Gold Demand Defies Rising Real Rates Amid Record Bullion Holdings

Despite gold prices falling to one-week lows at $4300 per troy ounce, demand for bullion has continued to rise. The top two exchange-traded trust funds backed by gold, including the SPDR Gold Trust (NYSEArca: GLD), have shrunk by 0.1% since Friday's close, but gold ETFs worldwide expanded last week to hold more than 4250 tonnes of bullion for the first time ever.

This growth in demand defies rising real rates, with the 10-year inflation-protected US Treasury bonds yielding their highest level since November 2008. Historically, gold prices have tended to fall when real US bond yields rise, but Saxo Bank's Ole Hansen notes a notable disconnect between gold demand and real yields.

Asset managers Alliance Bernstein reckon that central banks are still diversifying reserves away from the US Dollar and other G7 currencies into gold, causing gold prices to 'rise with slowly rising real rates'. Fidelity Investments' Jurrien Timmer also believes that gold's fair value price is $5000 based on a model tracking the size of the US money supply.