Gold climbed towards its highest level in almost eight years on Wednesday as investors looked for a safe place to park their cash at a time of rock-bottom bond yields and expectations for a rise in inflation.
The price of gold in the spot market on Wednesday rose as much as $10 to $1,779 a troy ounce, its highest level since October 2012, before edging back to $1,772. The all-time high for gold was reached in 2011 when it hit $1,900.
Analysts said the rally reinforced the impression that investors are suffering more bouts of nerves over the outlook for global trade and coronavirus, with caution also evident in stock markets. Concern that government bond yields will struggle to keep pace with inflation in the coming months has also boosted demand for the precious metal, which has gained about 16 per cent in price this year.
“Gold has been moving in lockstep with real [inflation adjusted] bond yields for quite some time even though we would caution to call this causation,” said Carsten Menke, an analyst at Julius Baer. “We believe higher gold prices and lower real yields are two sides of the same coin, reflecting growth worries or risk aversion.”
Gold’s big disadvantage as a financial asset — the fact that it provides no income — has become increasingly irrelevant with safe instruments such as US government bonds effectively paying investors a negative return. The 10-year real yield, as indicated by Treasury Inflation Protected Securities, stands at minus 0.67 per cent, from 0.13 per cent at the start of the year.
“Of all the correlations used to analyse gold, that 10-year Tips has proven the most reliable,” said Colin Hamilton, analyst at BMO Capital Markets.
Some of the world’s largest hedge funds have also raised their wagers on gold, betting looser monetary policy and even direct financing of government spending could provide more tailwinds for the yellow metal.
The amount of gold held by exchange traded funds — which offer investors a simple way to own physical metal — has risen 23 per cent to 102.2m ounces, the highest level in at least 12 months, according to data compiled by Bloomberg.
Some analysts reckon the price could move above $1,800 if physical demand in India, one of the world’s biggest gold consumers, returns after the monsoon season.
George Cheveley, portfolio manager at Ninety One, a UK-based asset management company, said the combination of the pandemic and the unprecedented reaction of central banks had forced a reassessment of gold.
“There’s been good interest in gold for two to three years and we see it continuing,” he said, adding that gold producers were in their best shape for two decades with high margins and strong balance sheets. “Gold miners look very attractive even after their recent strong run,” said Mr Cheveley.
Shares in Greatland Gold, a gold explorer listed on London’s Aim have climbed 550 per cent this year and the company, which has discovered a large gold deposit in Western Australia that it is developing with Newcrest Gold, is now worth £450m.
“There is a lot of uncertainty and a lot of tension in the world,” said Greatland’s chief executive, Gervaise Heddle. “That’s a very positive environment for the gold.”
Solita Marcelli, deputy Americas chief investment officer at UBS Global Wealth Management, said extra government spending to offset the worst effects of coronavirus will mean central banks will be under pressure to keep interest rates low.
“The Fed will . . . do everything in its power to keep the curve as close to zero as possible so that the fiscal stimulus doesn’t cost an arm and a leg, especially when we know we will need more of it,” she said. “You will have real rates stay low and in negative territory for quite some time and gold is the best hedge against real negative interest rates.”