Gold is spiking again, reaching (as I write) a record price in dollars, $3,579, versus $2,650 at the beginning of the year. Silver, too, has reached new heights and has outperformed gold this year as investors looked for a “cheaper” alternative. In part, these moves are the mathematical corollary of the weakness of the dollar (if not entirely, gold is at or near its peak in euros too), but not just that. The dollar and, by extension, Treasuries have benefited from being seen, among their other qualities, as safe havens. Their claim to that status is not so strong as it was.
No one can be sure why the Greenback finds the level it does on any given day, but it also appears that the expectation of a rate cut has played its part in the dollar’s weakness and the spike in the gold price. Gold pays no interest, and so (if the choice is between the treasuries and gold, a reduction in their yield reduces the opportunity cost of holding the latter).
A cut in the interest rates paid on Treasuries typically diminishes their investor appeal. And the implications of that rate cut may diminish it further if it is thought that it may herald higher inflation. The recent attacks on the Fed’s interest rate policy by the Trump administration suggest that the White House does not care about inflation — which remains above the central bank’s target level — as much as it should. That would be ominous under any circumstances, but it is made even more so by the clear inflationary risk represented by Trump’s tariff policy. The widening spread in the yield between long and short-dated Treasuries is evidence that some investors share this concern.
What’s more, it is a reasonable interpretation of the approach taken and the language used by the White House that it wants a Fed that is de facto if not de jure subservient to its priorities.
That is not reassuring to investors, and that, by definition, is counterproductive. The more nervous that investors become, the higher the price (the interest rate) they will demand for lending to Uncle Sam. That’s not something that anyone worried about funding the debt should want to see.
Gold is also being pushed up by persistent geopolitical tensions, and it may be gaining disproportionately at the expense of the dollar, another safe haven, because, as mentioned above, the U.S. is seen as less of a safe haven than it was, in no small part due to its tariff policies, both because of what they may do and because of what they symbolize.
For another more disreputable class of investors, gold’s appeal as a safe haven over the dollar has increased on the back of increasingly aggressive American use of sanctions. Western Europeans tend to adopt a somewhat similar approach, which is one reason (other than the, ahem, fundamentally unsound nature of the EU’s common currency) why gold has a greater appeal than the euro as an investment bolt hole. Indeed, gold has recently overtaken the euro as the second most widely held central bank asset after the dollar. Among the central banks making significant additions to their holdings last year were those of China, India, and Turkey. Make of that what you will.