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Gold Resilience: Analysts Ponder Metal’s Strength During Rate Surge

Isaac Nuriani    |
Feb 2, 2024
  • Chinese investors turn to gold for relief from sputtering economy.
  • Central banks buy near-record gold in 2023.
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The prospect of interest rates reversing direction and declining after nearly two years of a steady surge upward has a lot of people brimming with excitement. Among them are those with a strong affection for gold, who know it and other precious metals can respond well during periods of monetary policy that tend to weaken the dollar. 

Analysts at some of the most respected names in financial services agree that the expectations for interest rates this year bode well for gold. Both J.P. Morgan and UBS strategists see gold sitting at significantly higher levels by the end of 2024, with UBS emphasizing that “the power of the Federal Reserve’s policy pivot should not be underestimated.”[1] 

In fact, the roughly 10% surge in the price of gold we’ve since October has come largely on the strength of the anticipation that rate cuts could be on the way this year.[2] 

Of course, beyond the mere expectation of looser monetary policy, the actual implementation of such monetary policy can be practically euphoric for gold and silver prices. From mid-2001 through mid-2004, as the federal funds rate traveled from around 5.5% down to 1%, gold and silver steadily appreciated as both equities and debt securities struggled.[3] The same, of course, can be said of the years during which the financial crisis played out, when rate cuts powered by the first-ever instances of quantitative easing in the U.S. saw the prices of both gold and silver appreciate by triple digits from 2008 to 2011.[4]   

The historical relationship of declining interest rates and gold prices that’s frequently in evidence makes gold’s positive performance against the backdrop of those declining rates – even the expectation of declining rates – easy to understand.  

Which raises an interesting question: If an apparent move toward falling rates can “juice” gold, why hasn’t the fastest cycle of rising rates in roughly 40 years knocked the price of gold to the ground?    

“Hopes of falling interest rates are certainly helpful for gold, particularly if the baseline implication is that the central bank does not have the stomach or the latitude to fight inflation aggressively,” Bloomberg’s John Stepek noted in December. “But that in itself doesn’t explain its [gold’s] general resilience this year [2023]. The flipside of falling interest rates being ‘good’ for the gold price is that rising interest rates should’ve been bad for gold, and they haven’t been (at least not to the extent that models based on ‘real’ interest rates would imply).”[5] 

No, they haven’t. Neither were they as bad for gold in 2022 as one might expect, considering the Federal Reserve launched interest rates skyward seven separate times and by a total of 425 basis points that year.[6] To be sure, neither gold nor silver soared in that environment. But it’s reasonable to expect that such a rapid rate surge inside of just 10 months would have throttled the metals…yet that didn’t happen. In a year that saw the most popular asset classes finish in the red, both gold and silver eked out slight gains.[7]  

This week, we’re not going to discuss the prospects for gold in 2024 on the basis of a widely projected pivot to accommodative monetary policy sometime this year. Instead, we’re going to see if we can better understand why the stringent rate-hike regime that unfolded over the past couple of years hasn’t proved to be a bigger problem for gold thus far. 

Recently, analysts have proposed that two factors, in particular, have been responsible for gold’s resilience in the face of higher rates: relentless demand by central banks…and equally relentless demand by the citizens of China. 

One expert suggests these specific influences on the price of gold have been so strong that they’ve essentially severed the metal’s historical relationship with interest rates. If that’s true, it raises the possibility that gold may be relied on to move largely on factors other than interest rates, which could mean a potential new investment paradigm for precious metals. 

Let’s see what we find. 

“If Rates No Longer Matter, What’s the Investment Case” for Gold? 

In a recent article on what appears to be evidence of a “disconnect” between gold prices and interest rates, Frank Holmes, CEO of U.S. Global Investors, asks: 

“If rates no longer matter, what’s the investment case?”[8] 

I’m going to discuss that in a moment, but I would suggest that it might be a bit of overstatement to declare “rates no longer matter.” We’ve seen, with our own eyes, the reinvigoration of gold prices on the anticipation of lower rates. 

On the flip side, although sharply higher rates over the last two years have not hammered metals as might have been expected – the very topic up for discussion here this week – it’s not reasonable to suggest high rates had no negative impact on gold in an inflationary environment that otherwise might have sent gold soaring. 

But getting back to Holmes’ question: What is the investment case for gold exclusive of monetary policy? 

Endeavoring to answer his own query, Holmes cites recent analysis by Colin Hamilton of multinational investment bank BMO and the World Gold Council suggesting that it is investment demand from China as well as ongoing, rabid consumption of gold by central banks that’s ensuring gold’s resilience presently in the face of starkly higher rates.[9] 

Stunning levels of gold demand by central banks have been a matter of record for some time now, and we’ll talk more about that shortly. As for the manic level of household/investor gold-buying in China and its impact on the price of the metal, that’s an especially interesting angle on gold’s demonstrated strength against higher rates. 

