June 25, 2024

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Gold rallies as geopolitical turmoil overshadows rising bond yields

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Gold prices have rallied sharply since the Hamas-Israel conflict broke out, further highlighting the divergence in its long-term relationship with US Treasuries as investors flee to the haven asset.

Prices of the precious metal have surged as much as 10 per cent to $1,996 per troy ounce, hitting a five-month high, after Hamas launched attacks on Israel a fortnight ago.

With the region at risk of tipping into wider conflict, investors have bought gold, which is regarded as a store of value during times of geopolitical and market uncertainty.

“It’s the geopolitical risk premium that has come in for gold,” said Nicky Shiels, metals strategist at MKS Pamp, a Swiss precious metals refiner and trader.

However, gold’s rise has also put further stress on its typical correlation with real yields — US bond yields adjusted for inflation — that has largely held since the 2008 financial crisis. Normally, higher yields on Treasuries push the price of gold lower by making the zero-yielding metal less attractive by comparison.

That relationship has broken during the huge rise in real yields over the past year, with gold having been supported by record central bank buying, as some countries aimed to reduce their reliance on the dollar after Washington weaponised its currency in sanctions against Russia.

Analysts said that gold was also likely to have benefited from the uncertainty in the Middle East because it added to the Federal Reserve’s caution on the future direction of US interest rates. On Thursday, Fed chair Jay Powell said the geopolitical tensions sparked by the Israel-Hamas war “pose important risks to global economic activity”.

The violence in the Middle East has reversed gold’s recent slide, as rising bond yields pushed the yellow metal to $1,820 per troy ounce.

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2023-10-21 08:00:08

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