FX.co ★ Gold is hedge against political mistakes

This week, gold hit a 2-month high as the prices climbed above $1,845 an ounce. However, it is curious that the yellow metal can make new gains amid a hawkish central bank backdrop and rising US Treasury bond yields.

With rising real interest rates on Treasuries, adjusted for inflation expectations, gold and yields usually have a close inverse relationship. If real interest rates rise, gold prices will decline.

Gold earns no yield. Therefore, when real yields increase, gold becomes less attractive. However, an extraordinary dynamic is currently observed.

It is considered to be a significant event. Markets expect at least four rate hikes this year as the Federal Reserve is ready to tackle high inflation in the United States. However, the gold market is probably anticipating a political mistake.

According to Pepperstone's head of research Chris Weston, currently gold is not a hedge against inflation. It is a hedge against policy mistakes. Multiple rate hikes with passive balance sheet depletion are expected this year. Besides, if central banks have to change their strategy and cut interest rates again, gold is bound to soar. Currently, gold insures investors against this political mistake.

Moreover, rising crude oil prices also contribute to this fact as rising oil prices support gold. Thus, as demand rises, oil may climb to $100.

Gold will constantly be in demand. A noteworthy aspect is rising gold prices concerning the major currencies.