Why gold is hot again

Picture: Reuters

Picture: Reuters

Published May 9, 2016


New York - Gold broke the $1 300-an-ounce barrier this week for the first time since January 2015.

Why do people want it?

Typically seen as a barometer for scepticism about the modern financial system, bullion is notoriously hard to value. Emotions—notably, fear—tend to dominate the price action, but instances of acute market stress often inspire a rush to the US dollar instead.

In other cases, gold's value seems to be driven purely by technical factors. Accelerating inflation is said to be positive for the metal, as investors seek a store of value, but the movements of real interest rates (which are adjusted for inflation) offer a compelling explanation for the precious metal's gyrations over the past decade.

The end of the commodities boom and aggressive moves by central banks to tamp down volatility have weighed on gold, which remains more than 30 percent off its 2011 peak. Investors are growing more enthusiastic, though: SPDR Gold Shares' holdings of gold spiked by 20.8 metric tons on the first trading day of May, the biggest one-day increase since 2011.

Stan Druckenmiller, the billionaire investor who averaged annual returns of 30 percent from 1986 through 2010, said on Wednesday that while some regard gold as a metal, “we regard it as a currency, and it remains our largest currency allocation.”

Gold's gains this year have come as a surprise.

The Federal Reserve's inflation-fighting interest rate increase in December, the first in nearly a decade, looked to be the final nail in gold's coffin, yet real yields in the US have declined in the wake of the central bank's move.

That lowers the opportunity cost of holding gold (which has a nominal yield of zero) relative to Treasuries, making the metal more attractive to investors.

Negative yields on sovereign debt in some parts of Europe, as well as in Japan, further bolster the case for gold as an alternative safe haven asset.


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