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Gold has had a nice run since last summer, but wise investors shouldn’t count on its winning streak continuing.

Late Tuesday, the precious metal hit its highest levels in more than six years, surging briefly above US$1,600 an ounce, after Iran fired missiles on U.S. military bases in Iraq.

On Wednesday, the World Gold Council reported that eager investors have been pouring money into gold-backed exchange-traded funds, boosting the funds’ holdings to a record peak.

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These sound like bullish developments for gold investors. However, there is good reason to be skeptical. Gold is just as likely to fall as rise over the next few months.

Much of the current enthusiasm for the metal is based on two arguments. One is the notion that rising Middle East tensions are sure to boost the price of havens such as gold. The other is the conviction that low interest rates will spur more enthusiasm for precious metals.

Unfortunately, neither idea is quite as solid as it appears.

Investors should be particularly wary of the notion that precious metals do well in times of geopolitical crisis. This is only briefly true. Gold’s price may skip upward during nervous patches, but it typically fades fast once the initial furor is over. That is what happened, for instance, after North Korea’s missile tests in 2017.

Even major U.S. military interventions in the Middle East don’t spur a sustained stampede into gold, notes Oliver Jones, a senior markets economist at Capital Economics in London.

For instance, the price of the precious metal shot up in the month after the start of the Gulf War in 1990. Six months later, though, the U.S. economy was mired in recession, and gold began a long swoon.

The price of gold also rose in the six months after the start of the Iraq war in 2003. However, global stocks fared even better during that period, making gold a relative loser by comparison.

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The point here is that broader economic factors tend to swamp the influence of geopolitics on gold prices. Betting on war, or military tensions, to generate unusually big gains in gold is not generally a good idea.

A more respectable proposition is betting on low interest rates to help boost gold prices.

Over the past couple of decades, the price of gold has shown a strong tendency to move in the opposite direction to real interest rates – that is, interest rates with the impact of inflation stripped away. Especially when real interest rates dip deep into negative territory, as they did during the 1970s or after the 2008 financial crisis, gold prices tend to shoot upward.

This makes sense. Gold doesn’t pay a cent in interest, so anyone who is thinking of buying it has to weigh the metal’s appeal against other investments, such as bonds, that do offer such payouts.

When interest payments on those other investments are large in terms of the real buying power they deliver, investors have little incentive to stock up on gold. But when the real payout from alternative investments dips below zero – that is, when their yields aren’t big enough to cover the bite of inflation – gold becomes more attractive. The metal may not offer a payout, but at least it won’t automatically erode your purchasing power.

In recent months, the math has favoured gold. After the interest rate cuts by the U.S. Federal Reserve last year, and a modest uptick in inflation beginning last summer, some key real interest rates have dipped, ever so slightly, into negative territory. For instance, a seven-year inflation-protected U.S. government bond now offers a real annualized payout of about minus 0.05 per cent. Basically, investors in these bonds are signing up to lose buying power.

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Compared with such lacklustre alternatives, gold packs definite appeal. That has been reflected in its rise since last June.

The problem is that real rates would have to go even deeper into negative territory to boost gold higher from here.

There are two ways for that to happen: The Fed could cut rates even lower, or inflation could suddenly jump. Neither eventuality appears likely. The Fed has given every indication it wants to remain on hold this year, while inflation has been comatose for years.

Gold investors who are hoping for continued gains from here may be waiting a long time.

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