Gold Price Driven by Interest Rates, Central Banks, and Safe-Haven Demand

Gold's price is not primarily driven by industrial supply and demand, unlike most commodities. Instead, it's influenced by financial, monetary, and geopolitical forces. The relationship between gold and real interest rates is crucial to understand.

The opportunity cost of holding gold is a significant factor. Gold pays no interest, dividends, or coupons, making it less attractive when other assets offer higher returns. Real interest rates are the key to understanding this dynamic. A real interest rate is simply the nominal interest rate minus inflation. When the US Treasury Inflation-Protected Securities (TIPS) yield falls or turns negative, gold tends to rise.

The relationship between gold and real interest rates has become more complicated in recent years. Central banks have emerged as dominant buyers, purchasing over 3,200 tonnes of gold from 2022 to 2024, more than double the pace of the previous decade. This structural shift is driven by reserve diversification, reducing dependence on the US dollar and US Treasuries.

Central banks' share of total gold demand rose to nearly 25% in 2024, compared to around 12% in the 2015-19 period. Their strategic buying has put a floor under the gold price, as they hold for years or decades rather than responding to price changes. Safe-haven demand also interacts with other drivers, temporarily overriding them.