Gold hits new high as investors seek hedge against stubborn inflation

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Gold prices surged to an all-time high on Wednesday as traders respond to signals that the US Federal Reserve is preparing to cut interest rates later this year even as inflation remains stubbornly above the central bank’s target.

The safe haven asset has rallied 15 per cent since mid-February to as high as $2,288 per troy ounce on Wednesday, also boosted by concerns over the potential for an escalating conflict in the Middle East. It later pared gains to trade 0.2 per cent higher on the day at $2,284 per troy ounce.

Two Fed officials said on Tuesday that three interest rate cuts this year would be “reasonable”, even though the world’s largest economy continues to perform strongly, with consumer prices rising slightly in February. Gold, which offers no yield to investors, tends to benefit from a fall in so-called real interest rates — borrowing costs adjusted for inflation.

“The expectation for falling real rates remains an important driver for the bullish outlook on gold,” said Joni Teves, a precious metals analyst at UBS. “As long as the Fed stays dovish, there is a risk of even larger declines in real rates should inflation surprise on the upside.”

Analysts said that traders were buying gold — known as an inflation hedge — to protect themselves against the risk of a rise in inflation, which would push real rates lower.

Line chart of Intra-day high ($ per troy ounce) showing Gold breaks to all-time high

Brent crude, the global oil benchmark, has crept up about 18 per cent since the middle of February to reach almost $90 per barrel, fuelling anxiety about a rebound in inflation.

“The market is interpreting that the Fed is willing to accommodate higher inflation as it cuts rates,” said Michael Widmer, commodities strategist at Bank of America.

Investors are starting to pay increasing attention to gold as a protection mechanism against concerns about high US debt levels, something that will be a focus in the run-up to the election this year, according to Widmer.

Gold’s rally had been given further impetus by investors buying call options in the futures market, aiming to profit from a rally driven by voracious demand from central banks and Chinese consumers, who are snapping up gold at record levels.

Analysts also said that Israeli strikes on an Iranian consulate in Syria had further burnished gold’s appeal as a safe haven.

“Strength begets strength,” said Robin Bhar, an independent precious metals consultant. “[Gold] seems to be in the hands of the speculative traders who are piling in and wanting to see this thing move much higher.”

Gold remains a significant distance from its real terms all-time high from 1980, equivalent to more than $3,000 per troy ounce after adjusting for inflation.

However, some analysts caution that gold’s surge from just over $1,800 per troy ounce six months ago looks overdone, particularly given the risk that the Fed and other major central banks lower interest rates more slowly than currently expected because of high inflation.

“The US economy is surprising with its strong performance, which would make a first interest rate cut in June less likely and thus weigh on the gold price,” said Alexander Zumpfe, senior precious metals trader at Heraeus, a refinery of precious metals. But he added that “it seems as if gold turns every market development into a price increase”.

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