The spot price of gold has soared above the 2k milestone, reaching a new all-time high of $2040. Can the upwards momentum continue?
The huge blast in Beirut helped trigger a flight to safety in markets on Tuesday. 2750 tonnes of ammonium nitrate exploded in the Lebanese capital, killing dozens and leaving thousands wounded. The shock event saw investors flock to the safety of gold.
The price of gold has gained over 13% in the last month, that’s nearly $250 per oz. The gains had paused underneath $1980 per oz for a week but the price has now broken higher and the highs made around $1980 would be expected to act as support for any pull back.
Spot Gold & US 10 Year Treasury yields (3-months)
The move higher in the price of gold has been in concert with falling US Treasury yields, as well as falling real yields (Treasury yields adjusted for expected inflation).
Gold has taken out $2000 and it seems likely Treasuries could follow suit with a drop below 0.50%.
Will it go higher?
While it was the geopolitical shock of the events in Beirut that triggered the latest move up, it is other factors that are behind the meteoric rise in the metal this year. Once traders have digested the events in Lebanon, gold could experience a short term pullback, but it is when these longer term factors look like they are changing that gold will lose some of its allure.
Two of the principal causes for the rally in gold are related; the rise in coronavirus infections in the United States and the need that creates for more monetary and fiscal stimulus.
1. Monetary stimulus. More money printing from the Federal Reserve, which has put in place an 'unlimited' program for buying government and corporate bonds- means devaluation of the US dollar relative to other currencies, including gold.
2. Fiscal stimulus. The huge rise in government spending to support the economy during the pandemic is causing rising inflation expectations and gold is traditionally used as an inflation hedge.
In principal, once investors expect new stimulus measures to stop, some of the pressures on treasury yields and the US dollar should abate, which should translate to less need for gold.
However, if the policies being enacted now are truly inflationary; inflation is hard to contain. Once the cat is out of the bag, it’s hard to put back in- and the need to hold gold will live on.
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