about 1 month ago • 2 mins
Some assets like to travel hand-in-hand. But the price of gold has typically moved in the opposite direction of real (i.e. inflation-adjusted) US Treasury yields. They’re “inversely related”, that is, so when real yields rise, gold tends to fall, and vice versa. This relationship makes sense once you take a closer look at the two things that move real yields: government bond yields and inflation. When nominal yields rise, the “opportunity cost” of owning gold (instead of bonds) goes up: gold, after all, doesn’t generate income. And so the shiny metal looks less attractive when bonds offer better returns, and that causes its price to fall. But when inflation is rising, the opposite is true. Since traditional government-issued currencies – and bonds’ future payouts – become worth less in times when consumer prices are rising, investors start to seek out gold for its stability and the value that’s baked into its limited supply.
That’s how it usually goes anyway. But that inverse relationship has broken down since the huge rise in real yields that began early last year. And there are a few reasons for that. First, gold demand has been propped up by record buying activity from central banks as some countries diversify their reserves to reduce their reliance on the dollar. Second, gold has seen an increase in demand from Chinese investors, who are faced with a property crisis, a falling yuan, and tumbling yields. In Shanghai, the local price of gold surged last month, at times commanding a record premium over international prices of more than $100 an ounce, compared with an average over the past decade of less than $6.
Third, gold’s perception as a safe-haven asset has boosted its allure recently, given the rise in geopolitical and economic volatility. The price of the precious metal surged as much as 10% this month, hitting a five-month high, as fresh conflict erupted in the Middle East. And with central banks having aggressively hiked interest rates, a move that typically ruffles the financial waters, it’s no surprise that investors have been grabbing onto this metallic safeguard.
Of course, the fact that gold has broken from its usual relationship with real yields might suggest that something is off: it’s possible that it went and got ahead of itself, and could be ripe for a correction. And with bonds and cash-equivalent assets (like money market funds) offering such attractive yields, it makes sense to question whether gold is the best defensive asset to own right now. But, with the financial system navigating shakier grounds, central bank decisions casting shadows over their currencies, geopolitical risks rising, and a recession still looming, gold remains a distinct buffer. So, although the metal may not seem like a bargain right now, keeping some of its bling in your portfolio mix might not be a bad call. A good, cost-effective way to do that is via the abrdn Physical Gold Shares ETF (ticker: SGOL; expense ratio: 0.17%).
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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