The new gold rush is underway. Suddenly, the precious metal has regained its long-lost luster, jumping to more than $ 2,000 an ounce during the first full week of August, its highest inflation-adjusted level in a decade. That new peak nearly equaled its all-time record in 1980 when the Hunt brothers from Texas notoriously cornered the silver market and gold joined the ride. Then gold collapsed from what everyone, in hindsight, recognizes as delusional heights. Now, the golden bugs claim it is the safest harbor in these stormy seas, while history warns that a rerun of 1980 could be looming. Who is right?
In the past few days, the shiny metal has pulled back a bit, closing 5% from its top at $ 1,946 on Aug. 12. Still, the 24% takeoff this year easily outpaces stocks and bonds, beating the S&P 500’s modest gain 5-1.
There are two things that drive gold prices higher: financial fears and political fears.
“Around the world, authorities are resorting to lowering interest rates,” said Paul Engeman, director of Ainslie Bullion, a trading company.
“That means rates are moving into negative territory” [where investors get nothing from their deposits or have to pay banks to keep them.
The purchase of gold bars does not generate interest payments, but increases in the price generate good returns. Although the price fluctuates, gold is considered a safe asset because it never goes away and tends to increase in value when economic times turn bad.
It’s not just individual investors who have bought into the gold rush.
Russia’s central bank has bought six tons of gold in recent weeks and 77 tons this year, which has helped boost demand.
Other central banks have been buying as well and that is in response to the “armament of the US dollar in terms of tariffs and trade wars with China and other countries,” Engeman said.
The dollar is traditionally a store of value, but trade tensions threaten its value and make gold more attractive to large investors, he said.
Since the Federal Reserve lowered the short-term interest rates it controls to near zero, longer-term interest rates, also known as government bond yields, have also fallen to some of their lowest levels. The yield on the 10-year Treasury note was about 0.6 percent on Monday.
At the same time, because the Fed has created huge amounts of new money, analysts say it could prepare the United States for higher inflation in the future.
Investors are taking note of that possibility. In recent weeks, market measures of expected inflation, known as breakevens, have moved higher, with investors now expecting inflation to average around 1.5 percent annually for the next 10 years. Since the 10-year Treasury will return to those investors only about 0.6 percent a year, that means investors who buy the 10-year bond should essentially be comfortable with losing almost 1 percent of that investment. per year, after accounting for inflation. In market jargon, that means “real” or inflation-adjusted returns are negative.
Since you don’t lose money, remember, gold is supposed to hold its value even if you don’t pay interest, it’s better than losing money, usually investors switch to gold from Treasuries when this happens.
“The only thing that matters in the price of gold is the actual performance of the United States,” said Natasha Kaneva, a precious metals analyst at JPMorgan Chase.
Inflows to exchange-traded funds for gold – mutual fund-like vehicles that are one of the easiest ways to buy gold – soared after the Fed made major policy announcements in late March, during the worst of the outbreak. . And the flood of cash to gold funds has continued.
