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Gold glitters as global economy slows

Gold is back in the news as it breaks a key price barrier after 6 years of trying.

Gold  broke through the US $1,400 an ounce level in mid-July reaching its highest level in six years.

The change in the price of bullion is linked to growing trade uncertainty and the downward spiral in bond yields.  As the global economy slows, central banks have indicated that a new round of interest rate cuts are on the way. That has pushed down the yields on bonds with some sovereign issues now in negative territory.

For the past six years, bullion has faced resistance at about US $1,350 an ounce. That changed with the relaxing stance on rates. Spot prices touched US $1,453.09 on July 19 and as of August 6, the spot price was US $1,475.60, the highest since 2013.

Ray Dalio, the founder and co-manager of the Bridgewater Associates hedge fund, is making a case for a bigger rise in gold as central banks get more aggressive with policies that lower rates and devalue currencies.

The U.S. China trade war took a currency devaluation turn last week.  Beijing sent global financial markets lower by allowing the yuan to fall past the politically sensitive level of seven to the dollar for the first time since the 2008 financial crisis.

On Tuesday, the Reserve Bank of India cut its key for a fourth time last Tuesday, the same day that New Zealand and Thailand also lowered their rates. Those rate cuts help push their currencies lower relative to the U.S. dollar as well.

The Trump administration responded to China’s move by saying it improperly manipulates the yuan’s value. That opens the way to possible new trade penalties.

In a Linkedin post, Dalio writes about “paradigm shifts” in investing. He said investors have been buying stocks and other equity-like assets in the face of declining rates, but as they face diminishing returns they will be looking elsewhere for returns.

The most promising alternatives are those that “do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,” he said.

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Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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