What the gold rally says about market uncertainty
inflation) diminishes gold’s appeal: from a yield perspective, investors are better off holding treasury bonds rather than a non-yielding asset like gold. Read this | Are sovereign gold bonds the new ‘gold standard’ in investing? In recent months, however, US bond yields have declined, driven by expectations of easing monetary policy, and they’ve fallen more than inflation. From January to August, the two-year treasury yield dropped by 33 basis points (bps), and the 10-year yield fell 24 bps, while inflation decreased by 20 bps between January and July.
This compression in real yields has provided bullish momentum for gold. The anticipation of monetary policy has also weakened the US dollar. Since gold is priced in dollars, a weaker US greenback makes it cheaper for investors with other currencies to buy gold.
The dollar index dropped by 2.3% in August alone, following a signal from Fed Chair Jerome Powell about potential easing in September—adding a modest, but noticeable, lift to gold demand. Chinese demand, both institutional and individual, is another critical driver of global gold demand. The People’s Bank of China began significantly increasing its gold reserves around 2015, in response to rising US-China tensions, particularly over the militarization of the South China Sea.
Each escalation in US-China friction has pushed Beijing further towards de-dollarizing its reserves. By the end of July 2024, China’s central bank held 2,264 tonnes of gold, making up 4.9% of its total reserves. More here | Central banks are betting big on gold. Here's how to profit from the trend On the consumer side, individual demand for gold in China, including jewellery and investment products like bars and coins, rose by 15% in 2023.
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