The recent gold-price surge has been fueled by fears of a slowing global economy and increased geopolitical uncertainty, including the trade war between the U.S. and China.
Most experts don’t see those volatile factors being totally resolved anytime soon.
“If gold holds above the $1,400/oz trading level over the course of this week, we believe there is a very good chance that this could mark the beginning of a new gold bull market,” VanEck portfolio manager Joe Foster wrote to clients this week.
“In any case, it appears gold has entered a higher trading range,” he was quoted by Barron’s as advising his clients.
Barron’s also gave three reasons why the gold rally is likely to continue.
- 'Vulnerable' Markets: “Although stock markets are still in record territory — fueled by the faith that Federal Reserve policy can keep the U.S. economy running for longer — the current level is very vulnerable, according to VanEck’s Foster,” Barron’s explained. “Any signs that indicate the Fed is unable to prevent a downturn could trigger a stock-market selloff. That should further propel gold higher as investors flee to safety.”
- Low Bond Yields: Lower rates could lead investors to favor gold over bonds. Both are considered safe investments when uncertainties rise, but fixed-income assets are now offering less yield, Barron’s explained. “Many government bonds in the developed world — or the considered “safe” jurisdiction — are already generating negative interest, including Germany, Switzerland, Japan, and the Netherlands. It means when these countries borrow, they are able actually to charge their lenders instead of paying them. While the yields on U.S. Treasury bonds are still positive, they’ve been declining at an accelerating rate.”
- Inflation Won’t Be Low Forever: “Inflation has been low for a long time, but it won’t last forever, especially as rates keep going down, Charles Gave of Gavekal Research wrote in a Monday note. A possible rise in inflation would give investors another reason to bet on gold instead of bonds, whose value will be eroded simply because of the dollar’s lower buying power,” Barron’s explained.
Barron’s also suggested that “to bet on the commodity itself, investors can buy physical bullion directly, or shares in exchange-traded funds that are backed by the precious metal and track its price closely,” such as the SPDR Gold Shares ETF (ticker: GLD) and iShares Gold Trust (IAU).
To be sure, Newsmax Finance Richard Cox sees the precious metal beating the S&P 500 as a better investment for the near future.
"The prospect of lower interest rates has emerged as stock markets are trading at record highs and trends in private sector jobs data point toward decade lows. Ultimately, these divergences suggest investors might continue to adopt a more protective stance as a way of guarding against potential declines in the stock market," Cox recently wrote for Newsmax Finance.
"Historically, gold tends to be a primary beneficiary during these types of market environments, so I wouldn’t be surprised to see extended outperformance (relative to the S&P 500) in the months ahead."
For its part, gold prices gained on Friday on uncertainty that a crucial round of U.S.-China trade talks over the weekend would resolve the bilateral dispute.
The precious metal was on track to mark its best month in three years, up 8.2% in June alone, on the back of expectations the U.S. Federal Reserve would ease monetary policy. Prices were up 9.4% in the quarter, its biggest percentage gain since the first quarter of 2016, Reuters reported.
Spot gold rose 0.2% in the session to $1,411.83 per ounce as of 10:58 a.m. EDT. Prices surpassed the key psychological $1,400 level earlier this week to reach $1,438.63 for the first time in six years.
U.S. gold futures for August delivery rose 0.2% to $1,414.80 per ounce.
Meanwhile, the U.S. currency was down 0.2% and was set to turn in its weakest monthly performance since the start of 2018. Bets on interest rate cuts by the Fed have pushed the dollar index down 1.7% this month.
A weaker dollar makes greenback-denominated commodities such as gold more attractive for buyers with other currencies.
“We are still seeing huge investor interest in the precious metal. Markets are pricing in growing expectation for two interest rate cuts to the Fed’s base rate in the next few months,” said Carlo Alberto De Casa, chief analyst with ActivTrades.
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