Less than 24 hours after a massive Israeli attack on Tehran’s nuclear facilities, Iran conducted retaliatory missile attacks against Israel, causing gold prices to settle at a new record high on Friday.
“Gold is the new risk-free asset in people’s mind,” stated George Catrambone, head of fixed income, Americas, at DWS, in an interview. He also noted that 10-year and 30-year Treasury notes were obviously not preferred as safety bets at the moment.
According to Catrambone, that’s a lesson learnt since severe market turmoil broke out roughly two months ago when President Donald Trump surprised markets on April 2 with his widely-received “liberation day” tariffs that were significantly higher than expected.
“Until proven otherwise, gold is the new alternative risk-free asset,” he stated.
For a long time, investors have turned to gold, the US dollar, and Treasury securities as safe havens when market stress or geopolitical tensions have increased. Until this year, that is.
Trump’s aggressive stance on tariffs throughout the campaign had already caused international investors to turn to gold as a means of diversifying their holdings outside of the US currency, even before he was elected president in November.
Fears of a protracted “sell America” trade have hung over international markets since the tariff saga in April. The ICE U.S. Dollar Index DXY was up 0.3% on Friday, but it is still 9.5% lower for the year.
According to Dow Jones Market Data, the most active gold futures contract (GC00) (GCQ25) closed Friday at a record $3,452.80, marking its 24th all-time high of the year.
The significant amount of U.S. government debt and the latest estimates of the budget deficit under the Republican tax and spending bill currently in the Senate have been used against Treasurys.
An investment strategist named Michael Hartnett led a BofA Global Research team that found that interest payments on America’s $36 trillion national debt cost more than $1 trillion annually.
Furthermore, according to a client note released by the BofA team on Friday, interest payments will continue to increase until the 5-year Treasury yield BX:TMUBMUSD05Y drops below 3.3% from its current level of 4%.
The BofA team pointed out that the Trump administration expects the Fed to make a swift interest rate cut in the second half of this year.
According to Dow Jones Market Data, the 30-year “long bond” yield, BX:TMUBMUSD30Y, increased to 4.913% on Friday, around 98 basis points above its lowest 12-month level, while the 10-year Treasury yield, BX:TMUBMUSD10Y, increased to 4.423% on Friday, or 80 basis points over its one-year low.
The BofA Global team determined that the primary drivers of the Wall Street consensus “short the long bond” strategy were U.S. debt and deficits.
However, the Treasury market selloff has occurred in a situation where investors have not yet had to deal with a protracted risk-off period.
According to Dow Jones Market Data, the S&P 500 index SPX closed Friday much lower, although it was still about 20% above its closing low on April 8 and only 2.7% below its record closing high of 6,144.15 on February 19.
Catrambone remarked, “I wouldn’t throw the baby out with the bathwater,” “Gold is just too expensive at one point. Because of this, the trade isn’t sustainable over the long run.
