From late February to mid-March 2022, gold prices surged, mostly on ‘haven flows’ due to the war in Ukraine. In the following six weeks to mid-April, gold remained high, while US real rates shot up. However, gold has fallen back recently and reconnected to its main driver, real yields. Strategists at Société Générale note that real rates are a key driver of gold.

Real interest rates/gold relationship can break down when exceptional events occur

“The relationship between gold and market-based real rates is very strong over time but it suffered two short-lived dislocations early this year and post the onset of the Ukraine war. But although both dislocations proved temporary, other gold price drivers are currently bullish. To name just a few: The Ukraine war and other geopolitical risks, fears of inflation-induced recession, global supply chain weakness and flows into gold ETFs and moves by non-US-aligned central banks to ‘de-dollarise’ their reserves.”

“We would rather argue that the gold/real rates relationship has strengthened, as it can protect against multiple bullish factors and still push prices down significantly.” 

“Real yields as measured by nominal US Treasury yield minus US CPI have less influence, although they are not irrelevant.”