Why Gold Prices Are So High?

Gold prices started trading last week around $1,173 an ounce. They started the first day strong, closing around $1,190. Tuesday was a yawner for gold trading. But Wednesday saw the return of safe-haven trade as the gold price moved higher once again. It closed at $1,196, as U.S. Federal Reserve Chairwoman Janet Yellen gave her first day of testimony to Congress.

Then Thursday, gold prices soared on yet more safe-haven buying as stock markets sold off around the world. Gold spiked to $1,264 by late morning, aided by further Yellen testimony. She admitted her surprise at recent U.S. dollar weakness and said it was still early to opine on the risk of a recession.

Perhaps most influential was her mention again on this second day that negative rates are a serious option for the Fed if they’re judged as warranted. She told Congress that the committee is “taking a look at them again” and that it’s a policy option she’s keeping open.

And that brings us to the trigger that’s reigniting the gold market…

The prospect of deflation has forced central banks to push interest rates to negative territory, a situation that threatens to break the traditional banking system, fueling a flight away from financial assets to real assets like gold.

Compounding the problem, negative interest rates feed into the prospect of currency wars, fueling a flight from different currencies into gold.

Simply put, the determination of central banks to fight deflation at any cost will either (i) cause runway inflation, or (i) break banks and lead into currency wars.

That’s the win-win case for gold. Either scenario is bullish for gold. But with gold prices up close to 15% in the last three months, I’ll be very careful before pouring new money into the yellow metal.

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