Gold Hits Multi-Year High; More to Come?

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Gold Price News: August 8, 2019

Gold is having an incredible 2019. For the previous three years, the spot price of gold fluctuated between $1,150 and $1,350 per ounce (learn more here). This year, gold is breaking out with a vengeance. It’s up over 16% year-to-date and prices hit six-year highs this week at over $1,510/oz. In today’s Gold Price News, we’ll explore why there’s still a strong bull case for gold; even at these multi-year highs.

Several forces combined to power gold’s rally this year. The ongoing U.S.- China trade conflict is elevating uncertainty on a global scale and that alone is often enough to provoke a reaction in gold prices. But, there are bigger forces at work here.

Gold has an inherent value that serves a benchmark for currencies across the world. Inflation tends to drive gold prices higher so, generally, a weakening currency is a tailwind for gold prices.

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Gold Prices, Weekly, 5-Year Chart

Tailwinds For Gold Prices

As a result of the current uncertainties facing the global and domestic economies this past year, a significant amount of capital has shifted away from stocks towards risk-off assets like gold and U.S. Treasury bonds. However, there is a worldwide trend towards lower interest rates. As a result, the Fed is under increasing pressure to cut rates; something the central bank resisted for many years.

Its commitment to responsible fiscal policy helped make the U.S. a stalwart in the global finance community and an attractive destination for international capital.

Negative-Yielding Debt

Internationally, it’s a different story. Out of $50 trillion in global sovereign debt, $15 trillion is in negative-yielding bonds. It’s hard to understand why anyone would want to buy a negative-yielding bond, but these types of bonds are prevalent throughout the developed world. Often, large banks are required to hold government bonds like these.

The growing amount of negative-yielding international debt is one of the reasons the U.S. dollar is such a strong currency historically. This year, the U.S.Dollar Index hit levels it hasn’t seen for decades.

A strong dollar is a good thing for consumers because it gives them more purchasing power for their buck. However, it allows foreign companies to offer cheaper goods and services than domestic companies. A strong dollar also hurts large multi-national corporations that lose money when they change international profits into U.S. dollars.

Gold Looking More Attractive

The White House has been pressuring the Fed for more rate cuts, but many experts say the U.S. economy is doing too well to warrant a full-blown rate-cut cycle.

This creates a conflict for the politically-neutral central bank. The U.S. is in the process of negotiating a major trade deal with China, and the President says he needs to Fed to cut rates in order to sustain economic growth.

Gold price news

With so much pressure, it seems inevitable that the Fed will lower rates further. With bond yields declining across the world and a host of uncertainties facing equities, gold appears to have great potential for long-term growth.

Despite a booming economy, inflation numbers have been muted this year. Proponents of lower rates point to the low inflation rate as further justification for more rate cuts.

Higher inflation should be a tailwind for gold prices. While rate cuts are expected, they’re not entirely priced into the spot price of gold just yet. Additional cuts could push gold prices even higher.

Additionally, negative and low-yielding debt make bonds an increasingly less attractive investment option. This could create a capital shift towards other risk-off assets like gold, which could increase demand and drive gold prices even higher.

 What’s Next for Gold Prices?

If the global race towards zero-yielding bonds accelerates unexpectedly, expect gold prices to continue gaining. There was a drastic reaction in bond yields this week when New Zealand announced a deeper-than-expected rate cut and Germany reported unexpectedly weak manufacturing data. In turn, the dramatic drop in yield set off a sudden jump in gold prices. Many experts fear that the Federal Reserve rate cut may have set off a vicious cycle of worldwide rate cuts that could shake the foundations of the global financial system.

gold prices low bond yields
10-Year T-Bond Yields Approaching All-Time Lows

Low and negative-yielding interest rates are strong tailwinds for gold prices. However, gold prices are also affected by the strength of the dollar so the U.S. dollar will have to weaken for the run to really pick up steam. If the U.S. continues to cut rates, confidence in the dollar could decline and create a catalyst for more gains in gold.

The President is screaming for a weaker dollar and, so far, the Fed has given him his way. If the dollar weakens significantly then this rally could be just getting started.

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Chris Dios is an American writer and entrepreneur based in the Greater NYC area.

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