While gold is generally considered to be a hedge against inflation, it has mainly tracked real yields for the last decade. If they fall, the gold price tends to increase.
Indian wedding companies, German savers, opportunistic hedge funds or futures traders - there are many suspects for the rising or falling demand for gold. But no matter how you look at things, one of the most important drivers of the demand for gold is probably another old acquaintance: increasingly omnipresent central banks. They tend to influence the price of gold via several channels.
On the one hand, they have been among the biggest buyers on the gold market since the financial crisis. In 2018 they bought 651.5 tonnes - more than at any point since at least 1971, when the United States ended the dollar's peg to gold.
On the other hand, the interest-rate policy of major central banks significantly contributes to the attractiveness of gold. Since gold does not yield interest or dividends, investors always keep an eye on the opportunity costs of holding gold, i.e. the loss of regular income that would have been generated by investing in some other investments. To do this, one can simply and habitually take the yield of U.S. government bonds. Typically, the lower the interest rate, the more attractive gold becomes, all else equal. In our "Chart of the Week" we show that if one splits the U.S. nominal yield into its two components real yield and inflation expectations, it becomes apparent that historically, at least since the outbreak of the financial crisis, real yields have shown a parallel run with the gold price.
That's worth mentioning, as after all, some capital-market patterns have been different since then. However, there is little to suggest that things shouldn't continue to be "different" for the time being, when it comes to gold. We believe the influence of central banks' on capital markets is unlikely to diminish any time soon. The recent gold price rally to over 1500 dollars per troy ounce was accompanied by investors' growing realization that for the time being they should not rely on interest-rate hikes by the major central banks. That doesn't seem to be a coincidence.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/14/19