There is no easy answer to the U.S. deficit problem, which, coupled with the global macro turmoil, bodes well for gold prices. I have been bullish on the yellow metal for quite some time now and continue to back my bullish thesis.