All That Glitters

The price of gold is on the cusp of a record high—and it might not stop there.

At $2,038 an ounce—up 1.9% today—the gold price has about 1.5% to rise to hit its record high of $2,069.40 set in 2020. The shiny, yellow metal has gained 12% over the past month alone and is up 25% from its recent low in November.

The gold price is typically driven by three factors. An ounce of gold is worth more dollars when the value of the greenback declines. Lower bond yields mean less competition for gold, which produces no income. And greater risk aversion makes the shiny metal, as humanity’s oldest store of value, more popular.

Gold has hit the trifecta. Bond yields collapsed in March—the 2-year U.S. Treasury note yield was around 3.8% today, down from 5.1% at its peak early last month. At the same time, bond yields abroad have held up much better, weighing on the U.S. dollar.

The moves reflect the growing expectations of a looming end to the Federal Reserve’s interest rate increases and concerns about a recession in the U.S., perhaps as soon as this year amid turmoil in the banking sector. A looming debt-ceiling fight adds to the potential turbulence on the near horizon that could push safety-seeking investors to add to their gold exposure.

Breaking through $2,000 today puts the gold price above a significant psychological barrier. The metal’s next move will depend on how expectations of Fed policy and the economy evolve. But with bond yields, the dollar, and sentiment all working in their favor, gold prices appear to have room to run.

That’s also bullish for shares of companies that produce and sell gold. Newmont—a Barron’s stock pick last fall—has rallied some 20% over the past month. The VanEck Gold Miners exchange-traded fund (GDX) has gained some 28%.

Gold-mining stocks tend to be more volatile than the underlying commodity. That’s because of the disproportionate impact that changes in the gold price have on miners’ profits. It doesn’t cost any more to mine an ounce of gold whether its price is $1,500 or $2,000, and the difference falls to the bottom line.

Nonetheless, miners’ expenses have been in focus over the past few inflationary years. Management teams have cited higher prices for labor, diesel fuel, and raw materials used for mining and processing gold. A higher gold price helps offset those increases.

If gold prices continue to rise, expect the stocks to lead the way.