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Bond Yields Sink, Gold Price Jumps

New all-time highs on all-time lows...

With BOND YIELDS sinking everywhere, gold just hit new all-time highs in a raft of non-US currencies, writes Frank Holmes at US Global Investors.
 
"It is no longer absurd to think that the nominal yield on US Treasury securities could go negative," Joachim Fels, Pimco's global economic advisor, warned investors this month.

"Whenever the world economy next goes into hibernation, US Treasuries – which many investors view as the ultimate 'safe haven' apart from gold – may be no exception to the negative yield phenomenon."

Fels seems not to be the only investor with this idea, judging by the increased demand for gold.

The price of the yellow metal had its best week in nearly two months as the total value of negative-yielding debt around the world touched a new record of $15 trillion. With the nominal yield on the 10-year Treasury having fallen below 2% – and just shy of 0% on an inflation-adjusted basis – gold traded above $1500 an ounce in US Dollars for the first time since April 2013.

Gold also hit historic all-time highs when priced in a number of other world currencies, including the British Pound, Russian Ruble and Indian Rupee. This month the central bank of India, along with those in New Zealand and Thailand, surprised markets by cutting rates more than expected, adding to fears that an economic slowdown is imminent.

Mid-August, gold's performance for 2019 caught up with and surpassed that of the stock market.

Analysts at Goldman Sachs now say that $1500 is only the beginning, and that we could see $1600-an-ounce gold within the next six months.

"If growth worries persist, possibly due to a trade war escalation, gold could go even higher, driven by a larger ETF gold allocation from portfolio managers who still continue to under-own gold," Goldman analyst Sabine Schels said in a note to investors.

"Gold ETFs have recently built momentum almost as strong as in 2016, and we believe that can be maintained in the short-term."

Indeed, gold ETFs attracted $2.6 billion of net global inflows in July alone, raising their collective holdings to 2,600 tonnes – a level unseen since March 2013, according to the World Gold Council (WGC).

For further insight on global trade, Goldman no longer believes a resolution to the US-China trade war will occur before the 2020 presidential election. This month, in fact, President Donald Trump told reporters that "we are not ready to make a deal" with China, "but we'll see what happens."

Should the trade war continue to escalate, it could cost the world economy "dearly", according to Bloomberg. New modeling by Bloomberg analysts shows that global GDP would be 0.6% lower by 2021, amounting to a whopping $1.2 trillion hit, if markets slumped as a result of a full blown trade war.

Again, it's not just USD-priced gold that's done well in recent days. The precious metal blew past new all-time highs in a number of currencies on top of those I already mentioned. They also included the currencies of major gold-producing economies such as Australia, Canada and South Africa, which have fallen hard against the US Dollar.

Australia's Dollar traded at its lowest level against the USD since the financial crisis a decade ago.

In other currency war news, China added to its official gold holdings for the eighth straight month in July. Its central bank increased holdings as much as 10 tonnes, after raising it 84 tonnes in June. Total holdings now stand at 62.26 million ounces, as the world's second largest economy expands its efforts to diversify away from the USD.

China meantime allowed its currency, the Renminbi, to weaken past 7.0 versus the USD, a level not seen since 2008. This was just the latest development in the country's trade spat with the US that's nearing its 18th month.

Fears of slower growth may be beneficial for the price of gold right now, but they're taking a toll on copper, often seen as a barometer for the global economy. The red metal is widely used in, well, anything that needs to conduct an electrical charge, and when a slowdown in industrial demand is expected, prices struggle.

Take a look below. Copper has more or less followed the global manufacturing purchasing manager's index (PMI) down over the past year and a half. Factories across the globe contracted for the third straight month in July.

As the Wall Street Journal puts it, the slide "threatens to limit investment in new mines, a trend that industry analysts and executives say could lead in coming years to sizable shortages of the material critical to manufacturing and renewable-energy projects."

The price of copper slid as low as $2.53 per pound on last Monday, a 52-week low and nearly 25% down from its recent high of $3.30 from last June.

An economic gauge of heavy copper-using manufacturers indicated contraction in July. The Global Copper Users PMI fell from 50.0 in June to 48.6 last month, the weakest result in five months, according to IHS Markit.

"Companies noted that raised trade tensions played a part in reducing production, as new export orders fell at a sharper rate," said IHS Markit economist David Owen, who added that weakness in the European auto sector also played a role in declining copper demand.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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