Gold prices surged to a six year high Friday, capping its best weekly advance since 2016, as investors sought safety from falling global currencies, negative interest rates and the prospect of escalating military tensions in the Gulf region.
Spot gold prices hit $1,410.78 per ounce in overnight trading, the highest since September 2013, before paring that advance to around $1,388.60 during European hours as the U.S. dollar index, a measure of the greenback's strength against a basket of six global currencies, traded at a three-month low of 95.55. The gold/silver ratio, a measure of the amount of silver needed to buy an ounce of bullion, traded at a 1993 low of 90.8 this week.
In fact, with both the European Central Bank and the Federal Reserve signalling the near-term prospect of lower interest rates, and the Bank of Japan following suit, global government bond markets, as well as G20 currencies, are bracing for a race to the bottom that could fuel and extended rally in gold prices over the coming months.
"The combination of dollar weakness, speculation over lower US interest rates and geopolitical tensions have encouraged investors to sprint to the hills and pick up gold in their portfolio," said FXTM research analyst Lukman Otunuga. "With major central banks signalling potential rate cuts in the future, gold is set to push higher, especially when considering how the precious metal performs well in low interest rate environments."
Benchmark 10-year U.S. Treasury bond yields, which hit a two-and-a-half year low of 1.974% yesterday, were held at 2.004% Friday while similarly-dated German bunds, a proxy for risk-free interest rates in the Eurozone, were pegged at a fresh record low of -0.329%.
Just over $13 trillion in global government bonds are trading with a negative interest rate, according to Bloomberg data, the largest tally on record. And with the CME Group's FedWatch tool pricing in a 100% chance of a July rate hike, and a near 70% chance of two more cuts between now and the end of the year, the effective Fed Funds rate could easily turn negative before the autumn, taking investors out of the dollar and into alternative assets.
"Importantly, the prospect of the real Fed Funds rate turning negative (especially were the Fed to cut 50 basis points in July) has sent gold through $1400/oz and adds weight to views that the dollar has topped," said ING's head of strategy Chris Turner. "We favour a weaker dollar this summer, but based on our trade team's view of an escalation in tension in 3Q19 continue to favour the defensive currencies of Japanese yen and Swiss franc against the dollar."