Gold prices have seen a significant surge as much as 10% to $1,996 per troy ounce, which is a five-month high. This surge is primarily linked to the recent conflict between Hamas and Israel, as geopolitical tensions and market uncertainties have driven investors to seek the safety of gold. This situation has created a geopolitical risk premium for gold.
Interestingly, this increase in gold prices has disrupted its typical correlation with US Treasury yields. Normally, when US Treasury yields rise, gold prices tend to fall, as gold is a non-yielding asset.
However, over the past year, this relationship has been altered due to a rise in real yields. Gold has also been supported by central bank buying, as some countries aimed to reduce their reliance on the US dollar, especially in light of sanctions against Russia.
Furthermore, gold’s performance has been influenced by the Middle East conflict, which has added to the Federal Reserve’s cautious approach to US interest rates. Federal Reserve Chair Jay Powell mentioned that geopolitical tensions could pose risks to global economic activity.
Some experts also suggest that the rapid increase in bond yields is prompting investors to turn to gold. Additionally, there is the factor of traders who had bet on gold’s decline being forced to exit their positions, which has further contributed to the rally.
In addition to these factors, strong demand for gold in China, reflected by a notable premium in Shanghai compared to London, has played a role in supporting global gold prices. Nevertheless, some analysts wonder if central banks are also contributing to the support of gold prices.