Gold Shines as Central Banks Embrace Negative Yields
Gold prices soared to the highest level in a year Thursday, as heightened economic and geopolitical uncertainties drove investors to seek shelter in the precious metal.
With a growing number of central banks resorting to negative interest rates to stimulate growth, investors were drawn to gold as an ultimate store of value, fearing that the unprecedented monetary experiments would eventually lead to currency devaluations.
Gold futures jumped 4.5% to settle at $1,247.90 a troy ounce--the highest level since February 2015--on the New York Mercantile Exchange. Thursday's move represented gold's biggest one-day percentage gain since September 2013.
Gold has risen 18% since the start of the year amid continued turmoil in global financial markets, signs of weaker growth, and diminished expectations for rate increases in the U.S.
That move has intensified on Thursday after the Riksbank, the Swedish central bank, cut its key rate further into the negative territory. The aggressive move followed the Bank of Japan's action to introduce negative interest rates two weeks ago.
Adding to investor jitters was Federal Reserve Chairwoman Janet Yellen's comments at her second day of congressional testimony. Ms. Yellen said while she doesn't think the U.S. central bank will need to push short-term rates into negative territory, the Fed is "taking a look at" the idea.
In a setting of negative yields, investors would have to pay the banks to hold their money. "Because gold doesn't pay any interest, zero is better than negative," said Paul Wong, a portfolio manager at Sprott Asset Management.
Globally, negative-yielding bonds now total over $6 trillion, up from $3 trillion just two months ago, according to Sprott. Throughout the history, the only time a central bank imposed negative interest rates was the Swiss National Bank in the 1970s, Mr. Wong said.
In addition, a fall in the dollar against other major currencies, sharp losses in stocks, especially banking shares, and a collapse in oil prices also contributed to investor jitters about the unsteady economic and financial conditions, pushing investors to plow money into gold.
"This is a typical environment where gold does well," he said.
For some, the latest surge in gold prices came as a surprise as the precious metal, which is traditionally perceived as a safe-haven investment, had disappointed its followers in recent years because of its poor performances despite the volatility in global markets. The SPDR Gold Shares, the world's largest gold exchange-traded fund, lost nearly half of its holdings between 2012 and 2015.
"A lot of investors who got out of the gold markets...might be rethinking," said James Steel, chief precious-metal analyst at HSBC Securities (USA) Inc. So far this year, the fund has grown 9% of its assets as investors piled in.
"Portable, liquid, convertible to any currency, gold is the additional haven many investors in countries with greater problems are rushing to," wrote George Gero, a precious-metal strategist at RBC Capital Markets in a note to clients.
Demand for the precious metal is set to outpace that of last year. Total demand for gold in 2015 weighed in at 4,212.2 tons compared with 4,226.4 tons in the previous year, according to the World Gold Council.
Global gold supply slumped 4% year-over-year to 4,258.3 tons. Mine supply increased at its lowest level since 2008 at 1%, while recycled gold dropped 7% to 1,092.8 tons--an eight-year low, according to the Council.
By Carolyn Cui