Just a few months ago, investors who weren’t into gold were barely looking in its direction. For much of the first quarter, the yellow metal sat on the sidelines, moving just a few dimes on some days, as the dollar became the preferred hedge against the trade war. To brand gold as “unexciting” then would have been a dramatic understatement.
Fast forward to this week: gold just can’t stop making new peaks, hitting—for days in a row—highs not seen since 2013.
Even after Federal Reserve Chairman James Powell signaled on Tuesday that a rate cut in July wasn’t a given, gold bulls were undeterred. After a brief turbulence, U.S. gold futures on Comex settled up a fourth straight day for their ninth positive settlement in 11 days.
Fund managers and family offices that had a mere passing interest in gold at the start of the year are now piling into the precious metal.
And why wouldn’t they?
Spot gold, reflective of trades in bullion, is up almost 10% on the year. Almost all of that comes from the June rally, which has been its biggest since February 2016.
And holdings of SPDR Gold Trust (NYSE:GLD), the world’s largest gold-backed exchange-traded fund, saw the biggest percentage gain in nearly 11 years on Friday.
What has made gold such a monster asset all of a sudden?
Analysts give a combination of reasons, beginning with the anticipated Fed rate cut, which could come as early as July; the festering U.S.-China tariffs fight, that’s threatening to tip the global economy into recession; Iran’s retaliation against the Trump administration’s sanctions that have turned the entire Persian Gulf into a hotbed of fear.
George Gero, precious metals analyst at RBC Wealth Management in New York, told Investing.com:
“Gold continues its extraordinary march higher as global economic worries, political worries and U.S. politics underpin many bids from buyers in many countries. Opportunity costs for buying gold have also lowered buyers resistance.”
“Everywhere you look, from South America to China and the Middle East, the United States is engaged in political battles and you need a hedge for that. You also need a hedge against the stock market.”
That last line would ring true with most investors as gold futures settled up on Tuesday despite their initial slide on Powell’s comments that the Fed will do what it had to on interest rates and not be cowed by the White House. Wall Street’s three leading stock indexes, meanwhile, closed down.
Wednesday’s early trade in Asia saw gold prices unusually in the red, and some think it’s a sign that the June rally was overdone.
After Powell’s comments that "monetary policy should not overreact to any individual data point or short term swing in sentiment," doubts are beginning to surface from bond to equity and forex markets that the Fed might do as much as a 50 basis points cut in interest rates needed to continue feeding the gold rally.
Indeed if the Fed opts for a smaller-than-expected rate cut, of say 25 basis points, it will probably amplify U.S. President Donald Trump’s criticism of both the central bank and Powell. There's talk the president might replace Powell as chairman, although Powell's actual term as a Fed governor would go on. The legality of such a move is not entirely clear, although such a crisis at the Fed might actually be good for gold, given its safe haven draw.
That’s one reason many believe that the current dip in gold is just a blip before new highs of $1,450—or even $1,500—are attempted.
Given the contract’s Tuesday settlement of $1,418.70, that’s a premium of nearly $50, or 3% more.
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