Gold Exposure Now a “Necessity” for Chinese Portfolios, According to Expert 

Regionally, investment demand for gold in Europe fell off by 180 metric tons last year, the worst showing since 2013. “Rocketing interest rates, the hawkish stance of local central banks, strong currencies and surging living costs were among the likely factors driving profit-taking,” the World Gold Council noted.[10] 

China was a much different story, however. There, investment demand for gold soared by 280 metric tons, a 28% increase over 2022 and effectively offsetting last year’s drop in Europe.[11] 

Referring to China’s single-handed impact on gold prices last year, Louise Street, senior markets analyst at the World Gold Council, said, “China was key to a lot of what was happening last year. When you look at the consumer sector, China is not the price-setting factor but it is providing a floor.”[12] 

China is in the midst of a sharp economic slowdown, evidenced by a variety of metrics including a 20%-plus decline in the CSI 300 – the country’s counterpart to the S&P 500 – over the past year, as well as a 35% drop year over year in new home sales among the nation’s biggest developers.[13]   

According to BMO’s Colin Hamilton, many in China are allocating excess savings into gold as a capital preservation strategy against this backdrop of a weakening economy  

“Gold exposure has become a necessity for Chinese portfolios as they continue to expect disinflation and income uncertainty,” Hamilton said recently.[14] 

Chinese citizens themselves readily admit that uncertainty – of all kinds – is fueling their interest in gold right now, with one Shanghai resident recently telling Nikkei Asia, “China’s international relations are deteriorating, and there are wars occurring around the world. The price of gold isn’t going to fall.”[15] 

Pointing to another – but related – reason for vigorous gold consumption among Chinese, market analyst Itsuo Toshima notes, “People in China appear to be buying gold, the stateless currency, because of their lack of confidence in the yuan.”[16] 

In other words, the Chinese are buying gold as a hedge; a hedge against varieties of both economic and geopolitical uncertainty. And it seems they’re buying so much gold that, in the opinion of analysts, this purchase activity is by itself going a long way to supporting the metal’s price while higher interest rates do their best to push down on it.  

The China story is an interesting one, offering potential implications that extend far beyond what’s immediately apparent. For that matter, so does the continued purchase of gold at a stunning pace by the world’s central banks, which is the other principal factor cited by analysts responsible for gold’s ongoing price resilience. 

2023 Central Bank Gold Demand Nearly Matches 2022 All-Time Record 

Gold demand among central banks these days may be at its most notable point in all of history. For one thing, there’s the fact that central banks have been net purchasers of gold for the last 14 calendar years…beginning in 2010, as the impacts from the global financial crisis were continuing to play out.[17]  

But that’s not all. Aside from central banks’ uninterrupted net-purchase record over the last decade and a half, there’s the vastly increased pace at which central banks are buying gold.  

According to fresh data from the World Gold Council, central banks purchased 1,037 metric tons of gold last year, just 4% less than the 1,082 metric tons purchased in 2022 that stands as the all-time record.[18] 

Putting the stunningly high levels of gold consumption by central banks in additional perspective, the council said: 

Two successive years of over 1,000t of buying are testament to the recent strength in central bank demand for gold. Central banks have been consistent net buyers on an annual basis since 2010, accumulating over 7,800t in that time, of which more than a quarter was bought in the last two years.[19] 

After buying all this gold over the last two years, surely analysts at the World Gold Council expect central banks to ease up in 2024…right? 

Not exactly. 

In 2024, we expect central banks to keep buying at an impressive rate, likely in excess of the pre-2022 annual average of around 500t. They almost matched their 2022 total last year and we believe that a longer-term strategy is at play here and errs on being more open-minded to another solid year of buying, albeit somewhat lower than this year.[20] 

Of course, that’s basically the same thing the World Gold Council said last year at this time in its outlook for 2023, suggesting then that “central bank buying is unlikely to match 2022 levels.”[21] 

But it effectively did match it. 

As for why central banks are buying so much gold, it’s largely for the same, compelling and easy-to-understand reason that Chinese households are buying so much of it: as a hedge – a “just in case” – against the economic and geopolitical uncertainty that has manifested in numerous, actual risks for years now.  

