High rates upstage inflation as gold underperforms
The first half of 2021 provided a good example of how gold’s diverse sources of demand and supply interact. The gold price dropped by 6.6% in H1,1 as gains during most of Q2 were thwarted by a significant pullback in late June. Gold’s price also underperformed in most key currencies except for the Japanese yen and the Turkish lira, which weakened against the US dollar (Table 1).
Overall, gold’s performance was driven primarily by higher interest rates – especially during Q1 and then again in late June on the back of a more hawkish-than-expected statement by the US Federal Reserve.2 Gold was also influenced by upbeat investor sentiment as the global economy started to recover from the impact of COVID-19. However, there were supporting factors for gold. Concerns of higher inflation offset part of the drag that interest rates brought. And the strong response from governments to aid economic recovery in the form of monetary and fiscal policies has made some investors worried about currency risks and capital preservation. In addition, gold benefited from a recovery in consumer demand in Q1, although second waves of the virus and new lockdowns presented challenges in Q2. Our short-term model shows that these factors, combined with the effects of price momentum and investor positioning, help to explain the vast majority of gold’s performance year-to-date (Chart 1).