Sinking Global Interest Rates Help Push Gold’s Opportunity Costs Lower
While gold’s performance is the result of interactions between all of the above strategic and tactical drivers, gold’s recent rally has seen solid support from falling interest rates over the course of 2019. In fact, lower real rates are significantly changing the opportunity cost picture for gold investors, particularly as competing assets like bonds provide lower yields and returns for investors seeking shelter from growing macroeconomic uncertainty.
Heading into 2019, market implied US real interest rates were hovering around 1.0%,3 and both the Fed and European Central Bank (ECB) were projecting multiple interest rate hikes coupled with reductions of their balance sheets. But lower global growth expectations, a prolonged trade dispute between the US and China, and an inversion of the yield curve have shifted the positive interest rate trajectory 180 degrees. Since the start of this year, real interest rates have collapsed (dipping below zero in Q3 2019), with the Fed and ECB changing course back to accommodative monetary policies.
The Bond Market Conundrum Helps Gold Shine in 2019
Against this interest rate backdrop, defensive positioning by investors is on the rise, which is supporting gold’s upward price movement in several ways (see Chart 2 and Chart 4). As global uncertainty has risen, investors have responded according to conventional wisdom, turning to fixed income markets for both safety and stability. But with continued low rates, the traditional playbook may not best serve investor objectives going forward. From this perspective, gold’s rally may continue to find support from the attractive relative valuations and improvement in opportunity cost associated with gold.
As investor demand for bonds has risen, it has helped bid up bond prices, putting further pressure on yields. Globally, negative yielding debt has climbed from $7 trillion to $13.4 trillion over the last 12 months,4 while gold sentiment has also risen (see Chart 2). This quick growth in negative yielding debt has created an attractive carry for gold, despite it not offering a yield in the traditional sense. On a relative basis and in face of continued negative rates—both real and nominal—gold’s opportunity cost is rapidly converting into an “opportunity benefit.”