Central Banks Drive Gold Prices Despite Rising Yields

According to FTSE Russell's Indrani De, rising bond yields pose a significant challenge for gold. However, investors should not strictly apply the conventional link between gold and interest rates. De explains that nominal and real yields are both increasing, which typically raises the opportunity cost of holding an asset with no income.

De notes a fundamental shift in the gold market as central banks have become increasingly significant buyers. Between 2000 and the Global Financial Crisis, central banks sold more gold than they bought, but then shifted to being net buyers. Official-sector purchases have exceeded twice the amount recorded between 2010 and 2021 over the last two to three years.

This demand is consequential because official-sector buyers typically do not make allocation choices based on opportunity cost generated by elevated bond yields. As a result, a significant portion of gold demand now originates from sources insensitive to yields, which De calls a primary factor behind the increased decoupling of rising yields from gold prices.