18 APRIL 2024
The gold price has boomed in recent years, but it is no longer trading in lockstep with US interest rates.
Typically there is a marked inverse correlation between gold and bond yields. The reason being is that gold doesn’t generate a yield so when cash and bond rates go up, investors tend to choose those as their favoured safe-haven assets. The converse is also true.
The chart below shows the price of gold bullion (red line) against the 10yr US inflation-adjusted (real) bond yield (blue line) going back 15 years. Importantly, the gold price is inverted so when the red line is declining that reflects the gold price going up and vice versa.
Until early 2022 these lines moved in tandem but, ever since, the gold price has defied the spike in US borrowing costs and rallied to new highs.
It is no coincidence this trend broke down around the time Russia invaded Ukraine. The resulting financial sanctions imposed on Russia included the freezing of around half its U$700bn foreign currency reserves, much of which was invested in overseas government bonds. This was an unprecedented move that has prompted Central Bankers elsewhere, especially in developing markets, to change how they allocate their own reserves. Anecdotal evidence suggests, in aggregate, they are buying fewer US Treasury bonds (historically the preferred exposure) and a lot more gold bullion. 2022 saw 1,082 tonnes of Central Bank gold purchases; a record that was almost matched again in 2023.
Geopolitics is thus playing a key role in gold’s rally, but so too is strong Chinese retail demand, where investors are seeking a hedge against fiat currency debasement. These two factors help explain why the gold price has become detached from US interest rates.
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