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Gold prices have risen sharply since the Hamas-Israel conflict erupted, further highlighting the divergence in its long-term relationship with U.S. Treasuries as investors flee to the safe haven.

Prices for the precious metal rose as much as 10 percent to $1,996 a troy ounce, hitting a five-month high after Hamas launched attacks on Israel two weeks ago.

With the region at risk of tipping into wider conflict, investors have been buying gold, seen as a store of value in times of geopolitical and market uncertainty.

“It’s the geopolitical risk premium that has been taken on gold,” said Nicky Shiels, metals strategist at MKS Pamp, a Swiss precious metals refiner and trader.

However, the rise in gold prices has also put even greater strain on its typical correlation with real yields – inflation-adjusted US bond yields – that has largely existed since the 2008 financial crisis. Typically, higher Treasury yields push down the price of gold because they make the metal less attractive in comparison without a yield.

That relationship fractured during the huge rise in real yields last year, as gold was supported by record purchases by central banks as some countries sought to reduce their dependence on the dollar after Washington weaponized its currency through sanctions against Russia.

Analysts said gold also likely benefited from uncertainty in the Middle East as it increased the Federal Reserve’s caution over the future direction of U.S. interest rates. On Thursday, Fed Chairman Jay Powell said geopolitical tensions sparked by the Israel-Hamas war “pose significant risks to global economic activity.”

Violence in the Middle East has reversed the recent decline in gold prices as rising bond yields pushed the yellow metal to $1,820 an ounce.

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Others argue that the speed of repricing in the bond market is actually driving investors into gold.

“The other part of the story is that yields are increasing so much. “That probably spooked people given the fragility of the markets,” said Ryan McIntyre, managing partner at Sprott Inc, a precious metals investor with more than $25 billion in assets under management.

Marcus Garvey, head of commodities strategy at Macquarie, said gold’s rise was also partly due to traders who had bet on the metal’s decline being forced to liquidate their positions. “An important aspect is that the market was quite tight to begin with,” he said.

Global prices have also been driven up by strong demand in China, reflected in the price in Shanghai trading well above the price in London. It hit a record differential in September after China’s central bank imposed temporary curbs on gold imports to defend the renminbi.

But some analysts question whether the support for gold prices is greater than investors’ push for safe places to park their money.

“The rise in real yields this week should have effectively taken the bottom out of gold,” said Adrian Ash, director of research at BullionVault, a precious metals marketplace. “The big question right now is who will hold the price. . . I think it’s the central banks.”

Source : www.ft.com

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