What the chart shows

 This chart shows the inverse of the yield on a 10-year Treasury Inflation Protected Security (TIPS)1 against the US Dollar denominated price of gold per troy ounce since 2000. The chart highlights how historically the 10-year TIPS yield, that is a real yield or net of inflation, has had a close inverse relationship with the price of gold. This correlation has been relatively consistent because higher real yields on bonds diminish the attractiveness of non-interest yielding assets, such as gold, typically used as a defensive asset and as an inflation hedge. Recently however, this relationship has broken down as the rise in real yields has not been followed by a corresponding decline in the price of gold. Remarkably, by the end of November this year, gold had returned 12.4% year-to-date for investors and in fact reached its highest recorded price level.  

Why is this important?

 It is important to consider the factors contributing to the breakdown of this relationship and understand the drivers behind gold’s substantial rally. Firstly, gold has traditionally been regarded as a store of value and safe haven during periods of market turmoil and has thus experienced high demand due to geopolitical instability arising from the conflict in Ukraine, and more recently the Middle East. Another key factor has been the change in markets’ interest rate expectations, with investors now forecasting earlier cuts in 2024, which has caused a weakness in the dollar. This depreciation benefits the dollar-denominated metal as it gives non-US gold buyers higher purchasing power. The final and arguably most significant reason for gold’s surge has been the persistent appetite from central banks. Q3 saw central bank gold purchases reach the second highest level on record, continuing the momentum following a record-breaking year in 2022. This has occurred as central banks, particularly in emerging markets, have sought to reduce their reliance on the dollar following sanctions imposed on dollar-denominated Russian assets. This triggered a shift into alternative stores of value such as gold to mitigate any further ‘dollar weaponisation’ risks. 2024 may also still prove to be a tumultuous year amidst ongoing conflicts, unresolved geopolitical tensions and a busy election calendar which includes the US, UK, Mexico and Taiwan. Alongside lingering recession odds, such risks have supported a perhaps overly elevated price for the precious metal. 

 1TIPS are bonds issued by the U.S government which are linked to the Consumer Price Index (CPI).