Gold prices soared to record highs on Tuesday, closing at more than US$2,000 an ounce for the first time in history, as U.S. policy makers prepare to unleash another round of pandemic-related spending.
As an investment, gold has thrived amid the astronomical levels of stimulus that governments and central banks around the world have deployed to try to protect their economies from the financial ravages of the coronavirus.
Soaring debt and deficits are generally bullish for gold, as are rock-bottom interest rates, a low U.S. dollar and heightened levels of financial market volatility.
“Bullion has limited downside in such an environment,” Matthieu Arseneau, deputy chief economist for National Bank Financial, wrote in a recent note.
So far this year, gold spot prices have risen by 33 per cent, making bullion one of the best-performing financial assets in the world. The S&P 500 Index is up by 2 per cent over that time, while the S&P/TSX Composite Index is down by 4 per cent.
Tuesday’s spike in spot gold to US$2,016 came after U.S. Senate Democratic leader Chuck Schumer said COVID-19 legislation talks with White House were moving in the “right direction.” Gold futures also rose to a record of US$2,037 an ounce.
Progress in negotiations on new pandemic support also seemed to drag down both long-term U.S. bond yields and the U.S. dollar.
“The [gold] market is being well supported by the likelihood of additional stimulus in the U.S.,” said David Meger, director of metals trading at High Ridge Futures.
One of the traditional drawbacks of investing in gold is that it pays no yield. But in an era of negative interest rates, neither do many government bonds.
The combination of rising inflation expectations and declining interest rates has dragged the yield on inflation-protected U.S. 10-year Treasuries to a record low of minus 1.06 per cent, as of Tuesday’s close.
In other words, the opportunity cost of owning gold has declined as the payout on the safest bonds has vanished.
“Gold prices are almost perfectly correlated with real interest rates,” Peter Berezin, chief global strategist at Montreal-based BCA Research, wrote in a report.
According to National Bank’s Mr. Arseneau, about 60 per cent of gold’s move in 2020 can be attributed to the “massive drop” in real rates. A mixture of the slumping greenback, rising inflation expectations and excessive volatility in stock prices has also fuelled the rally in bullion.
If something were to bring an end to gold’s run, it would probably have to be a swift reversal in real interest rates, which is unlikely, Mr. Arseneau said.
“The last time federal debt in the U.S. was as elevated as it is now was at the end of the Second World War, after which long-term Treasury yields were kept below inflation for a protracted period,” he said.
“We expect negative real interest rates to endure for the foreseeable future.”
With heightened demand for gold, meanwhile, money has poured into gold exchange-traded funds, which accounted for nearly half of total global demand for physical gold in the first half of this year.
“Gold ETF investment demand shattered numerous records … as investors sought safety from the economic turmoil created by COVID-19,” Juan Carlos Artigas, head of research at the World Gold Council, said last month.
Investors’ appetite for gold has also helped fuel the best run in Canadian mining stocks in years. The S&P/TSX Composite Gold Index has gained 54 per cent so far in 2020. And precious-metals miners account for 21 of the top 30 stocks in the benchmark index year to date.
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