The Federal Reserve’s easing signals have given gold a boost, but the move portends economic troubles
By Lauren Silva Laughlin
After a long period of lackluster performance, gold has jumped roughly 9% in the past month. Photo: Mike Groll/Associated Press
Gold has taken the lead. The asset, at times considered a haven, has hit an almost six-year high after the Federal Reserve signaled that it was willing to lower interest rates. If rates continue to fall, expect further jumps in the yellow metal. But the moves portend some bad news.
The price of gold has sometimes risen in tandem with inflation, or in response to financial stress around the world. Lately though it appears to be responding to signals sent by central banks.
This helps explain why, after a long period of lackluster performance, gold has jumped roughly 9% in the past month, even as stock prices have also risen.
Following the Fed’s dovish signals Wednesday, the benchmark 10-year Treasury yield went below 2% on Thursday, its lowest level in several years, and gold rallied by around 3.5%.
Gold tends to rise when after-inflation returns on other assets perceived as safe, such as government bonds, decline. Pimco has tracked the relationship between gold prices and interest-rate yields, and concludes that for every 1 percentage point decline in inflation-adjusted yields, gold prices should move up by roughly 30%.
In that light, the recent jump in gold prices looks fairly tame. Since the end of October, inflation-adjusted yields on 10-year Treasurys have fallen roughly 0.9 percentage point, while gold is only up about 13%, Pimco notes. The fund manager figures gold should have risen 20% to 30% in total based on the yield movement.
Of course, the question now is where yields are going. Earlier this month, JPMorgan Chasecut its year-end prediction for the 10-year Treasury yield to 1.75%, down sharply from its prediction in March of 2.9%.
Other central banks are pushing in the same direction. In the U.K., 10-year yields fell close to their lowest levels since late 2016 after a downbeat assessment on the economy from the Bank of England. Meanwhile, German yields remain deeply negative as the European Central Bank nears further easing.
Investors have more than just boosting their gold positions to consider. The underlying cause of the depression in yields is worsening global sentiment about growth, partly due to the U.S.-China trade dispute. Gold may offer some protection. More worrying is what investors are protecting themselves from.
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