Gold prices are looking better and better – the other week they hit their highest levels of the year driven by bets that inflation will remain sticky despite recent declines.
The most actively traded gold-futures contract rose to $2,055 a troy ounce, up 12% year to date. That puts it within range of its record high reached in June 2020.
Source: Wall Street Journal
Investors value gold as a hedge against inflation, expecting it to maintain its value if other assets fall. Yet its most recent rally comes after closely watched data prints showed that inflation is slowing.
The rising gold price could mean investors are betting that the Federal Reserve (Fed) will pause its rate-hiking program even with inflation still well above the central bank’s 2% target. That might be because the economy is weaker than it seems: though the labour market remains strong, March’s banking crisis caused worries that the economy remains vulnerable to short-term headwinds.
A reversal by the Fed could result in higher inflation becoming embedded in the economy in the coming years, creating an environment that favours higher gold prices.
Gold has also been boosted by the recent drop in Treasury yields. Last month, nervous investors jumped into Treasuries, bringing down yields. That increases the relative appeal of holding gold, by reducing the foregone income of bonds. In addition, gold has been made cheaper for foreign investors as lower Treasury yields have weakened the US dollar.
Gold futures contracts have climbed 12% since the start of this year, whereas the S&P 500 has gained around 8%, and the ASX 200 about 6%. Gold stocks on the ASX have had a truly golden run, up some 30%!
Source: Westpac Broking
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