Gold prices have hit fresh record highs of $2,194 an ounce. The latest rally appears to have been driven by an emerging consensus on Wall Street that the US Federal Reserve will begin cutting interest rates in June, says Lyle Niedens for Investopedia. Investors look to gold to be a safe-haven in troubled times, but it faces competition for this role from government bonds, which, unlike gold, also pay an income. In the current period of high real (inflation-adjusted) interest rates, bonds become relatively more attractive. But with US rates, and hence bond yields, set to fall the investment balance is tipping back in favour of gold.
Competition from bonds
Gold has remained resilient during the period of higher rates. The price has been boosted by strong demand from China, where the central bank bought 390,000 troy ounces last month in its 16th consecutive month of purchases, says Bill Weatherburn of Capital Economics. The change in the US rates outlook was relatively small compared to the large jump in gold, which has leapt by more than 6% in the past month alone.
Market watchers are certainly struggling to explain gold’s breakout, say Harry Dempsey and Mary McDougall in the Financial Times. While US bond yields have ticked down recently, yields are still higher than they were in January, when gold was stuck at around $2,040/oz. Even more strangely, there have been marked outflows from gold exchange-traded funds (ETFs), with Bloomberg reporting outflows of 21 million ounces from gold-backed ETFs in the past year as the new bitcoin ETFs compete for investors’ funds. “It has been the quietest, most confusing rall
