Recently, World Gold Council [WGC] said, Stubborn stagflation about gold in their published, Gold Market Commentary. The report suggests further, the relationship between the price of gold and its core drivers shifts over time, sometimes reflecting who is most active in the market. For example, US real interest rates (opportunity cost) were tightly linked to movements in gold between 2007 and 2022.
Last month we suggested that one reason for gold’s decoupling from rates post 2022 was the preponderance of emerging market demand from central banks and other investors, rather than a breakdown in US investor relationship with rates.
Now that central banks and Asian investors have stepped back a bit, as indicated by our Gold Demand Trends data, local premia and intraday session returns, a tighter gold-rates relationship could re-establish itself and Western investors (particularly the US) could become more dominant in driving short-term returns.
Should rates across the curve start to drop, a ramp up in gold buying could be triggered in the US. But we’re not seeing that quite yet. In fact, the curve is steepening as the short end drops on Fed cut hopes, but the long end remains high on risk premia and future inflation concerns.
The sticky long end might hinder some rates-driven interest in gold. However, a rise in inflation that is concurrent with a slowdown in economic activity1 and weakening labour markets, signals we are increasingly flirting with a stagflationary environment. And this tends to favour gold. But which investors are most sensitive to such an environment?
Gold’s sensitivity to US real interest rates may increase as Western investors, particularly in the US, take a more active role amid softer demand from emerging markets. While rates in the long end remain sticky, this reflects growing stagflation concerns – an environment that has historically supported gold.
Among US investor segments, ETF holders show the strongest response to stagflation risks and have picked up their pace of investment over the last few weeks, not just in the US but in Europe too – where real rates are still rising – suggesting risk drivers are offsetting rates-based drivers. Futures traders appear more focused on rate dynamics. As the yield curve steepens (driven by lower front-end rates) and inflation fears persist, the interplay between macroeconomic signals and investor behaviour will be key in shaping gold’s next move.
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