You asked, we answered: explaining gold’s recent performance

Table 1: Gold return in key currencies year-to-date*

Gold has outperformed what simplistic models suggest. A commonly used model based solely on the direction of the dollar and real rates suggests gold should have been 21% lower than it is now (Chart 1). But last year we highlighted the pitfalls of relying on such a simplistic approach. Why? First, gold’s correlation with the dollar is not always negative. We’ve seen this correlation flip to positive over the past few months – as it has done in the past. Second, rising interest rates can make gold less attractive if they raise the opportunity cost or reflect higher economic growth ahead. Neither of those appear to be true at present. Growth expectations are falling and the opportunity cost – correctly viewed in real terms – remains historically low. 

Table 2: Gold’s performance under negative and moderate interest-rate conditions*

The Fed, along with many other central banks, appears to be playing catch up in its attempts to control inflation. If the economy was weathering the prospect of higher rates better, then the story might be worse for gold. But stagflation risks are mounting with every data print, which is supportive for gold in our view.

3. Can you explain why gold and oil seem more correlated recently?

Oil and gold have become more positively correlated over the past year or so (Chart 2). While this happens from time to time, the long-term correlation between the two is generally close to zero, sometimes oscillated between negatively and positively correlated over the last 25 years. For example, the correlation turned negative at near the start of the pandemic in 2020, when oil settled at a negative price and gold rallied 25%.

The rationale for the recent positive correlation centres around heightened geopolitical uncertainty, which has not only boosted the performance of commodities – particularly energy – but also gold specifically, in its role as a hedge. As we’ve discussed previously, gold often lags other commodities in reflationary periods. It is almost a cause-and-effect situation where commodities move higher, creating inflation that some investors then hedge with gold.

4. Where is central bank buying headed?

During a turbulent first quarter marked by geopolitical crises and surging inflation, central banks globally added 84t of gold to their reserves. While this is 29% lower y-o-y, it is more than double the previous quarter and, in the main, reflects buying by a few emerging market central banks. This healthy level of demand corresponds with the findings of our 2021 central bank survey: for the first time respondents highlighted gold’s performance during periods of crisis as the top reason to hold gold.

Looking ahead, gold might attract further interest as a diversifier as central banks seek to reduce exposure to risk amid heightened uncertainty. We expect central banks to remain net purchasers in 2022; however, slower economic growth and rising inflation may restrain this demand in the short term. We also caution that active management of reserves can result in selling during crises to take advantage of gold’s abundant liquidity.

The results of our 2022 central bank gold survey will be published by the end of June.