The gold price has been in the news in recent days, soaring to a 10-month high above $1,300 an ounce following a lift in geopolitical tensions on the Korean Peninsula.
As a safe-haven asset, it’s clearly been a supportive factor, extending gold’s rally from the lows seen late last year to around 17%.
However, as seen in this excellent chart below from the Commonwealth Bank, rather than rising geopolitical risks, much of that gain has been driven by changes in real, US bond yield.
As Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank explains, it’s been changes in US inflation-adjusted bond yields, rather than shifts in perceived geopolitical risk, that have not only been driving movements in the gold price in recent times, but also over the past 10 years.
“The major driver of our gold price view is the trajectory of US 10-year real yields,” he says.
“Gold prices and US 10-year real yields have historically had a tight inverse relationship. Lower yields increases the appeal of non-US interest bearing assets like gold.”
The chart above demonstrates that inverse relationship perfectly. When real yields fall, the gold price tends to rally, and vice versa.
Recently we’ve seen US real bond yields slide as a result of concern that Donald Trump will be unable to deliver increased infrastructure investment and taxation reform.
“The Trump administration has disappointed many,” says Dhar.
“Trump did not deliver US health care reform. Nor have promised tax reforms materialised. Markets have consequently begun to doubt that US economic growth will accelerate.”
That in turn has seen market expectations for further rate hikes from the US Federal Reserve scaled back, helping to underpin the gold price.
As for the outlook, Dhar suggests there’s a risk the gold rally may reverse.
“We still believe that higher US interest rates will eventually weigh on the gold price this year given that the majority of the market are pricing in only one more rate hike by June 2018,” he says.
However, given high levels of uncertainty relating to North Korea, he admits that prices could remain supported should geopolitical concerns continue to escalate.