Extraordinary monetary and fiscal stimulus, which resulted in masses of liquidity injections into the market, record levels of debt, plummeting real rates and a fall in the US dollar, made holding long gold positions particularly attractive and rewarding in 2020.
Arguably, the most important driver of the price of gold are real rates (interest rates minus inflation) given the inverse relationship between the two. As the precious metal is characterised as a non-yielding asset, if interest rates rise the opportunity cost of holding it becomes negative. When these fall or go into negative territory, as is the case today, the appeal of gold to help prevent capital erosion grows sharply. The inverse correlation between the two is staggering and explains a large part of why prices reached record levels last year.
Source: Unigestion, Bloomberg, as of 17 June 2021
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