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The gold rush heats up as sub-zero yields spread

A sluggish economy and declining real value of savings make the precious metal's allure stronger

London

GOLD, once mocked for its lack of yield and practical use, offers something the growing pile of negative-yielding bonds doesn't - inflation protection.

Plus, it makes a great doorstop.

As holders of promissory notes issued by sovereigns and companies watch the real value of their savings drain away amid central bankers' efforts to kick-start growth, the allure of one of the oldest investment assets has become ever stronger.

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The breakthrough

For five years, resistance above US$1,350 an ounce was too much for bullion to overcome. That changed in June, as it became clear the Federal Reserve was heading for a round of interest-rate cuts.

Spot prices touched US$1,453.09 on Friday, the highest level since May 2013.

Really yielding

Gold's inflation-busting properties and low opportunity cost when interest rates drop have never been as important as now. The inverse relationship between bullion's price and US real rates expectations, as measured by the yield on five-year inflation-linked Treasuries, is the strongest it's ever been. The correlation measured over 60 days hit -0.7 as bullion climbed.

Below zero

Even before accounting for the effects of inflation, the universe of bonds yielding less than nothing hit a record US$13 trillion this month. Add in the corrosive effect of general price rises, and that number swells to US$25 trillion. It could even top US$30 trillion if the Fed cuts rates twice this year, according to data compiled by Bloomberg.

Not zero

Gold is probably the original negative-yielding asset. Storing gold in a vault costs money. Some firms in London, a city known as a gold-storage hub, charge private clients between 12 and 20 basis points of the value of the metal for a year's storage in secure vaults.

Big clients, like central banks, may be able to secure deals closer to 8 basis points. Similarly, holding metal in an exchange-traded fund costs money.

Nevertheless, the amount of metal stored in high-security facilities registered with the London Bullion Market Association started rising in October and continued doing so through March, the last date for which data was available, probably because even at -0.2 per cent, it looks a better deal than many bonds.

Not done yet

But is the rally getting stretched? Maybe not. While hedge funds increased bullish bets on the precious metal, the aggregate long position on futures as a share of open interest is only about 36 per cent.

That's still below the peaks of 2011, 2016 and 2017, suggesting there's some room for prices to rise as money managers may allocate more to bullion. BLOOMBERG