The yellow metal usually exhibits high negative correlation with real yields, i.e the lower real yields the higher the gold price. But they have been diverging recently.
There are several possible reasons that could explain the current divergence:
- Gold as the ultimate safe-haven and geopolitical risk hedge: in the current context of the Russia-Ukraine tensions, investors cannot find shelter in US government bonds, which are pricing in several interest rates hikes. Gold is therefore one of the very few hedges available;
- During periods of rate hikes, gold’s negative correlation with long-term real rates tends to break down. As Goldman wrote, this has to do with the fact that the rate hikes themselves lead to fears of a growth slowdown and recession and therefore boost demand for safe haven assets, such as gold. This means if inflation fails to slow down in the second half of 2022 and the Fed is forced to hike more than currently expected, gold should be resilient as this would increase fears of a potential recession.
- Demand coming from emerging markets savers. Gold suffered last year from lower demand coming from Emerging Markets. With the growth recovery in EM, demand is on the rise again.