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The Gold Rush Heats Up as Sub-Zero Yields Spread

Gold, once mocked for its lack of yield and practical use, offers something the growing pile of negative-yielding bonds doesnít -- inflation protection. Plus, it makes a great doorstop.
As holders of promissory notes issued by sovereigns and companies watch the real value of their savings drain away amid central bankersí efforts to kick-start growth, the allure of one of the oldest investment assets has become ever stronger. These five charts show just how popular gold has become -- and how closely itís linked to the downward spiral in yields.
The Breakthrough
For five years, resistance above $1,350 an ounce was too much for bullion to overcome. That changed in June, as it became clear the Federal Reserve was heading for a round of interest-rate cuts. Spot prices touched $1,453.09 on Friday, the highest level since May 2013 as global factory output slows and the market debates whether Chairman Jerome Powell will cut rates by as much as 50 basis points in July.
Really Yielding
Goldís inflation-busting properties and low opportunity cost when interest rates drop have never been as important as now. The inverse relationship between bullionís price and U.S. real rates expectations, as measured by the yield on five-year inflation-linked Treasuries, is the strongest itís ever been. The correlation measured over 60 days hit -0.7 as bullion climbed.
Below Zero
Even before accounting for the effects of inflation, the universe of bonds yielding less than nothing hit a record $13 trillion this month. Add in the corrosive effect of general price rises, and that number swells to $25 trillion. It could even top $30 trillion if the Fed cuts rates twice this year, according to data compiled by Bloomberg.
Not Zero
Of course, gold doesnít yield nothing -- it yields less than nothing. In fact, itís probably the original negative-yielding asset. Storing gold in a vault costs money. Some firms in London, a city known as a gold-storage hub, charge private clients between 12 and 20 basis points of the value of the metal for a yearís storage in secure vaults. Big clients, like central banks, may be able to secure deals closer to 8 basis points. Similarly, holding metal in an exchange-traded fund costs money. Nevertheless, the amount of metal stored in high-security facilities registered with the London Bullion Market Association started rising in October and continued doing so through March, the last date for which data was available. Thatís probably because even at -0.2%, it looks a better deal than many bonds.
Not Done Yet
But is the rally getting stretched? Maybe not. While hedge funds increased bullish bets on the precious metal, the aggregate long position on futures as a share of open interest is only about 36%. Thatís still below the peaks of 2011, 2016 and 2017, suggesting thereís some room for prices to rise as money managers may allocate more to bullion. And while holdings in exchange-traded funds have risen this year, the total amount of bullion in funds still isnít as high as it was at the end of 2012. And some, like Bridgewater Associatesí Ray Dalio, suggest the market may just be at the start of a period that will be very positive for gold.

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UAB Magazine - Issue 464 July 2019