Gold Nears $4,000. Why It’s Soaring—and How It Can Keep Going.

Gold prices have surged more than 50% this year, and are on pace to reach $4000 an ounce. (AFP via Getty Images)

Key Points

• Gold prices rose 1.5% to $3,945 an ounce, extending its annual gain past 50%, driven by global political instability.
• France’s government collapse and potential new elections caused its CAC-40 to fall and 10-year bond yields to rise 11 basis points.
• Japan’s Nikkei 225 surged nearly 5% to a record high, while the yen weakened due to new Prime Minister Sanae Takaichi’s fiscal policies.

Gold prices powered to within touching distance of the $4000 mark in Monday trading as investors piled cash into bullion amid a wave of political turmoil in three major global economies.

France’s newly formed government, led by Prime Minister Sébastien Lecornu, collapsed within hours of its creation of a new cabinet, setting up the likelihood of new national elections that could ultimately bring down President Emmanuel Macron.

Created with Highcharts 9.0.1Gold priceSource: FactSetNote: continuous futures contractAs of Oct. 7, 4:08 p.m. ET

Created with Highcharts 9.0.12025Oct.2,5002,7503,0003,2503,5003,7504,000$4,250

France’s CAC-40 fell the most in six weeks, dragging the European regional Stoxx 600 benchmark into the red. French 10-year government bonds, known as OATs, rose 11 basis points to 3.61%, more than 20 basis points higher than similarly-dated bonds sold by the Greek government.

In Japan, the ruling Liberal Democratic Party elected a conservative lawmaker, Sanae Takaichi, to become the country’s new Prime Minister.

However, her support of fiscal policies that include near-zero interest rates and heavy government spending sent the yen spiraling to a record low against the euro and past the 150 market against the U.S. dollar.

“Takaichi is seen as a pro-growth leader, and has signaled skepticism about the persistence of Japan’s inflation,” said UBS Global Wealth Management’s chief economist Paul Donovan. “This has supported equities, and may delay expectations of a Bank of Japan rate increase.”

Japan’s Nikkei 225 stock index surged nearly 5% on the Monday session, closing at a record high of just under 48,000 points. However, longer-dated bond yields also ended firmly higher as investors fretted about the adding of extra debt to the country’s already-teetering pile of around 235% of its GDP.

Here at home, the federal government shutdown enters its sixth day with little hope of an agreement on spending in sight.

Congressional Budget Office figures suggest as many as 750,000 federal workers have been furloughed since the shutdown began on Oct. 1, and markets have been bereft of major economic data heading into a crucial stretch of the year.

The collective turmoil has helped boost gold prices again on Monday, with the bullion rising 1.5% to a fresh record high of $3,945 an ounce. That extends gold’s annual gain past 50%, marking the strongest performance since 1979 and effectively more than doubling in price over the past two years.

Gold-backed ETFs have added around 150 tons in flows since August, according to Ole Hansen, head of commodity strategy at Saxo Bank, taking the overall tally to a record 3025 tons.

He expects the current rally to continue as markets look for alternatives to traditional safe-haven trades amid the current political climate.

“With many potential investors suffering from vertigo following a 45% year to date rally, the bigger question is whether we are seeing a paradigm shift in how tangible assets such as metals are perceived,” Hansen said

“In a more fragmented world, where the West has weaponized markets, payment systems, and monetary channels, sanctions and asset freezes have eroded trust in traditional havens—particularly the dollar and U.S. government bonds,” he added.

And that means gold will continue to shine.

Write to Martin Baccardax at martin.baccardax@barrons.com