[Economy] Gold prices maintain the $4,000 range despite rising US interest rates—Central bank reserve diversification and future outlook

Despite US Treasury yields reaching their highest levels in approximately 24 years, gold prices have firmly maintained the $4,000 per ounce range. We will clearly outline the factors behind this “resilience,” which cannot be explained by standard economic theory, as well as the future market outlook.

1. Why gold does not fall despite the headwind of yields

Because gold is a non-interest-bearing asset, it typically has a nature where prices tend to fall during phases of “rising real interest rates” or “strong dollar and high interest rates.” However, in the current market, the following structural changes are supporting prices.

• Central bank reserve diversification (de-dollarization movement): Following the invasion of Ukraine in 2022, the freezing of Russian foreign reserves due to sanctions by Western nations triggered an acceleration in diversification (increased buying) from dollar-denominated assets into gold, particularly among central banks in emerging countries.

• Premium that cannot be explained by macroeconomic factors: According to analysis by metals strategists, the premium (added price) associated with “geopolitical risk hedging and de-dollarization,” which cannot be explained by real interest rates or the dollar exchange rate, has become structurally established at a scale of several hundred dollars (at one point exceeding $1,000), compared to approximately $120 before 2022.

2. Global demand backing and a state like a “compressed spring”

From trading data and the trends of various countries, it is confirmed that there is persistent real demand despite the high price range.

• Strong buying appetite from China, Poland, and others: Import volumes in China, the world’s largest gold consumer, remain at high levels, and persistent demand is seen domestically beyond the holdings of the People’s Bank of China (central bank). Additionally, central banks in Europe, such as Poland, continue to actively increase their gold holdings.

• Market participants’ views: As pointed out by some, “The fact that prices have not fallen despite the significant temporary headwinds for gold is because the underlying factors are very strong. Gold is currently in a state where someone is compressing a spring,” meaning it contains energy that would not be surprising if it turned toward further price gains at any time.

3. Future points of interest: The direction of investment demand from Europe and the US

Currently, gold buying as a safe asset is being recognized against the backdrop of concerns over government debt, but the following factors are expected to become further price-pushing factors in the future.

• End of the FRB’s monetary tightening phase: If the Federal Reserve Board (FRB) enters a full-scale interest rate cut phase in the future, additional capital inflows (reversal of position unwinding) from Europe and the US into gold-linked ETFs, which are susceptible to interest rate trends, are expected.

• Trends of institutional investors: As geopolitical risks and the effects of portfolio diversification are re-evaluated, institutional investor buyers for large gold bullion continue to be attracted.

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