Gold reached a five-year high on Wednesday breaking through a major resistance level after the US Federal Reserve signalled a rate cut is in the offing.
Gold for delivery in August, the most active futures contract trading in New York, reached an intraday high of $1,366.60 an ounce, up 1.3% from yesterday settlement price and the highest since mid-March, 2014.
Gold is up 6.6% this year, finding support from safe haven buying amid geopolitical worries and trade tensions, but expectations of lower interest rates and a drop in bond yields in the US saw the metal finally breaking through $1,360, considered a major resistance level.
The relationship between long-term interest rates in the US (as proxied by 10-year Treasurys) and the gold price is strongly negative. The yield on the 10-year note fell to 2.023% on Wednesday, the lowest since the election of Donald Trump on November 8, 2016.
Rising real interest rates raises the opportunity costs of holding gold because the metal provides no yield and investors have to rely on price appreciation for returns. Lower rates also makes the dollar which usually move in the opposite direction of the gold price, less attractive.
Ross Norman, CEO Sharps Pixley, the largest bullion broker in London, told Wealthadviser on Tuesday, that gold could be in the very early stages of a bull run:
“We are seeing distinct similarities with the very early bull run in the late 1990s, just before we saw that inflection moment. There was massive despondency in the physical market for gold, increasing M&A amongst the miners and a market tracking sideways with falling prices and falling volatility.
“Everything changes once we break through $1,360; it is the mother of all resistance levels. […] Once we breach that, we should see a steady rise to around $1,800 an ounce.
“A combination of central bank buying, surging demand from institutional investors for gold ETFs and increased activity on Comex means that the mood is very positive towards gold. It’s only the retail investors that are late to the party.”