In fact, among the reasons most frequently cited by central banks for buying gold in the World Gold Council’s 2023 Central Bank Gold Reserves Survey are its “performance during times of crisis,” its capacity to serve as a “long-term store of value/inflation hedge” as well as its potential as an “effective portfolio diversifier” and “geopolitical diversifier.” [22]   

For some central banks – China and Russia, most notably – gold’s potential utility as a diversifier includes helping them to de-dollarize; to diversify away from the dollar and otherwise hedge against the risks of economic sanctions and U.S. fiscal instability they believe are posed to them through the greenback.[23] 

Focused and currently relentless buying efforts on the part of both Chinese citizens and central banks have gone a long way to supporting gold prices during a phase of the monetary cycle that likely would be much more hostile to metals. So much so, in fact, that these gold-buying forces have, according to some analysts, invalidated long-standing relationships between interest rates and the metals’ prices.  

We’ll talk more about that – as well as the potential implications – as we close out. 

Analyst: Gold’s Historical Correlation to Interest Rates Is Now Broken  

Colin Hamilton of BMO recently went as far as to suggest that gold is now in a “new era” in which its historical correlation with real rates is broken and its prices driven by other factors including demand by central banks and Chinese investors.[24]  

And those other factors? In one way or another, and to one degree or another…they’re features of an economic and geopolitical landscape that are not expected to disappear anytime soon. Which additionally suggests the possibility that the enthusiastic consumption of gold designed to mitigate their impacts could continue. 

As Maxwell Gold, head of gold strategy at State Street, recently said, “The reasons driving central bank gold purchases…likely won’t change given today’s increasing economic and geopolitical risks.”[25] 

The same could be said, as well, for the general reasons savvy household investors in China and elsewhere are buying precious metals…given that, fundamentally, economic and geopolitical uncertainty poses the same general risks to individuals as to institutions. 

In other words, the possibility is being raised that the non-monetary-policy-related drivers of gold which have helped propel the metal’s price for much of the new millennium – including through periods of rising interest rates such as over the last two years – potentially could be with us in perpetuity.[26] And if that’s the case, then it additionally suggests that a potentially momentous shift in the outlook for gold as an investment asset could be underway; one that sees precious metals – including metals owned in a gold IRA – held in even higher regard as a core portfolio component. 




[1] J.P. Morgan, “Will gold prices hit another all-time high in 2024?” (January 17, 2024, accessed 2/1/24); Jenni Reid, CNBC.com, “UBS sees a 10% spike for gold this year as rate cut speculation swirls” (January 22, 2024, accessed 2/1/24).  
[2] London Bullion Market Association, “Precious Metal Prices” (accessed 2/1/24); J.P. Morgan, “Will gold prices hit another all-time high in 2024?”   
[3] Federal Reserve Bank of St. Louis, “Federal Funds Effective Rate” (accessed 2/1/24); StockCharts (accessed 2/1/24). 
[4] London Bullion Market Association, “Precious Metal Prices.” 
[5] John Stepek, Bloomberg.com, “The Factors Driving the Gold Price to New Highs” (December 4, 2023, accessed 2/1/24). 
[6] FederalReserve.gov, “Open Market Operations” (accessed 2/1/24). 
[7] London Bullion Market Association, “Precious Metal Prices.” 
[8] Frank Holmes, U.S. Global Investors, “A New Driver of Gold?” (January 29, 2024, accessed 2/1/24). 
[9] Ibid. 
[10] World Gold Council, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 2/1/24). 
[11] Ibid. 
[12] Harry Dempsey, Financial Times, “Chinese investors buy gold as property and stock markets fall” (January 31, 2024, accessed 2/1/24). 
[13] Ibid. 
[14] Ibid. 
[15] Momoka Matsumoto, Noriyuki Doi and Hiroki Masuda, Nikkei Asia, “Chinese pay premium prices for gold as economic outlook dims” (December 13, 2023, accessed 2/1/24). 
[16] Ibid. 
[17] World Gold Council, “Gold Demand Trends Full Year 2023.” 
[18] Ibid. 
[19] Ibid. 
[20] Ibid. 
[21] World Gold Council, “Gold Demand Trends Full Year 2022” (January 31, 2023, accessed 2/1/24). 
[22] World Gold Council, “2023 Central Bank Gold Reserves Survey” (May 30, 2023, accessed 2/1/24). 
[23] Anil Varma, Business Insider, “Global central banks are hoarding gold like never before as they seek to reduce ‘overconcentration’ of dollar reserves” (October 10, 2023, accessed 2/1/24). 
[24] Dempsey, “Chinese investors buy gold.” 
[25] State Street, “What’s Driving Central Banks to Record Gold Purchases — and Will It Last?” (October 4, 2023, accessed 2/1/24). 
[26] London Bullion Market Association, “Precious Metal Prices.” 

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