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Caution Driving Gold Higher

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Most observers expect the Federal Reserve to nudge rates higher this month. Stock markets continue to push upward. Analysts continue to talk up the economy. Conventional wisdom holds this should all be bad for gold. And yet the price of the yellow metal hit its highest level since November yesterday, peaking midday at $1,296.15 per ounce.

It’s easy to get caught up in the moment, but the most recent rally makes up part of a broader trend. Gold is around 13% higher on the year, and as we reported last week, gold was up for fifth straight month in May, the longest “win streak” since 2010. A recent Bloomberg survey signaled more gains on the horizon.

So what gives? Why are investors buying gold?

In a word – uncertainty.

An abundance of caution seems to be pushing the price of gold higher.

Political uncertainty and geopolitical tensions around the world have people on edge and seeking the safe-haven gold traditionally offers.

Things have heated up again in the Middle East with Saudi Arabia, the United Arab Emirates, Bahrain, and Egypt severing ties with Qatar. Terror attacks continue across Europe. Tensions remain high on the Korean peninsula. Voters in the UK head to the poles Thursday, a general election that will impact how the country handles Brexit. Former FBI director James Comey will testify in the ongoing investigation into Trump administration ties to Russia. And the European Central Bank is expected to release a policy decision this week.

On top of all the political uncertainty, the dollar remains weak. Despite the expectation of an interest rate hike this month, many analysts believe the Fed will back off its more aggressive plans to “normalize” rates due to weak economic data.

Jeffrey Halley, market strategist at Oanda Corp. in Singapore, told Bloomberg all of these factors are driving gold upward.

The two main drivers of gold are the value of the US dollar and uncertainty. We have both in abundance at the moment. The double whammy has seen traders pile into gold and, given the power of the rally this week, I can’t see any other outcome than a test of $1,300 sooner rather than later.”

Ambrosino Brothers senior VP Todd Colvin said “gold has really been on a tear, deeming it a “caution trade” in an interview with Bloomberg.

The Federal Reserve has said it’s going to raise rates, which should be an adverse effect to gold, but it hasn’t been. So, right now gold is kind of trading on its own. I don’t necessarily think it’s more of a fear trade that we’re seeing, but it’s a caution trade, and I think it has legs up to at least $1,320 given the trend we’re seeing.”

A recent Barron’s article compared gold to insurance.

Many investors look at gold and its financial equivalents as insurance policies for when stocks falter. This year, stocks have performed well with the Dow Jones Industrial Average up 7% this year, to 21,136 as of Tuesday’s close. Yet the insurance is also paying off nicely.”

One could look at the current list political tensions and troubling events on the horizon and think, ‘well, this will soon pass.’ But as we’ve pointed out in recent months, uncertainty seems to be the new norm. Next week, there will be a whole new set of political issues, surprise events, and rising tensions to make us uneasy.

In other words, it doesn’t appear likely the need for caution will fade away in the near future. In fact, in today’s political and economic climate, it seems wise to always proceed with some level of caution. After all, you don’t buy insurance just because you wake up one day and feel particularly cautious, and then cancel it the following week when you feel better.

One thing is always certain. Uncertainty won’t be going away any time soon.

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