Gold prices have surged $100 an ounce over the past seven weeks, closing Friday just under $1,300 an ounce, settling at their highest price in almost three months.

A decline in the U.S. dollar following a speech by Federal Reserve Board Chair Janet Yellen in Jackson Hole, Wyoming, that failed to mention monetary policy, provided the latest boost to gold prices.

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Year to date, the yellow metal has gained over 12%, well above the 9.3% increase in the S&P 500.

“Gold shines as Washington stumbles,” writes Russ Koesterich, co-portfolio manager of BlackRock’s Global Allocation Fund (MDLOX) in a recent market commentary.

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“Policy uncertainty, as measured by the U.S. Economic Policy Uncertainty Index, has had a more statistically significant relationship with gold prices than financial market volatility.”

 

Koesterich explains that the lack of progress on government stimulus plans is trumping (really, no pun intended) the usual market indicators for gold prices, namely inflation and volatility. Gold usually rallies when inflation and volatility rise but that’s not the case currently. Inflation is falling so real rates for 10-year Treasuries have reversed back to where they started the year and volatility remains low.

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Investors who had expected tax cuts and infrastructure spending programs from the Trump White House — and the higher rates that would follow, also known as the “reflation trade” — are now reversing that trade because there has been no progress on those programs. They’re covering short positions and have initiated new long ones, both causing gold prices to rebound.

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Koesterich says the future performance of gold may continue to be linked most closely to developments — or the lack thereof — in Washington. If the political uncertainty and low real rates continue, gold prices will at minimum hold steady, according to Koesterich. But if Congress manages to enact a tax cut or other stimulus, then real rates could rise and gold prices could fall, says Koesterich.

He’s giving better than even odds that the “Greek drama that is modern-day Washington” won’t change much for the time being, so his bias remains “to stick with gold…. For now I would prefer to bet on gold’s diversifying properties rather than political stability.”

Bart Melek, global head of commodity strategy at TD Securities, writes in his latest market commentary that safe-haven trades reflecting growing concerns about a possible U.S. government shutdown and increasing tensions with North Korea are also supporting gold prices.

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