- No. 16 | 29th April 2024
Market Report
Learn more about all important trends in the precious metals markets in our market reports on a regular basis.
Alternative drivers help gold defy typical headwinds
One of the most well-defined relationships between the gold price and other financial products has broken down over the last 24 months. Since around the year 2000, gold has exhibited a relatively strong inverse relationship with yields on the 10-year US Treasury note. This is to be expected as the non-yielding nature of bullion means that as the coupon paid on very low-risk US government debt rises, the opportunity cost of holding gold also rises, and the interest in buying falls. Thus far in 2024, bond yields have risen as a reaction to pared back expectations for interest rate cuts owing to stronger than expected US labour and inflation data. Meanwhile, gold has made successive all-time highs, with particular strength shown in the last month prior to the recent correction.
Price driving power is shifting from the West to the East. The fundamental drivers of the gold price change over time, and for now the dollar and US yields have taken a back seat. Strong physical demand from Chinese investors and the People’s Bank of China are contributing to the froth in the gold market. China is the largest market for retail gold demand, and struggles in the property sector along with a long drawdown in the Chinese stock market may have pushed more investors into gold. This is evidenced by a sharp jump in gold trading volumes on the Shanghai Gold Exchange and its sister, the Shanghai Futures Exchange.
Correlation does not equal causation. Higher gold prices coinciding with higher US Treasury yields does not necessarily mean higher yields are now driving the gold price. For now, other factors appear to be outweighing the yields’ influence on the gold price. Reserve asset diversification and global geopolitical instability are boosting gold’s appeal as a hard asset, particularly as US government debt obligations rise over the next few years.
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