Gold demand grows as investors seek a safe haven

Investors are witnessing a decoupling of the relationship between gold’s fair value and US real yields, as concerns over the Ukraine war and high, persistent inflation prompt investors to put more emphasis on gold’s safe haven status.

For over a decade, gold’s key price driver has been the real yield on 10-year US Treasuries, which defines the opportunity cost of holding the non-yielding asset. Other factors determining the gold price are its safe haven status during periods of political crisis and its value as a hedge against inflation.

Gold is sensitive to rising interest rates, particularly US bond rates, which increase the opportunity cost of holding non-yielding bullion and put downward pressure on its price. But when investors focus on political or economic crises they will buy gold as a hedge, as they have been doing this year.

ETF Securities has bought around 8 million ounces of gold this year to support investment in its GOLD ETF.

ETF Securities’ research partner JP Morgan says tension between fair value estimates and hedging against risk is what gives gold its pricing dynamics, and right now geopolitical risk and inflation concerns have become the dominant factors and may continue to be in the short to medium term.

“We are in a period of exceptional geopolitical risk and, at the same time, inflation is shifting higher and is no longer seen as transitory. Today. Gold’s price is being driven by its safe haven appeal and its value as an inflation hedge.”

Gold was range bound between US$1,750 and US$1,850 an ounce through most of 2021. It climbed over US$2,000 in January and has been trading around US$1,900 since then.

As the price has moved, analysts have debated gold’s sensitivity to US bond yields, rising inflation and the Ukraine war. Concerns about inflation and the Ukraine war are driving demand, while higher bond yields and a strong US dollar are seen to be putting pressure on the gold price.

The relationship with real yields has not gone away and will weigh on prices at some point but so far this year the gold price has been strong relative to real yields.

The US 10-year real yield has rebased higher since early March, while gold has withstood this downside pressure.

“We have seen strong demand. Investors are allocating more to gold as a hedge. The question now is whether the current dynamics will be sustained."

"We have some strong upside in yields this year and real yields will continue to push higher. On the other hand, we might be looking at the end cycle for this growth recovery, with aggressive rate rises. That is when gold comes into its own as a safe haven.”

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