Gold Shines, Defying Historical Relationships

Traditional relationships breaking down

I admit that I’ve been surprised, i.e. wrong about gold in 2024. While gold has benefited in recent weeks from the pullback in real interest rates, for most of the year real-rates had been grinding higher. Historically, this would have put downward pressure on gold.

The negative relationship between real rates and gold has a long pedigree. Looking at 20 years of quarterly data, changes in 10-year yields have a strong negative correlation (-0.64) with changes in gold prices (i.e. as yields have increased, the price of gold has decreased and vice versa). A similar dynamic holds for gold and the dollar. The dollar continues to defy expectations and has risen year-to-date. In the past, that would have also been associated with lower gold prices.

Watch the central banks

If not rates and the dollar, what accounts for the recent surge in gold? One catalyst has been a significant pickup in central bank buying. Based on data from Bloomberg, annual central bank precious metal purchases have quadrupled since 2020. The increase has been particularly acute for China, where gold on the central bank’s balance sheet has risen sharply since early 2023.

Outside of central banks diversifying their holdings, investors appear to also be taking note of increasingly unsustainable government budget deficits, mostly but limited to the United States. U.S. deficits appear stuck at 6-7% of gross domestic product (GDP) for the foreseeable future. Structural deficits, coupled with record pandemic stimulus efforts, have pushed gross public debt (which includes debt held by the Federal Reserve) near $35 trillion, more than 120% of GDP and a level last seen in the aftermath of WW II.

Going forward, investors may need to rethink the role of gold in a multi-asset portfolio. As the past year has demonstrated, gold may have support even in the face of elevated real rates and the near-term inflation outlook. Instead, gold appears to be evolving into a play on how central banks hold their reserves as well as a proxy for investor angst on when, if and how the U.S. address its debt problems.

About the Author

Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team as well as the lead portfolio manager on the GA Selects model portfolio strategies.

Mr. Koesterich's service with the firm dates back to 2005, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. He joined the BlackRock Global Allocation team in 2016 as Head of Asset Allocation and was named a portfolio manager of the Fund in 2017. Previously, he was BlackRock's Global Chief Investment Strategist and Chairman of the Investment Committee for the Model Portfolio Solutions business, and formerly served as the Global Head of Investment Strategy for scientific active equities and as senior portfolio manager in the U.S. Market Neutral Group. Prior to joining BGI, Mr. Koesterich was the Chief North American Strategist at State Street Bank and Trust. He began his investment career at Instinet Research Partners where he occupied several positions in research, including Director of Investment Strategy for both U.S. and European research, and Equity Analyst. He is a frequent contributor to financials news media and the author of two books, including his most recent "The Ten Trillion Dollar Gamble."

Mr. Koesterich earned a BA in history from Brandeis University, a JD from Boston College and an MBA from Columbia University. He is a CFA Charterholder.

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Russ Koesterich, CFA, is a Portfolio Manager for BlackRock's Global Allocation Fund and Lead Portfolio Manager for BlackRock’s Global Allocation (GA) Selects Model Portfolios and is a regular contributor to Market Insights.

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