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US inflation surprise lights fire under gold price

Gold on Wednesday enjoyed its best trading day since June 24, 2016 when financial markets were shocked by Britain voting to leave the European Union.

The most active gold futures contract on the Comex market in New York touched a high of $1,358.60 an ounce in midday trade, up more than 2% or nearly $30 an ounce compared to Tuesday's settlement after inflation data in the US came in higher than expectations. Volumes were massive with 39.4m ounces of April delivery gold traded by mid-afternoon.

US equity and bond markets have been in turmoil with huge swings up and down after employment data released at the beginning of the month indicated inflation may be returning after years in the doldrums. Higher CPI numbers are likely to force the Federal Reserve to pick up the pace of interest rate hikes this year.

While the price of gold usually has a negative correlation to interest rates as the metal provides no yield and investors have to rely on price appreciation for returns, gold is also seen as an effective hedge against faster price growth and weakening currencies. The US dollar dropped back on Wednesday and is now down 12% over the past year against the country's major trading partners. The yield on US benchmark 10-year Treasurys rose to a four year high of 2.9%.

Gold has gained $112 an ounce since mid-December and despite culling positions in recent weeks large-scale speculators on derivatives markets like hedge funds have nearly doubled net long positions – bets that gold will be more expensive in future – since then.

Hedge funds are hedging with gold

Retail and institutional investment in gold-backed exchange traded funds (ETFs) have also kept faith in the metal. ETF vaults last week held some 2,250 tonnes or 72m troy ounces, levels last seen May 2013, as investors pile into the commodity seen as a safe haven amid turmoil on financial markets.

Filings with US market regulators revealed on Wednesday that Bridgewater Associates, the world’s biggest hedge fund, has raised its stake in SPDR Gold Shares (NYSEARCA:GLD) and iShares Gold Trust (NYSEARCA:IAU), the world's two largest physically-backed gold exchange traded funds, during the last quarter. Combined Bridgewater's holdings of physical gold in the two ETFs are worth just under $650 million.

Founder Ray Dalio is advising investors to keep 5–10% of their portfolio in gold as the risk of a US recession within the next couple of years rises.

Bloomberg reports the filing showed Bridgewater also boosted its stake in Denver-based Newmont Mining to 148,185 shares, while cutting its stake in Barrick Gold to 160,951 shares.

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Name Last Change
DOW 23957.90 3.02%
S&P 500 2643.69 2.58%
NASDAQ 7166.68 2.49%
TSX 15399.93 1.79%
TSX-V 817.08 0.00%

Resource Commodities

Name Last Change
Gold 1340.30 0.84%
Silver 16.54 0.91%
Copper 3.01 1.21%
Platinum 957.69 0.39%
Oil 64.30 1.35%
Natural Gas 2.62 0.80%
Uranium 24.25 N/A
Zinc 1.46 0


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