Investors are snapping up gold. Here's why

Gold, the yellow metal Wall Street normally flocks to in tough economic times, is shining bright at a three-month high, despite record stock prices and improving economies around the globe.

So what’s spooking investors enough to push gold up in price five of the past six weeks and up the first three days this week on its way to a Wednesday close of $1,237.60?

Here’s a short checklist: Economic policy uncertainty in the U.S. under President Trump. Political anxiety surrounding the populist movement in Europe and elsewhere. Ongoing stimulus from global central bankers. Angst over rising inflation. The U.S. dollar falling in value versus foreign currencies.

Gold has surged 7.5% in 2017, and is at its highest level since Nov. 10, or two days after Trump's election win.

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Frank Holmes, CEO and chief investment officer at U.S. Global Investors, says investors are buying gold by relying on simple investment-related math, as well as pricing in some bad economic outcomes if Trump’s plans to slap tariffs on U.S. trading partners like China hurts U.S. consumers by resulting in higher prices of imported goods sold at U.S. stores such as Walmart, Target and Home Depot.

On the math side, holding gold – which does not pay interest – has become more attractive due to the combination of lower bond yields and higher inflation readings, says Holmes. When the real interest rate -- the rate of interest on, say, a 5-year U.S. government bond minus inflation – shrinks or turns negative as it has done lately, investors tend to buy gold as they're not missing out on the yield benefit of bonds.

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But there’s also fear that politics and the unintended consequences of policies, such as building barriers to trade, will harm the economy.

If Trump imposes tariffs on imports to the U.S. to protect domestic manufacturers, it could result in U.S. shoppers paying higher prices at retail, and cause inflation to rise sharply and the economy to slow.

“The collateral damage could be massive to economic growth,” Holmes says.

Populist uprisings in Europe could also spook markets if elections in countries such as France result in outsiders with nationalist streaks winning, which would raise fresh concerns over the European Union’s ability to stay whole following Britain’s vote to exit the EU last June.

In such a world, gold gains even more luster, and the yellow metal could easily shoot above $1,320 an ounce as it did last June during the Brexit scare, and perhaps as high as its 2016 peak of $1,367.10 in early July 2016, Holmes adds.

Gold’s rise has also coincided with recent weakness in the dollar, adds Barry Bannister, senior equity strategist at Stifel. After rising nearly 7% from Election Day to its 52-week high on Jan. 3, the Wall Street Journal’s dollar index has fallen 3.6%, leaving it down 2.5% for 2017.

“When the dollar was strong after the election, amid expectations of stronger U.S. growth and higher U.S. interest rates, gold fell,” says Bannister. “There has been some slight reassessment of the pace of U.S. economic growth, allowing a relief rally in gold.”

Higher inflation expectations, which is a threat to financial assets like bonds, is also giving gold a lift, adds Fawad Razaqzada, technical analyst at FOREX.com.

“Globally, central banks are generally still pretty much (in stimulus mode) and interest rates are extremely low and in some cases negative,” Razaqzada explains. “The loose central bank policy had until now little impact on gold prices because there was no inflation and speculators preferred to hold racier equities over safe-haven assets like gold amid a generally positive market environment. But now, we are heading into and inflationary period and this is why in my view gold is beginning to shine.”

Gold, Razaqzada adds, would likely surge higher if the stock market, currently near record highs, were to suffer a decline of a big enough magnitude to add to the fear level on Wall Street.