By Lynnley Browning, Associated Press
WASHINGTON — Higher inflation pushed up gold prices Thursday to a five-month high as investors sought the precious metal for its safety in the rapidly shrinking equity markets.
Gold is often considered a haven in turbulent markets, and it is also seen as a hedge against inflation, which is expected to pick up this year. Commodities have also been lifted in recent months by the threat of an all-out trade war between the U.S. and China, along with a gradual return of inflation in other major economies.
Gold rose $4.60 to $1,326.70 an ounce. It was the highest close since Nov. 22.
As stocks worldwide plunged amid fears about the U.S.-China trade fight, hedge funds and other money managers bought more than 50,000 more contract on the Comex in New York last week than they sold, the highest bullish bet since May 2015.
Gold typically rises and falls with stocks, and the rise this week in gold futures has pushed the price to levels not seen since early October, when stock markets had just turned lower.
“With bullion at multi-year highs, investors are more optimistic about gold and the broader gold market compared to recent years,” said Richcomm Global Advisors’ Jon Nadler.
On Wall Street, the Dow Jones industrial average fell more than 574 points, its largest decline since the Nov. 8 stock market crash. The Standard & Poor’s 500 index slid 56 points, or 2.4 percent, and the Nasdaq composite fell 123 points, or 2.5 percent.
Since the market began sliding in January, gold is up 8.2 percent, bringing its gain for the year to 7.8 percent.
Some traders put their faith in safe-haven assets amid a growing belief that the U.S. economy is cooling and may be heading into a recession that would be hard to shake off.
“Purchasing gold as an inflation hedge is a vote of confidence in the notion that inflation will rise significantly over the next several years,” said Todd Salamone, senior vice president of research at Schaeffer’s Investment Research.
Gold prices have historically risen in every economic downturn. They rose 77 percent from July 1980 to July 1982, and almost 80 percent from August 1991 to July 2001.
While the inflationary trend has been negative for much of the past decade, the yield on the 10-year Treasury note has risen steadily in recent months.
Graphic by Kim Escue/Morning Call/TNS
This increased premium suggests higher inflation is starting to lift home prices and hurts the value of savings.
Some observers warn that the 30-year bond yield could go much higher. In March 2009, after a financial crisis and the onset of the Great Recession, investors were paying about 5.6 percent to buy the 30-year bond. They are now paying about 2.9 percent.
The dollar also climbed, hitting its highest level in more than four months, with the ICE U.S. Dollar Index rising 0.8 percent to 92.18. The rise has pushed the price of oil down by about 8 percent in the past month.
“The dollar is up, oil prices are down and inflation expectations are basically unchanged,” said Ira Heffron, CEO of Ranger Investment Advisors.
Heffron said Fed policymakers are worried that higher commodity prices could lead to higher wages and possibly ignite another inflation threat.
“I suspect the Fed’s trying to get ahead of the curve,” Heffron said.