Gold Faces Dual Pressures from Inflation and Interest Rates

Overview

This report analyzes new challenges facing the gold market, noting gold prices diverge from oil trends due to persistent inflation concerns and rising real rates. It cautions against over-associating with further real rate repricing and highlights downside risks to ETF demand and upside risks to recycled gold supply.

Core views

Gold's 10-day negative correlation with oil has broken as Brent crude fell below $100/barrel, with gold continuing its short-term downtrend from mid-May's $4,700/oz level, seeing combined ETF and futures selling of 1.6 million ounces. The core issue is persistent inflation combined with responsible monetary policymaking driving real rates higher. The report emphasizes not over-associating with further real rate repricing - this year's 48bps repricing is far below 2022's 270bps, which was effectively offset by 716t fluctuations in official gold demand. Demand-wise, Q1 central bank and bar/coin demand exceeded expectations, with bar/coin demand up 38% YoY, though ETF demand fell 78% YoY. The report sees H2 ETF demand upside risks, noting 2023's weak demand still accompanied rising gold prices. Supply-wise, recycled gold is a key volatility factor, with Q1 recycling at 366t supporting the full-year 1,470t forecast, with upside risks as capacity bottlenecks ease.

Analysis framework

The report employs a macroeconomic framework analyzing inflation risks, monetary policy responses, and real rate impacts on gold. Correlation analysis shows US 10-year nominal/real rates have higher correlation (R²=77%) with forward oil futures (e.g., Dec 2026) than spot (R²=51%), indicating focus on long-term high energy price potential. It also analyzes global bond market selloffs, noting compound effects in US, UK and Japanese markets - with US 10-year yields breaking 4.5%, weekly moves in these three markets were 21, 24 and 23bps respectively, reflecting a global phenomenon rather than single-country characteristics.

Methodology notes

• Macroeconomic framework

  Real rates' impact on gold pricing

  The report uses 10-year real yields as input for gold's financial fair value model - rising real rates reduce gold's appeal as it generates no interest income

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Gold supply-demand balance analysis

  The report analyzes gold market balance from supply (recycled, mined) and demand (central banks, ETFs, bars/coins) dimensions, focusing on demand elasticity differences and supply response speeds

Key data

• Real Rate Repricing48bpsYear-to-date real rate change, far below 2022's 270bps
• Official Gold Demand Fluctuation716tH2 2022 vs H2 2021, offsetting 270bps real rate repricing
• ETF Demand YoY Decline78%Q1 ETF demand versus last year's quarterly run rate
• Bar/Coin Demand Growth+38%Q1 bar/coin demand above last year's run rate
• Recycled Gold Supply366tQ1 recycled gold volume, supporting full-year 1,470t forecast

Impact & implications

The report suggests if new Fed Chair Warsh can notably shift committee views from mid-May's "slightly hawkish" stance at the June 17-18 meeting, this could benefit gold. Such a shift may alter rate pricing without changing the team's view of the Fed "pausing indefinitely near neutral," potentially significantly improving weak ETF gold investment flows since 2025.

Risks

• Upside risks to recycled gold supply as capacity bottlenecks ease
• More persistent inflation driving further real rate rises
• Fed policy shift falling short of expectations

What to watch

• Global inflation data especially US figures
• Fed June 17-18 meeting
• Whether ETF demand recovers within the year