Gold hits new record in six years - August 14, 2019

Gold hits new record in six years

Just weeks after we wrote about a serious uptrend in gold, the precious metal hit a new record in six years. What are the reasons behind this rise and how it’s all connected to central bank policies? We’ll investigate it!

Last week the price of gold futures went above $1507 per ounce. Last time the precious metal was this expensive was on 12 September 2013. That means that gold broke an almost six-year-old record last week, and it doesn’t appear to stop here.

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Why is it happening now?

Two weeks ago the Fed cut its rates (see: Will the Fed make a rate cut today?). Other central banks also do that or keep their rates super low. Japan for example still keeps it in the negative range. That’s important since there might be a serious connection between government bond rates and gold price. As a study from Nordea Bank points out, the more the negative yield debt is on the market, the higher the price of gold goes. The chart above shows how strong the link is between the two:

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Or as they put it: “Gold is now a better performing asset than S&P 500 or a 7-10yr Treasury portfolio this year. The more negative the interest rates, the better the performance of gold prices, it seems”.

Negative yields make strange things

The latter is a truth we have already underlined several times in our blog. What’s more, we’ve been writing about the negative effects of super low or negative interest rates for years now. (See our article “The Trap of Negative Interest Rates” from 2016.) This phenomenon in the end means that investors who keep their money in bank accounts or government bonds don’t make any profits or they may even lose money.

But wait, the chart above shows that there’s more and more bonds sold. There is a reason for that, too. Some market participants, especially institutional ones, must buy them for some reason. (The reasons might be laws or internal practices.) But not everyone is bonded to buy them, and that part of the market helps gold a lot.

Precious metal = haven

The reason is: precious metals are a safe haven for investors. When there are economic or political uncertainties on the markets, investors usually turn to gold. True, gold may not have any yields in the strictest sense of the word, but historically speaking it keeps its price or it even goes up on the long term.

Therefore, in a market atmosphere when government bonds can’t have any decent returns, it’s a great and relatively safe choice for investors to buy them. The market does the rest: higher demand means higher price, which we can see on both charts above.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.