Gold, a traditional safe haven, has long been known for its inverse relationship with U.S. real interest rates. Generally, as real rates rise, the opportunity cost of holding non-yielding gold increases, causing gold prices to fall.
However, recent developments suggest that this well-established trend may have changed.
In a recent report, Billy Leung, Marc Jocum and Justin Lin of Global traditional correlation between gold and real returns dissolved?
“We don’t think so,” the analysts said.
“Although rare, gold has shown a positive correlation with U.S. interest rates at certain points in history. A recent example is the COVID-19 pandemic, when real yields and gold prices collapsed in early 2020. For a more comparable period, we can consider two other periods: the fight against inflation of Fed Chairman Volcker from the late 1970s to the early 1980s, and the three years leading up to the global financial crisis,” they said.
Since 2022, investors have witnessed high inflation rates, geopolitical conflicts and economic downturns that mirror these historical scenarios. Despite the rise in real rates, these factors have boosted demand for gold, supporting its price.
“Since 2022, we have seen inflation at a 40-year high, Russia’s invasion of Ukraine, slowdowns in China’s economic engine, and multiple escalations of conflict in the Middle East. All of these catalysts acted as drivers of gold demand, allowing it to perform despite the historic cycle of rising rates,” said Leung, Jocum and Lin.
“However… these factors will eventually subside, and the historic negative correlation between gold and real yields could once again provide a tailwind during the next rate cut cycle,” they added.
A recent analysis from Global According to this model, gold could reach around US$2,885 by December 2025, assuming current conditions remain constant.
However, major financial institutions such as JP Morgan, Morgan Stanley, Citibank and Goldman Sachs are forecasting a more conservative target of $2,760 by the end of 2025.
“In general, this average seems more reasonable than the near $2,900 figure our analysis arrived at,” the analysts said.
“Our simulation assumes that the current environment remains unchanged and that only real rates are adjusted. The current environment is one of a weakened labor market, a sluggish Chinese economy, increasing U.S. defaults, and a stock market begging for rate cuts from the Reserve federal.
“This is unlikely to be the case as we approach 2025. Analysts have continued to downgrade recession risks in recent months, with the Bloomberg U.S. Recession Probability Forecast Index showing only now only a 30% probability in August 2024.”
Ultimately, the trio said gold’s future performance depends largely on the Fed’s actions and broader economic conditions.
“In the context of the two possible scenarios in which the Fed could cut rates: a soft landing or a hard landing, our base price target appears to account for the latter case, in which a US recession fuels demand for gold .
“In the most likely scenario of a soft landing, it is likely that gold will not perform as real rates imply, but will nonetheless benefit from an overall lower opportunity cost.”
