Why is gold surging? A look at the latest developments

Gold has been surging in price in the US since the Federal Reserve announced it was buying $1.4 trillion worth of the precious metal.

Gold surged to a record high of $1,966.50 an ounce on Wednesday, pushing US Treasury yields down to 3.89 percent from 3.91 percent earlier.

The US government has set a benchmark rate of 2.5 percent for two months, and gold is also up 0.7 percent on the week, according to the Gold Spot index.

The Fed is also expected to begin a series of rate hikes later this month. 

But the rally is not over yet.

The price of gold is not just a reflection of expectations, said Paul Goldsmith, an economist at the investment firm Goldsmiths.

Gold is also a “predictable” asset, he said, because it is “an absolute certainty” that a rate hike will come soon.

“There’s a lot of money on the line and it’s easy to see that there is a lot more to come,” Goldsmith said.

“So there is lots of optimism around gold.” 

Gold prices are up about 25 percent in the past 12 months.

But what are the implications for the US economy?

The surge in gold prices has been caused by a combination of factors, including a strong US dollar and weaker oil prices, according the New York Fed. 

Gold has been rising for about three years, and it is still relatively cheap compared with other assets, such as US Treasury bonds, said Andrew Gross, a senior portfolio manager at Vanguard.

Gold has a strong correlation with US stock market prices, he added.

“A strong dollar helps to drive demand for gold and the price of silver, so that’s the gold price that’s rising the most,” Gross said.

“A lot of the growth has been in gold.”

Inflation-adjusted US stocks, which include the dollar, are up nearly 5 percent since December, while the Dow Jones industrial average is up about 5 percent.

Gross said the rise in gold may have more to do with a strong dollar than an underlying economic recovery.

“It may be that the fundamentals are driving up the price, but the fact is that the economy has been recovering quite well and it seems to be going in the right direction,” he said. 

The Federal Reserve’s move to buy $1 trillion worth is a signal to investors that they should hold on to their cash, he noted.

“You know, if you’ve been holding gold, you’ve probably not been holding it for long,” he added, pointing to the recent sell-off in the metal.

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