Strong demand for gold from global central banks has resulted in gold prices not being driven by rising real rates as usual.

FactSet data shows that gold prices did not decline as real rates rose (which is the typical price-driving pattern for non-interest-bearing assets like gold), but instead increased by nearly 30% in the year leading up to Monday, becoming one of the best-performing assets of the year.

On Monday, gold futures for February delivery fell about 0.8% to around $2,658 per ounce. Nevertheless, after first reaching $2,800 in October, gold prices remain at historic highs.

Ten years ago, when real rates (blue line in the chart below) returned to positive territory, the situation for gold (red line in the chart below) was completely different. At that time, gold prices hovered below $1,500 an ounce for several years.

Gold Price vs. 10-Year TIPS Yield

Wells Fargo Investment Institute strategists Mason Mendez and John LaForge stated that the chart uses the yield on 10-year Treasury Inflation-Protected Securities (TIPS) as a reference for real rates, showing how the 'inverse relationship of TIPS yields/gold has fractured.'

Investors who have been hit hard by TIPS in recent years have been reluctant to return to the sector, even as the risks of inflation reigniting under a second Trump administration grow.

The above team noted in a client report on Monday that this change in relationship is more related to gold than to real rates, adding that gold has been 'particularly sensitive to geopolitical tensions in Ukraine and the Middle East' in recent years.

Although U.S. President-elect Trump expressed that he hopes to see these two conflicts resolved upon his return to the White House, Wells Fargo strategists stated that they expect central banks in emerging markets will not 'slow down their pace of gold purchases to diversify reserves.' They also anticipate that by the end of 2025, gold prices will reach a target range of $2,800 to $2,900 per ounce.

The strategists wrote that last year, central bank purchases accounted for 23% of total gold demand, up from 10% in 2021.

Article forwarded from: Jin Ten Data