- Expectations the Federal Reserve is at the end of its tightening campaign have prompted a move lower in the dollar and real, or inflation-adjusted, rates. Falling real rates and a weaker dollar provide a supportive backdrop for gold.
- Gold has tended to perform well in periods of heightened investor fear, as we saw during the tumult in regional banks in March.
- Although gold is a non-yielding asset, a tactical allocation may make sense for some investors as a way to add diversification to portfolios and as a hedge against potential shocks.
Gold is having a moment; one we believe is likely to continue. The precious metal has risen over 8% so far in 20231, thanks to a combination of positive factors. Here are three reasons gold has been moving higher and why investors may consider making a tactical allocation.
The end is near: There’s no guarantee, of course, but it’s likely the May rate hike will be the last of the Federal Reserve’s tightening campaign, which began in 2022. Expectations of a Fed pause have prompted weakness in the dollar, benefiting gold which is priced in dollars.
Concurrent with the dollar’s drop, inflation-adjusted 10-year yields have fallen by approximately 50 basis points2 from their late 2022 high. Falling real rates and a weaker dollar are a strong backdrop for gold. An analysis comparing 5-year real rates and spot gold prices showed a strong negative correlation over the past 20 years, meaning gold and real rates tend to move in opposite directions.3