Gold surged above $2,000 an ounce for the first time since May as concerns over conflict in the Middle East outweigh the impact of the recent jump in bond yields.

Spot gold rose as much as 1.2% after Israel’s military said it was “expanding ground activity” in Gaza, putting the metal on course for the biggest monthly gain since July 2020. Prices touched an all-time high of $2,075.47 in 2020.

Bullion has jumped about 9% since Hamas attacked Israel on Oct. 7, bouncing back from a seven-month low as demand for haven assets increased. The initial price move was also intensified as many investors who were betting on a further slide were caught off guard by the outbreak of war, forcing them to quickly cover their short holdings.

“We’re seeing this spike as Israel moves into Gaza, and there’s now a growing risk this might become a broader conflict,” said Bart Melek, managing director and global head of commodity strategy at TD Bank. “We have a situation where we’re now seeing that oil could move higher on broader geopolitical tensions, while the Federal Reserve might not be willing to counteract a supply shock. So that reality, along with gold hedging, likely prompted some short-covering that contributed to today’s spike.”

Trading Dynamics
Gold’s rally this month leaves the metal increasingly disconnected from one of its traditional trading dynamics as inflation-adjusted Treasury yields stay near the highest in more than a decade.

Non-interest-bearing bullion would typically come under massive selling pressure in such a scenario. Yet, the relationship has appeared to unravel over the past year as a combination of central-bank demand and haven buying kept gold prices elevated — and reasonably range-bound — for months, even as real interest rates spiked.

That trend had finally shown signs of turning around in the weeks preceding the Hamas attack on Israel, when indications from Fed policymakers that they would keep policy tight for a long period helped trigger a sharp sell off in bullion prices.

However, the threat of the conflict spilling over into the wider region that’s crucial to the global energy supply has rattled markets. A spike in oil prices could generate inflation that’s difficult for central banks to curb without hurting their economies, a situation that tends to be good for gold.

Spot gold climbed 1.1% to trade at $2,006.35 an ounce by 2:49 p.m in New York.  

This article was provided by Bloomberg News.