Glittering gold

Michael Kruger

What is behind the recent rally in the gold price?

Our investment team at Morningstar has written previously about the history of gold as an investment and the potential role it may play in providing protection against an equity market decline, as a possible inflation hedge and whether including gold in a portfolio can improve long-term returns or risk-adjusted performance. Given the recent move higher in the precious metal, these considerations are again front of mind for investors, who are trying to decide whether an allocation to gold may be appropriate for their portfolios.

To set the scene, it is worth highlighting the significant upward moves that we have seen from gold over the past few months. Gold reached an all-time high of $2,450 per ounce in May 2024, and has delivered a year-to-date return of 13.0% and a return of 19.5% over the past 12 months (to the end of May 2024). In this article, we explore what has been driving the strong upward moves that we have seen in the gold price.

What’s interesting about the recent surge in the gold price from late 2022 to early to mid 2024 is that it came during a period when market participants would not have expected the yellow metal to rally significantly. Gold prices tend to be negatively correlated to real interest rates. The lack of cash flow generated from gold increases the opportunity cost to hold it as interest rates rise and the opportunity cost to fall as interest rates fall.

What you can see from the red bars in the left chart above is that real interest rates have risen significantly since the US Federal Reserve started hiking interest rates aggressively, starting in March 2022, to tame rampant inflation. This has coincided with strong upward movements in the gold price, which is a bit of an anomaly when looking at the inverse relationship between real interest rates and the gold price that has persisted historically.

Another interesting observation is that the recent rally in the gold price has coincided with a period of outflows from gold ETFs, which is evident from the red bars in the right chart above. The previous strong run up in the gold price in 2019 and 2020 was supported by strong inflows into gold ETFs, however, the recent rally does not appear to be supported by gold ETF purchases.

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