Markets

Gold surges above $1,500, now has a better return than stocks this year

Key Points
  • Wednesday marked the first time since April 2013 that gold traded above $1,500, bringing its 2019 gains to more than 18%.
  • That return is higher than the S&P 500's 14.3% year-to-date gain.
  • Gold got a boost amid worries over the global economy U.S.-China trade war intensified while several central banks around the world cut interest rates.
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Gold rose to its highest level in more than six years on Wednesday as concerns about the global economy made the precious metal and other traditional safe havens more attractive than riskier assets like stocks. The metal also caught a bid as the amount of negative-yielding bonds keeps growing.

Gold futures for December delivery jumped 2.2% to trade at $1,522.70 per ounce. Wednesday marked the first time since April 2013 that gold traded above $1,500. The gains brought the metal's gains to more than 18%. That return is higher than the S&P 500's 14.3% year-to-date gain.

Investors turned to gold at a time when the amount of debt trading at negative yield increases. Currently, there is $15 trillion worth of bonds with negative rates. This makes gold more attractive since it retains its value even in times of slower economic growth.

Concerns over the global economy come as the U.S.-China trade war intensified with Chinese authorities allowing the country's currency, the yuan, to depreciate against the dollar while several central banks around the world cut interest rates.

"That is the biggest factor because it introduces a whole new set of risks to the equation," said Ryan Giannotto, director of research at GraniteShares. "What's really playing into people's fears is does the depreciation of the yuan signify a larger threat to the economy."

On Monday, China allowed the yuan to weaken beyond 7 per U.S. dollar, marking the currency's lowest level against the greenback in more than a decade. That move led to Wall Street's biggest sell-off of 2019. The People's Bank of China initially quelled escalation fears on Tuesday by pegging the yuan at a stronger-than-forecast level relative to the dollar. However, those worries reemerged after China set the yuan at a weaker-than-expected rate.

China's currency moves came after President Donald Trump announced last week a 10% tariff on an additional $300 billion worth of Chinese goods. Investors are fearful about the tariff because the goods being targeted include consumer products ranging from apparel to Apple products like the iPhone.

Trade tensions have helped gold surge this month while stocks have lagged. The precious metal is up more than 5% in August. The S&P 500, meanwhile, has dropped more than 4%.

"Although gold futures remain near-term overbought, momentum is decidedly higher," said Tom Essaye, founder of The Sevens Report, in a note. "Fundamentally, the sharp downtrends in bond yields firmly support the bullish case for gold."

Concerns about the economy have also lifted gold prices while global yields fell.

Central banks in New Zealand, India and Thailand all cut interest rates overnight. New Zealand reduced its overnight rate by 50 basis points while India lowered its rate by 35 basis points. Thailand cut rates by 25 basis points.

The three central banks cited weaker economic growth in one way or another. India's central bank noted inflation growth was mild and needed to boost the country's economy. New Zealand's central bank said lower rates were "necessary to continue to meet its employment and inflation objectives." The Thai central bank said it expected economic growth to slow.

The U.S. 10-year note yield fell to its lowest level since 2016, briefly dipping below 1.6%. In Germany, the 10-year bund hit a record low, reaching negative 0.6%.

"The flight to safety has continued across global financial markets," said Ken Berman, CEO of Gorilla Trades. "Bulls are hoping that the recovery that started yesterday will continue, but volatility is likely to remain elevated."

Jeffrey Gundlach, CEO of Doubleline Capital, sees further gains for the precious metal moving forward as yields keep falling.

"At this point, I think the way to think about it is, as long as the volume of negative interest rate bonds outstanding increases, it's quite likely that gold moves higher in a similar vein," Gundlach told Yahoo Finance.

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