Gold Shines as De-Dollarization Drives Safe-Haven Demand

Gold's recent surge to an all-time high, breaching $2,750 per ounce, has ignited renewed interest in precious metals. This rally, according to a note from J.P. Morgan Asset Management, is fueled by a confluence of factors, including persistent macroeconomic uncertainty, heightened geopolitical risks, and a growing shift away from the US dollar.

Central banks worldwide, particularly in China, are driving this trend by steadily increasing their gold reserves. This strategic move seeks to hedge against a weakening US dollar and combat rising inflation. As the J.P. Morgan note highlights, "Amid a period of rising global liquidity, boosting most asset prices, the developing trend among country currency reserve managers to reduce reliance on the US dollar is adding a new dimension to gold’s fundamental outlook."

This shift away from the US dollar, often referred to as de-dollarization, gained significant momentum at the recent BRICS summit. With countries seeking greater financial autonomy and insulation from geopolitical tensions, the demand for gold as an alternative store of value is experiencing a sustained boost, further supporting its price appreciation.

Interestingly, gold's valuation has decoupled from its traditional inverse relationship with US 10-year real yields. Historically, higher yields would dampen gold's attractiveness as investors pivoted to potentially higher-yielding assets. However, the current environment of heightened geopolitical risk and a desire for alternative stores of value has disrupted this pattern.

"This performance indicates that new factors are outweighing the traditionally negative impact on gold of rising real yields," observes the J.P. Morgan report.

This decoupling presents important implications for fixed-income investors. The bank suggests that bond yields alone are no longer sufficient indicators of inflation or overall risk sentiment. As a result, fixed-income investors may need to diversify their portfolios beyond traditional bonds, considering alternative assets like commodities and currencies.

Highlighting gold's historical role, J.P. Morgan notes that it has been a valuable diversifier for fixed-income portfolios for decades. Over the past two decades, gold has demonstrated a negative correlation of approximately 0.36 with real yields, offering a potential cushion during periods of market turbulence.