Gold prices were rising again as scared investors seek refuge from paltry bonds yields.

The metal recently fetched $1,344 a troy ounce, a level it hadn't seen since April 2018, or 10 months ago, according to data from Bloomberg. Its also rallied more than 14% since the low of $1,174 in August. The SPDR Gold Shares (GLD)  exchange-traded fund, which holds bars of solid bullion, performed similarly.

Fed Flip-Flop

The top catalyst for the bounce in bullion prices is the change in tack by the Federal Reserve. It shifted its tone on possible future changes in its monetary policy. Whereas a few months ago investors generally expected multiple increases in the cost of borrowing during 2019, that's now changed and it is even possible that the Fed could cut interest rates later this year if the economy looks weak enough to warrant such a change.

"Ever since the Fed changed its aggressive stance, gold is looking more attractive," said Jack Ablin, chief investment officer at Chicago-based wealth management firm Cresset Capital Management.

When interest rates were expected to rise, then the choice between gold and interest-bearing bonds was simple. Bonds held the edge over the metal because the rising interest rates would help investors maintain the purchasing power of their portfolio. In other words, their investments would grow at least as much as inflation.

However, now that a rising rate environment doesn't look so likely to occur, investors are worrying about how to maintain the inflation-adjusted value of their portfolio. At such times, like now, investors like bullion better.

"If short-term financial assets offer returns more than inflation then people prefer financial assets, if not then they like to buy gold," said Ablin.

Gold has a history of helping investors maintain the real or inflation-adjusted value of their portfolio at times when other financial assets do not. The 1970s is an example. At that time stocks were in a bear market, while at the same time the value of gold jumped from $35 an ounce in 1971 to more than $800 by the end of that decade.

Crunch Time in the Eurozone 

The Fed's flip-flop isn't the only thing propelling gold prices higher. The slowdown in Europe's single currency area, the so-called eurozone, is also helping boost bullion prices. Italy already is officially in a recession and Germany's economy, the largest in the European Union, looks weak.

"The eurozone is in huge difficulties, and that means more negative interest rates," said Don Coxe, chairman of Chicago-based financial firm Coxe Advisors. "Negative-yield bonds make gold look better than it would otherwise."

In normal times, bonds offer two things. The first is the regular payment of interest in the form of cash coupons. The second is that you get back the face value of the bond at the end of life of the security.

That doesn't happen when the bonds have yields that are less than zero, as is the case with some of the European government bonds. German government securities, or bunds, for two-year and five-year durations now have negative interest rates, according to Bloomberg data.

"Negative yield bonds have a built-in loss," said Coxe. He noted that when investors buy gold, they might lose money in the short term, but then again they might make money. But bonds with negative interest rates have a built-in way to deplete the value of your investment, he explained.

Japan also has similar negative yielding government bonds.

In all cases, gold, which doesn't provide any yield, suddenly looks more attractive than government securities that have negative interest rates.

Mining Mergers 

A recent spate of mergers in the gold mining sector has highlighted a likely future hiccup in gold supply starting soon.

"The mergers revealed that there is going to be a shortage of gold in the early 2020s," said Coxe.

While there is a lot of gold held in vaults across the world, it is rare to see a period when there is a year of net disinvestment of the metal by investors. Mostly, investors as a group snap up gold year after year. 

He explained that the gold deposits available to miners are increasingly those that produce low-grade ore. In other words, the gold is there, but the amount of gold per ton of rock is dwindling in the industry.

When the ore is lower grade, it costs mining companies more to extract an ounce of gold than it typically does for higher grade ore.

The net result is that less gold supply will hit the market than had previously been envisioned. Combine that with the increased demand for the metal and you likely have higher gold prices coming along soon.

Constable owns none of the securities listed in this story.