As detailed in one of our recent blogs, movements in interest rates have long been a key driver of gold’s performance, particularly in the short and medium term, as they represent, in part, the opportunity cost of holding gold.
As relevant as they are, however, opportunity costs are generally just one of the four key drivers of gold. Yet, our analysis indicates that over the past year, gold’s sensitivity to interest rates, accounting for other factors, has risen more than four-fold. This period began with unprecedented central bank activity in financial markets, which initially sent bond yields sharply lower worldwide in early 2020. In fact, the extent of monetary expansion during the second quarter of last year stands out even in comparison to the first wave of quantitative easing enacted in response to the Global Financial Crisis in 2008 (Chart 1). As a result, our short-term gold performance model1 showed that interest rates alone explained more than 40% of gold’s price rally to above US$2,000/oz last year.2
Chart 1: Federal Reserve’s balance sheet ballooned in 2020
Y-o-y change in Federal Reserve assets (2006–2020)*