Interest rate movements have made their mark on gold prices over the past two years.
After a strong 2020 performance where the price rallied 25% in US dollar terms in an environment where rates fell, gold has been much weaker during 2021, down 5% year-to-date with rising rates.1 While demand for gold has rebounded, particularly in the jewellery and bar and coin markets,2 the recent gold price sell-off has been largely driven by the sharp increase in interest rates in global fixed income markets relative to the record lows they reached last year (Chart 1).3
Rate increases have been driven by improving economic conditions and higher inflation expectations. While in the short-run, higher rates are a headwind for gold, we believe that gold remains a key strategic portfolio component for several reasons:
- A rising rate environment does not always result in gold’s price underperformance (p. 1-2)
- A significant increase in inflation and/or money supply may offset the negative effect from rising rates (p. 2)
- Central banks may use alternative monetary policy tools to limit the negative effect of rising rates (p. 3)
- The prolonged level of short-term interest rates is creating a structural shift in asset allocation strategies by reducing expected returns and/or increasing portfolio risk (pp. 5-6).