Gold's Traditional Relationship with Yields Undergoes Fundamental Shift

Rising bond yields are creating a challenge for gold investors, but FTSE Russell's Indrani De says this headwind can be mitigated by understanding structural changes in global demand. According to De, central banks have become increasingly important buyers of gold, with their purchases accelerating substantially over the past two to three years.

Central banks were net sellers of gold from 2000 until the Global Financial Crisis before becoming net buyers. Today, they hold more gold than U.S. Treasuries at current valuations, and De notes that this is not a sign of a loss of faith in the U.S. dollar. Instead, it reflects a gradual diversification of reserves amid a changing geopolitical landscape.

De expects official-sector gold demand to remain an important feature of the market, with purchases potentially retreating from exceptionally high levels but remaining geographically broad and driven by heightened geopolitical uncertainty.