Geopolitical
tensions
spurred
a
major
gold
rebound
in
October,
widening
the
gap
between
real
yields
and
gold
even
further.
In
our
view,
the
weakening
of
the
decade-long
correlation
between
real
yield
levels
and
gold
is
not
only
a
reflection
of
the
current
higher
inflation
regime,
but
also
reveals
stronger
structural
demand.
Meanwhile,
emerging
market
central
banks
have
ramped
up
their
gold
holdings
in
an
effort
to
gain
more
independence
from
the
US
dollar,
and
the
shift
in
China’s
growth
model
has
increased
economic
uncertainty,
boosting
physical
demand
for
gold
from
local
investors.
Taken
together,
the
confluence
of
these
factors
should
support
gold
at
a
structurally
higher
price
level
than
prior
to
the
pandemic,
softening
the
historical
influence
of
real
yields.
Gold:
Who’s
Buying
it,
and
Why?
As
the
ramifications
of
events
in
the
middle
east
hit
home
in
early
October,
the
price
of
gold
rebounded,
pushing
the
metal
close
to
$2000
(£1566)
per
ounce.
Notably,
the
surge
followed
a
period
of
consolidation
that
gold
had
experienced
on
the
back
of
rising
real
yields.
As
such,
the
precious
metal’s
recent
pickup
has
amplified
its
recent
decoupling
from
the
10-year
yield
on
US
Treasury
Inflation-Protected
Securities,
or
TIPs.
This
prompted
us
to
take
a
closer
look
at
the
underlying
factors.
Some
time
ago,
we
established
inflation
as
an
important
long-term
driver
of
gold.
The
precious
metal’s
post-pandemic
price
dynamics
largely
confirm
this
hypothesis.
Clearly,
the
elevated
inflation
rates
seen
over
the
past
two
years
imply
a
markedly
lower
gold
price
in
real
terms
(which
we
obtain
by
deflating
the
dollar
gold
price
with
US
headline
inflation).
This
essentially
reduces
the
gap
between
real
yields
and
gold.
Yet
a
substantial
part
of
the
gap
remains
unexplained.
In
our
view,
the
decoupling
of
the
decade-long
correlation
between
long-term
US
real
yield
levels
and
the
gold
price
largely
points
towards
structural
shifts
in
demand.
In
an
effort
to
gain
more
independence
from
the
US
dollar,
EM
central
banks
have
stepped
up
their
gold
holdings
substantially
over
the
past
two
decades
–
in
particular
China
and
Russia.
The
pace
of
institutional
gold
buying
saw
another
acceleration
after
the
US
and
their
allies
froze
Russian
dollar
reserves
in
response
to
the
invasion
of
Ukraine
in
early
2022.
With
official
gold
purchases
exceeding
100
tonnes
in
H1
2023
alone,
China
continues
to
be
the
most
significant
institutional
buyer
year
to
date.
Difficult
China
Backdrop
Makes
Gold
Shine
Gold
has
also
become
increasingly
attractive
for
individual
buyers.
Again,
China
is
a
case
in
point.
Once
considered
a
safe
asset,
real
estate
has
lost
much
of
its
appeal
among
local
investors.
The
government’s
decision
to
deflate
the
housing
market
means
the
sector
is
in
a
structural
decline.
New
sales
and
housing
starts
have
fallen
to
levels
not
seen
in
a
decade,
and
house
prices
have
moved
markedly
lower
over
the
past
quarters.
Chinese
equities
have
similarly
underperformed
over
the
past
two
years
and
the
renminbi
has
revisited
its
2022
lows,
erasing
the
gains
it
made
after
China’s
reopening.
With
the
government
enforcing
strict
limits
on
capital
outflows,
it
is
hard
for
investors
to
turn
to
the
outside
world.
Along
with
its
lack
of
viable
and
attractive
domestic
investment
alternatives,
China’s
macro
backdrop
makes
gold
shine
ever
more.
Beyond
this,
local
investors
see
gold
as
a
hedge
against
the
weakness
of
the
Chinese
renminbi.
The
unusually
high
demand
for
gold
is
particularly
visible
in
a
recent
spike
of
the
China
gold
premium
–
the
spread
at
which
gold
is
traded
in
Shanghai
compared
to
London.
The
spread
typically
hovered
around
$10
per
ounce
over
the
past
ten
years,
yet
it
temporarily
rose
above
$50
per
ounce
during
Q3
2023.
Given
that
domestic
financial
asset
returns
are
set
to
remain
highly
volatile,
we
expect
physical
gold
demand
to
stay
strong
in
China,
a
level
high
enough
to
matter
for
the
world
market.
Taken
together,
we
expect
the
confluence
of
these
factors
to
support
the
gold
price
at
a
structurally
higher
level
than
prior
to
the
pandemic,
weakening
the
historic
influence
of
real
yields
on
gold
to
a
considerable
extent.
Claudio
Wewel
is
an
FX
strategist
at
J.
Safra
Sarasin
Sustainable
Asset
Management
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