The price of gold is rising despite increasing yields.

Last Updated: 8. November 2023By

The price of gold has experienced an enormous 7.3% surge in October, flirting with the $2,000 mark. In general, the price of gold has proven to be quite strong this year despite rising bond yields. As the chart above shows, gold has been demanded as much as interest-bearing investments, despite the fact that gold does not yield interest and interest-bearing investments are usually preferred when yields increase.

The support for the gold price has come from a financially powerful source. Normally, when interest rates increase and bond yields rise, as they have been doing this year, the gold price should suffer since gold does not yield interest and interest-bearing investments are more sought after.

The reason behind this is the high gold purchases by global central banks. According to the latest report from the World Gold Council, global central banks purchased a total of 337 tonnes of gold in the third quarter, the second highest volume of central bank purchases in a third quarter since records began. Since the beginning of the year, central banks have bought a remarkable 800 tonnes, 14% more than in the same nine months of the previous year.

Central banks continue to buy gold at a rapid pace, with the largest buyers being among the emerging market central banks. China was at the top with 78 tonnes of gold, followed by Poland (over 56 tonnes) and Turkey (39 tonnes).

It is becoming increasingly clear what I have written to you often: central banks are trying to increasingly escape dollar hegemony and are diversifying into the one asset that offers security and trust on a large scale: gold.

And central banks are far from done buying gold. For example, the president of the Polish central bank, Adam Glapiński, said during a press conference last month that the country will continue to buy gold. This will „make Poland a more credible country“. The declared goal of the Polish central bank is to increase the proportion of gold in total Polish currency reserves from the current 11.2% to 20%.

And then there is inflation. It is a fact, not a myth: gold usually acts as a good hedge in times of high inflation.

Historically, the average gold price has risen 14% when inflation exceeded 3% – which is the current situation. In the past 12 months, gold has risen in US dollars by more than 17% – the S&P 500, on the other hand, has only risen by 15% in the same period.