Expectations of real yields seem to be the underlying driver for the gold price. Gold has no income and therefore the opportunity cost of holding it gets higher as real yields rise. Until relatively recently, rising interest rate expectations had been weighing on the gold price as central banks across the world changed course in response to higher inflation.

Real yields are still rising. From a low of -1.9% in November last year, real yields had moved to -1.0% by early February. In the statement accompanying the recent interest rate rise, the Federal Reserve gave no sign that it would ease its current trajectory of rate rises. It is still forecasting six or even seven rate rises for the year ahead. As such, real yields could rise further from here, depending on the trajectory of inflation.

However, the long-term correlation between gold and real yields appears to have been temporarily forgotten. The crisis in the Ukraine briefly sent the gold price above $2000 an ounce as gold resumed its historic role as a defence against geopolitical crises. To some extent, this is reassuring, gold’s poor performance during the latter stages of the pandemic had left many gold bugs wondering whether it could continue to fulfil this role.

That said, the gold price has started to tumble again more recently. This weakness appears to be related to a fall in the oil price. Gold peaked at almost the same time as the oil price, suggesting investors were responding to fears that an oil price spike could derail the global economy as it has so memorably in the past. Since then, the International Energy Agency has stepped in to bring new supplies onto the market and pressures on energy markets have eased somewhat.

Where does this leave gold today? It is difficult to know which of the various factors that influence the gold price will dominate. However, in the absence of an escalation in geopolitical tensions, or a commodities shock, it seems likely that real yields will once again start to influence the price. A lot of inflation and a lot of interest rate rises are already anticipated. As such, gold is probably fairly priced at its current level, but worth holding in case of further international tensions.