If you were to open the price chart of spot Gold on your Bloomberg terminal, you will not miss the sharp rally in gold in the last few months. In the last 6 months, gold is up by nearly 20% and is one of the best performing asset classes in risk adjusted terms. What exactly is driving this gold rally in recent months?

Geopolitical risk

If there is one factor that has always managed to drive the price of gold higher, it is geopolitical risk. Be it the chaos post Lehman or the European default, gold has been the natural beneficiary. Currently, the trade war is threatening to expand its horizons to other areas. At the same time, the Middle East and West Asia are on a boil with Iran shooting down an American drone. With Iran and Saudi Arabia in direct confrontation, the risk is that oil movement could be impacted.

Falling interest rates

With the Fed turning dovish and the ECB and the Bank of Japan also hinting at lower rates and more liquidity, it is not great news for financial assets. That is prompting a shift to gold. There are two more reasons. Firstly, with low rates of interest, there is no opportunity cost in holding gold. That is driving demand. Secondly, a negative yield curve in the US is hinting at a likely recession and that is naturally leading to safe haven demand for gold as an asset class.

Currencies debased

This is one of the principal reasons why gold is back in demand. The dollar has been under pressure and it is actually symptomatic of a larger problem. Since the financial crisis of 2008, leading central banks like the Fed, ECB, BOJ and Bank of England have purchased bonds worth $15 trillion to prop up the economy. That kind of currency printing has surely debased their currencies, which is not visible due to a different set of reasons altogether. The market is now betting that with central banks unable to get out of their dovish approach, the currency debasement may actually happen. In such a situation it is gold as a currency that emerges as the safest currency. After all, gold supply is limited and it is not a fiat currency. In addition, the gold prices have always represented an anti-dollar trade and that is what is showing up.

Negative yield curve

The case for buying gold is also coming from the inverted yield curve in the US. When investors prefer short term bonds over long term bonds, it is a sign of lack of confidence. In the US, this has been a consistent lead indicator of slowdown in the last 100 years. As we have seen through the seventies; in times of low confidence in paper assets due to weak growth, it is gold as an asset class that shines brightest. Gold is inspiring a lot more confidence among investors! ©