Gold prices have hit their highest levels in six years as investors brace for an interest rate cut by the US Federal Reserve and seek a safe haven amid tensions between Washington and Tehran.
The price of one troy ounce of gold peaked at $1,452.60 on Friday morning, the highest point since May 2013, with fears over the Persian Gulf standoff also driving up the price of a commodity that is viewed as a market refuge during geopolitical crises.
Gold prices have been boosted by the fall in bond yields – or the interest rate paid out by bond issuers – which move inversely to their prices. Many of the safest sovereign bonds are now negative-yielding, meaning that investors are effectively paying for the privilege of lending money to borrowers, with the upshot that gold is more attractive.
Investors also tend to buy gold, which has relatively little practical value and yields no income, in times of geopolitical uncertainty. Iran on Friday denied that a US warship shot down one of its drones in the strait of Hormuz, contradicting the US president, Donald Trump.
The decline in bond yields around the world has been the “most important driver” in gold’s price rises, said Oliver Jones, a senior markets economist at Capital Economics, a London consultancy.
Yields have fallen as investors prepare for the Federal Reserve, led by the chairman, Jerome Powell, to cut its main interest rate for the first time in more than a decade. This could weaken the dollar, which would push up commodity prices and therefore make dollar-priced investments like gold attractive. It could also raise US inflation - which would further drive investors to gold, because the precious metal is viewed as an investment that holds its value.
The bets made by investors imply there is a 100% chance that the US central bank will ease monetary policy, according to CME Group. There is more than a 50% implied probability that Powell could announce a cut of 0.5 percentage points – more than the 0.25-point increment usually chosen.
The US has enjoyed a decade of uninterrupted growth and the latest GDP figures showed that the world’s largest economy grew at an annual rate of 3.2% in the first quarter. However, concerns are building that the recovery will slow sharply.
“The key thing that the Fed is worried about is the weakness of the rest of the world spilling over to the US,” Jones said.
At the same time, the increasing tensions between Iran and the US have added to nerves for some investors. The price of Brent crude oil futures rose by more than 1% on Friday to $63 per barrel after the report of the downed drone.
Gold traders have also been boosted by the backing of Ray Dalio, the billionaire founder of hedge fund Bridgewater Associates, in a blogpost published on Wednesday.
Dalio wrote: “I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.”