Gold in Crisis?

Authored by

Michael Ponikiewicz

VP, Portfolio Manager, Multi Asset Class Strategies

Seth Weingram, Ph.D.

SVP, Director, Client Advisory

Key Takeaways

  • Despite gold’s reputation as a safe haven, it does not always deliver on that expectation.
  • Gold’s price is influenced by macroeconomic factors, especially nominal interest rates, inflation expectations, and the U.S. dollar.
  • The interplay between these factors helps to explain gold’s surprising performance in the COVID crisis and offers a framework to understand why gold’s behavior might deviate from conventional wisdom in other circumstances.
3 min

April 2020

The surprisingly procyclical behavior of gold prices during the coronavirus crisis has renewed scrutiny of its widely perceived safe-haven status. In March, as stocks were suffering one of their most violent selloffs in the past century, the price of gold dropped $200, as much as 12% (Figure 1). It subsequently rallied back to multi-year highs as equities rebounded.

Various narratives surfaced to explain the drop in gold during an episode in which many investors would have expected and greatly valued protection, including forced selling driven by margin calls and profit taking. In our view, however, those explanations largely miss the mark. Instead, gold’s recent performance is a reminder that the commodity’s safe-haven qualities during market stress (and its behavior more generally) depend on the particulars of the macroeconomic environment, especially real interest rates and the U.S. dollar, the currency in which gold is denominated.

Gold and the Macro Environment 

Revisiting a few of gold’s salient characteristics helps to clarify its behavior during the COVID crisis: it has essentially zero productive value and generates no income, but it is also scarce, durable, and portable. Those properties explain why gold has long been viewed as a good store of value, with expected returns that bear some relationship to inflation expectations. As a result, its price is directly influenced by real returns available on other assets, including “safe” sovereign bonds, e.g., U.S. Treasuries. 

Figure 1: Gold and Equities – Co-moving in the COVID Crisis


Sources: Acadian Asset Management LLC, Bloomberg. Index source: MSCI Copyright MSCI 2020. All Rights Reserved. Unpublished. PROPRIETARY TO MSCI. It is not possible to invest directly in an index. For illustrative purposes only. Investors have the opportunity for losses as well as profits. Past performance is no guarantee of future results.

Figure 2: Gold Prices, Inflation Expectations, Real Interest Rates, and the Dollar

Inflation breakevens calculated based on U.S. Treasuries. Sources: Acadian Asset Management LLC, Bloomberg. For illustrative purposes only. Investors have the opportunity for losses as well as profits. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

In 2019 and the first part of 2020, declining real interest rates helped to push up gold prices. In 2019, nominal Treasury yields fell as the U.S. Federal Reserve pivoted back towards easing to stimulate a softening economy and offset trade tensions. Inflation expectations remained stable, so real interest rates drifted lower (Figure 2, top two charts). This decline in real yields accelerated in the first two months of 2020 amid brewing concerns about COVID’s impact on Chinese supply chains and global growth and expectations of further rate cuts. Figure 2 shows that by February, real rates on U.S. Treasuries were negative for maturities between 2 and 10 years. By early March, gold’s price had risen 30% relative to mid-2019 levels. 

But as the COVID crisis escalated and global equity markets plunged, real yields spiked. This reflected an abrupt collapse of inflationary expectations that more than offset the Fed’s rapid reduction of its target rate from 1.5% to zero. In fact, Figure 2 shows that the TIPS market briefly priced in nearly 1% deflation. The sharp drop in gold prices is consistent with Treasuries suddenly offering a comparatively attractive real yielding investment, and a rapid strengthening of the dollar added to the pressure (Figure 2, bottom chart). 

A macro environment conducive for gold would be one with falling nominal rates, rising inflation expectations, and a weakening dollar. During the acute March equity selloff, only the first of these conditions prevailed, and gold fell sharply. Since then, however, gold has risen to multi-year highs as inflationary expectations have rebounded while nominal rates have remained subdued and the dollar has partially reversed its sharp appreciation. Figure 3 contrasts macro conditions in terms of their favorability for gold between the violent equity selloff and the subsequent rebound. 

Figure 3: Favorability of Macro Conditions with Respect to Gold Prices

Source: Acadian Asset Management LLC. For illustrative purposes only.


While many investors view gold as a reliable safe haven in times of crisis, it has not always delivered on that expectation. The price of gold is influenced by macroeconomic and policy-driven factors, which must be considered in order to have a coherent picture of its behavior in relation to other assets. The interplay between nominal interest rates, inflation expectations, and the U.S. dollar helps to explain gold’s performance in the COVID crisis and offers a framework to understand why gold’s behavior might deviate from conventional wisdom in other circumstances.


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