Fed’s dovish stance propels gold to a multiyear high

After remaining tepid for the first four months of the year, gold prices have taken off in a big way. The initial impetus was provided by a tweet made by President Donald Trump on May 5, which revived trade tensions in a big way. Since then, the SPDR Gold Shares ETF (GLD), the biggest gold-backed ETF, has gained 6% as of June 19, while the VanEck Vectors Gold Miners ETF (GDX) has tripled that gain by returning 18.3% as of the same date. In comparison, the S&P 500 Index (SPY) and the NASDAQ Composite Index (QQQ) have fallen 0.3% and 2.1%, respectively.

Gold futures are near a six-year high

Gold futures have risen 2.8% to $1,386 per ounce on June 20, their biggest one-day jump since October. A fresh catalyst for gold’s price surge was provided by the Fed on June 19. After its two-day policy meeting, the Fed kept interest rates unchanged but suggested future rate cuts if the conditions warrant it. This information lit a fire under gold prices. Gold futures are currently trading near a six-year high.

Factors supporting gold

Investors should note that gold doesn’t yield anything in terms of regular income, and higher interest rates make it difficult for the metal to compete with income-generating assets. When interest rates decline, investors prefer gold. Also, lower interest rates in the US make the US dollar less attractive to investors overseas, reducing its appeal. After the Fed’s dovish remarks yesterday, the Invesco DB US Dollar Bullish Index (UUP) weakened against major currencies, providing gold with a boost. Gold is denominated in US dollars and is usually inversely related to the greenback.

Read A Perfect Storm for Gold: All Macro Drivers Align for a more detailed discussion of the macro drivers that are helping gold prices.

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