Gold’s quiet jump to new high
Gold prices have hit fresh record highs of $2,194 an ounce. The latest rally appears to have been driven by an emerging consensus on Wall Street that the US Federal Reserve will begin cutting interest rates in June, says Lyle Niedens for Investopedia. Investors look to gold to be a safe-haven in troubled times, but it faces competition for this role from government bonds, which, unlike gold, also pay an income. In the current period of high real (inflation-adjusted) interest rates, bonds become relatively more attractive. But with US rates, and hence bond yields, set to fall the investment balance is tipping back in favour of gold.
Competition from bonds
Gold has remained resilient during the period of higher rates. The price has been boosted by strong demand from China, where the central bank bought 390,000 troy ounces last month in its 16th consecutive month of purchases, says Bill Weatherburn of Capital Economics. The change in the US rates outlook was relatively small compared to the large jump in gold, which has leapt by more than 6% in the past month alone.
Market watchers are certainly struggling to explain gold’s breakout, say Harry Dempsey and Mary McDougall in the Financial Times. While US bond yields have ticked down recently, yields are still higher than they were in January, when gold was stuck at around $2,040/oz. Even more strangely, there have been marked outflows from gold exchange-traded funds (ETFs), with Bloomberg reporting outflows of 21 million ounces from gold-backed ETFs in the past year as the new bitcoin ETFs compete for investors’ funds. “It has been the quietest, most confusing rally,” says Nicky Shiels of Swiss trading house MKS Pamp. “What took it from $2,000 [last month] to above $2,150 is the headscratching part.”
This gold rally is unusual for another reason, says Louis-Vincent Gave of Gavekal for CityWire. “One of the main reasons to own gold is as insurance” against financial disasters. The metal is supposed to provide ballast in a portfolio when other assets plunge.
Yet these highs have come alongside a continued boom in everything from US stocks to cryptocurrencies. That said, it is worth noting that gold is not as historically pricey as it appears. In inflation-adjusted terms it is still below its early 1980s record of $3,000/oz in current dollars.
Investors might be fixated on US interest-rate policy, but they need to look east. Between them, China and India “account for roughly two-thirds of global gold consumption”. The latter is enjoying a historic period of growth and wealth creation. It’s not hard to imagine that some of those extra riches are turning into additional jewellery purchases. “The price of gold is no longer set in London or New York as much as... Mumbai or Shanghai.”