The desire for gold is the most universal and deeply rooted commercial instinct of the human race," said renowned Wall Street trader Gerald M. Loeb. In times of uncertainty, this instinct gets even more pronounced. Gold prices have continued their upward march and have now risen 18% so far this year, as fears of recession loom large.
In its latest survey of fund managers, Bank of America Merrill Lynch points out that the proportion of fund managers expecting a global recession in the next 12 months was at its highest since 2011. Last week, the US yield curve inverted, setting the stage for the yellow metal to shine even brighter.
“The US yield curve is a key factor that seems to be driving the upmove in gold prices. This is something similar to what we saw during 2008-09," said Debajit Saha, senior precious metals analyst at Thomson Reuters GFMS in India. “Currently, the US yield curve is inverted and more easing by the central banks would make gold an attractive asset. An inverted yield is seen as a sign of recession, which means safe haven demand for gold should rise."
While a curve inversion is widely considered a warning that the US economy is headed for recession, some experts have argued this is debatable. Nevertheless, a look at the gold market suggests traders are seeking refuge in the precious metal.
“Despite the sharp rally that we have seen in global gold prices in the recent weeks, the sentiment towards gold remains positive—just look at the short positions in gold on the COMEX, they are at a multi-year low," says Saha.
“The recent gold price rise indicates investors are diversifying their assets fearing a global recession, although technically we aren’t there yet. The surge isn’t temporary and future price path will largely depend on policy action," says Sudheesh Nambiath, head of India Gold Policy Centre at the Indian Institute of Management, Ahmedabad.
Worries about the global economy have intensified because of the US-China trade war. “The escalation and de-escalation of US-China trade tensions and the move in US (real) interest rates have been the main drivers of gold prices in recent days and are likely to continue influencing the holdings of financial investors," said analysts at UBS AG in a 14 August note to clients.
Besides, central banks have been on a gold-buying spree. The World Gold Council’s latest outlook report showed that central banks bought 224.4 tonnes of gold in the second quarter of 2019. “This took H1 (first half) buying to 374.1 tonnes—the largest net H1 increase in global gold reserves in our 19-year quarterly data series," it said on 1 August. Further, holdings of gold-backed exchange-traded funds grew 67.2 tonnes in the June quarter to a six-year high of 2,548 tonnes.
Although investment demand for gold remains high, not all are seeing this movement in bond yields as predicting a recession. “Inverted yield curves in the US and elsewhere tell us very little about the timing of future downturns and, for now at least, the economic data are more consistent with a slowdown than a downturn in the world economy," Simon MacAdam, global economist at Capital Economics, said in a report on 15 August. MacAdam added that while there are clear risks to the Capital
Economics’ forecast further ahead, at their best, yield curves are blind in one eye—they can often see economic trouble ahead, but struggle to gauge how far away it is.
To be sure, the current gold price of $1,515.10 an ounce is considerably below the lifetime high of $1,921.15 an ounce seen in September 2011.
In rupee terms, gold prices surged to an all-time high of ₹37,799/10gm last week and currently have come off a bit at ₹37,476/10 gm.
With fears of a recession looming large, investors are likely to continue to rush to gold for comfort. As such then, it won’t be surprising if gold’s good run sustains. “Curve inversion is widely considered a warning that the economy is headed for recession. So, in that sense, the positive trend in gold is likely to continue," says Kishore Narne, head of commodity and currency at Motilal Oswal Financial Services Ltd.