The rise of 2.85% over two trading days is similar to those after other Middle Eastern flare-ups
“NOBODY REALLY understands gold prices, and I don’t pretend to understand them either,” Ben Bernanke, then chairman of the Federal Reserve, told America’s Senate Banking Committee in 2013, after a turbulent few months in the market for the metal . Yet it is not difficult to understand why the price of gold hit its highest level since early that year—$1,588 per ounce—on January 6th.
The jump to a near-seven-year high followed the drone strike that killed Qassem Suleimani, leader of the Quds Force of Iran’s Islamic Revolutionary Guard Corps, three days earlier. Investors typically seek sanctuary in gold when geopolitical risk soars. . In fact, the price of gold has been rising for a while, climbing by more than 25% since November 2018. The effect of General Suleimani’s death, at least so far, is just an additional upward tick.
Analysts at PIMCO, a large fixed-income asset manager, think of gold as an asset with no default or inflation risk . That makes it pretty similar to TIPS, except that gold, unlike TIPS, never yields any interest. If real rates rise, the relative attractiveness of gold falls; if they fall, gold becomes more alluring. So a drop of a full percentage point in real interest rates over the past year helped push up the price of gold. Gold may pay no interest at all; but right now TIPS pay next to none.
Gold isn’t for everyone. Warren Buffett, probably America’s most celebrated investor, spurns it. Gold, he once said, “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.” John Pierpont Morgan, eponymous founder of America’s biggest investment bank, had a different opinion, quipping that “gold is money, everything else is credit”.
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