Gold has defied interest rate rises and record equity markets to rally to its highest level in more than three months.
The precious metal has jumped by more than 6 per cent since early December to reach $1,316 a troy ounce, its highest level since September 15. The move higher has also been paralleled by other precious metals such as palladium and platinum.
The short-term boost to gold has come from a weaker dollar, which makes the metal cheaper in foreign currencies. The dollar was the worst G10 currency of 2017, dipping nearly 10 per cent over the year on this trade-weighted basis. Investors are also eyeing a rise in inflation amid a higher oil price and following tax reforms that were signed into law last month by President Donald Trump.
“The 10 per cent decline in the dollar index helped to explain the bulk of gold’s performance, but it nevertheless managed to attract additional demand despite record stock market valuations and surging demand for cryptocurrencies,” said Ole Hansen, head of commodity strategy at Saxo Bank.
The move is gold’s best straight run since 2011, a year when gold hit a record of more than $1,900 a troy ounce before collapsing to trade close to $1,000 in 2015. Still, analysts say a sustained move higher for gold requires a catalyst such as a correction in global equity markets, which continue to rally to record levels. Gold is considered a haven asset and a store of wealth in times of financial stress and uncertainty.
“In the short term, it’s probably outperformed a bit more than is justified,” said Marcus Garvey, an analyst at ICBC Standard Bank. “To get really bullish you’d have to come up with a narrative where you think other asset classes will really underperform and gold as a defensive asset becomes materially more attractive.”
Also key to gold’s performance is the timing of any pick-up in inflation and the reaction of the US central bank. Over the past few years gold has had a close relationship to US real rates, or the interest rate after taking into account inflation.
Gold, which provides no yield, has tended to rise when US real yields fall, and vice versa. Over the past month expectations for US inflation have picked up. Some analysts fear if the Federal Reserve raises rates faster than expected that could weigh on gold.
Source: FT.com
