Investors are returning to gold as a store of value after the Federal Reserve’s emergency rate cut sparked a collapse in 10-year Treasury yields.
Spot gold extended gains Wednesday after jumping by the most since 2016. The metal is rebounding from a dramatic plunge on Friday, when investors sold bullion to cover losses in other asset classes.
“Gold rekindled its safe haven credentials yesterday after the Fed made the cut,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. Gold benefits from both uncertainty and deeply negative real yields, he said.
Speculation is mounting that the Bank of England will follow the Federal Reserve with an emergency interest-rate cut. The Group of Seven’s pledge to coordinate responses to the coronavirus outbreak, followed by the Federal Reserve’s move, has also set off a flurry of activity from policy makers across Asia-Pacific.
Investors are turning their focus to the Bank of Canada which may jump into action next, with a cut expected at its scheduled meeting later Wednesday.
Spot gold rose 0.4% to $1,647.30 an ounce by 12:49 p.m. in London. The metal rose 3.2% Tuesday, the most since June 2016, after Fed policy makers shaved 50 basis points off their benchmark, cutting rates outside the normal cycle of meetings for the first time since 2008. In other precious metals, silver edged higher, while palladium declined for a fourth day.
Holdings in gold-backed ETFs resumed their rise, setting a fresh record. Tuesday’s inflow of 15.6 tons was the largest since mid-January, according to a preliminary tally compiled by Bloomberg News.
“The precious metal has proven an effective way of hedging portfolios against coronavirus risks, and we think key drivers are still in place,” UBS Group AG strategists led by global chief investment officer Mark Haefele wrote in a note. “U.S. real rates are now lower, reducing the opportunity cost of holding gold.”
(By Elena Mazneva and Ranjeetha Pakiam, with assistance from Martin Ritchie)