Gold Surges as Central Banks Flock to Safe-Haven Asset

Gold prices have surged by around $400, or 10%, since the start of this month, reaching their highest level in years. Central banks are driving this demand, with net purchases totaling 289 tonnes in the second quarter, a record high for that period. The World Gold Council reports that a record 45% of central banks plan to increase their gold holdings over the next 12 months.

The rise in gold prices is attributed to several factors, including the Federal Reserve's dovish hold on interest rates, weak employment data, and low inflation figures. These have tempered expectations for rate hikes and dragged down the US dollar, making gold more attractive. The ongoing US-Iran conflict has also contributed to the increase, as well as concerns about the Fed's independence and chair Kevin Warsh's credibility.

Economist Phil Suttle notes that the US is now in a phase where its global seigniorage benefits of supplying the world's reserve currency have been exhausted. Central banks are increasingly hesitant to hold US Treasuries, with yields on 10-year bonds climbing to their highest level in 18 months.