Gold has not stopped setting record after record since the Fed began the global path of rate hikes more than two years ago. This, and expectations of a higher money price for a longer period of time, should have had a downward impact on the price of the gold metal, which usually behaves inversely to bond yields. It didn’t matter. And those responsible are, in large part, those who decide on these rates: central bankers, spurred on by global instability, have embarked on the purchase of gold in recent months, bringing their demand to historical highs, according to the quarterly report published by the World Gold Council last week. The precious metal has already appreciated more than 12% so far this year, up to $2,325 per ounce.
Total gold demand in the first quarter increased by 3% compared to the same period last year, to 1,238 tons. It is the first quarter with the highest demand since 2016. “Central banks and over-the-counter markets (where buyers and sellers negotiate their own contracts) push the price,” point out the World Gold Council. Bankers have been gaining prominence among buyers : they added 290 tons to their reserves in the first three months of the year. In the same period of 2022 there were 89, less than a third of its current demand.
“Central bank purchases have been very strong in recent quarters because monetary authorities are diversifying their reserves,” says Michael Widmer, head of metals at Bank of America. As XTB analyst Joaquín Robles points out, this renewed thirst for gold is led by China, India, Russia and Turkey. The Chinese central bank has been on a 17-month gold buying rally, its largest acquisition path. Behind this demand there is, first, a search for refuge. And, furthermore, analysts at the Swiss bank Julius Baer indicate the desire to be less dependent on the US dollar: the greenback, although another safe haven asset par excellence, is also a threat to currencies that depend on these monetary authorities.
Demand is conditioned by the circumstances of their countries: in Russia, it is a refuge (or a bargain) from sanctions on Russian capital. The Russian Ministry of Economy announced this Monday that they plan to buy, between May and June, more than 5.5 billion rubles a day in gold. That is, more than 56 million euros daily. In China – the great engine of this rally, according to Citi analysts – demand has also skyrocketed among private investors seeking to make up for the devaluation of the currency and the lack of investment alternatives due to the brick crisis that the country is going through. .
Breakup with the bonus
This fever has ended a correlation that had been in force since the time of US President Richard Nixon: investment manuals say that gold and US bonds are two safe haven values that tend to behave in reverse. With high rates, investors flock to bonds rather than gold, because, unlike the precious metal, fixed income returns interest. Thus, profitability rises, while the price per ounce falls. And when rates fall—or when markets expect them to—gold regains the attention of more cautious investors.
Reality, however, has surpassed the manuals: the historical inverse correlation between the two assets has disappeared in the last year. Not even the prospects of high rates for longer can withstand the gold metal, which has found its great suitor in central banks. “Traditional relationships have been broken,” Bank of America points out in a weekly report. It is no longer that the price of gold is discounting a rate drop, as was suggested at the beginning of the years. It is completely unrelated to the price of money (and bonds).
The strength of the American economy and, subsequently, inflation data worse than expected for this point in the year, have pushed back the start of monetary relaxation. Last year it was taken for granted that the US economy would start the year cold, and that we would reach the summer with the path of rate cuts well underway. And just a month ago, markets were pricing in three cuts in 2024. Now, according to data compiled by Bloomberg, only half of analysts believe they will reduce rates in September, and little more (56%) expect a drop in December. The expectations are transferred to the yield of the 10-year US bond: so far this year, its yield has skyrocketed by more than 15%, and it is already paying more than 4.5%.
“The decoupling between gold and US bonds has been strongly influenced by physical purchases that are not necessarily sensitive to rates,” concludes Widmer from Bank of America Research. Some factors help to get closer to the phenomenon, but the puzzle is missing pieces that clearly explain why the ounce of gold has reached an all-time high of $2,400 this year. “The data support the thesis of strong Chinese demand and continued purchases by central banks, but do not fully explain the recent record rise in gold prices,” Julius Baer points out. The only certain thing, at a time when economic certainties are scarce, is that gold lives in its own world.
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