Last Monday, gold reached a high of 1,442.90, breaking above its 6-year high of 1,434.
A traditional safe haven, gold took a sharp and parabolic turn once the Federal Reserve announced that it may be open to slashing interest rates once again.
Should rates fall, the yellow metal is expected to continue rising. While good news for gold investors, such a move hedges a potentially dismal outlook for the rest of the economy.
Historically, the price of gold has risen either in response to inflation or in response to financial turmoil across the globe.
Recently, gold appears to be rising in response to central bank rate decisions, all of which are being made against a backdrop of geopolitical uncertainty and growing fears of a global economic slowdown (last week’s FOMC announcement saw the 10-year Treasury yields sunk below 2% while gold rallied 3.5%).
Hence, in the last month alone, gold prices jumped over 9% along with the broader US stock market.
Historically, gold prices tend to rise when other safe haven returns, namely yields from government bonds, begin to decline.
Bond fund manager PIMCO, which has been tracking this relationship for years, has developed a calculation based on this gold-to-yield correlation.
It goes like this: a decline of 1 percentage point in inflation-adjust yields = 20-30% rise in gold prices.
Toward the end of October 2018, 10-year Treasury yields have fallen by approximately 0.9 percentage points.
At the end of October, gold was trading at $1215 per ounce. For gold to reflect PIMCO’s projected gains, its price would need to reach upwards of $1458 - $1575!
The big question concerning every investor now is where yields might be heading, and how much lower it might sink.
Despite any previously held optimism shared by financial institutions across the globe on the future direction of yields, predictions have been revised to reflect a downward movement.
JPMorgan Chase cuts it year-end forecast of 10-year yields from 2.9% down to 1.75%. The Bank of England saw their 10-year yields fall to a three-year low. German yields remain negative as the ECB’s monetary policy considers further stimulus measures.
Ultimately, the economic factors exerting negative pressure on yields is what most investors should be worried about.
Global sentiment is worsening as the global economic environment is looking more and more dismal.
As exciting as this might be for gold investors, it reminds us that gold prices rise for a reason, and usually, that reason is never a good one.
In short, it tells us that economic troubles lay ahead and that gold--a safe haven--may be the only asset capable of hedging investor wealth against the winter to come.