Gold, a traditional safe-haven asset, has long been known for its inverse relationship with US real interest rates. Typically, as real interest rates rise, the opportunity cost of holding non-yielding gold increases, leading to lower gold prices.

However, recent developments suggest that this well-established pattern may have changed.

In a recent report, Global X’s Billy Leung, Mark Jocum and Justin Lin noted that gold has hit multiple all-time highs over the past two years despite rising US real rates, raising the question of whether the traditional relationship between gold and real yields dissolved?

"We don't think so," analysts said.

"Although rare, gold has shown a positive correlation with US interest rates at certain points in history. A recent example is the COVID-19 pandemic, when both real yields and gold prices collapsed in early 2020. For a more comparable time frame, we can look at two other periods: Fed Chairman Volcker's fight against inflation in the late 1970s to early 1980s, and the three-year run-up to the global financial crisis,” they said.

From 2022 investors are witnessing high levels of inflation, geopolitical conflicts and economic slowdowns that reflect these historical scenarios. Despite rising real interest rates, these factors are driving demand for gold, supporting its price.

"From 2022 we've experienced our highest inflation in 40 years, Russia invading Ukraine, China's economic engine collapsing, and multiple escalations in the Middle East conflict. All of these catalysts have acted as drivers of demand for gold, allowing it to perform despite the historic rate-hike cycle,” said Leung, Jocum and Lin.

"However... these factors will eventually cool and the historical negative correlation between gold and real yields may return to provide a positive tailwind through the coming rate cut cycle," they added.

A recent Global X analysis estimated that gold prices typically rise by about $400 for every 1 percent decline in real yields. Based on this model, gold could reach approximately $2,885 by December 2025, assuming current conditions remain constant.

However, major financial institutions such as JP Morgan, Morgan Stanley, Citibank and Goldman Sachs forecast a more conservative target of $2,760 by the end of 2025.

"Overall, this pooled average appears more reasonable than the nearly US$2,900 figure our analysis arrived at," the analysts said.

“Our simulation assumes that the current environment remains unchanged and only real rates are adjusted. The current environment is one of a weakening labor market, a weakening Chinese economy, rising US defaults and an equity market begging for a rate cut by the Federal Reserve.

"That probably won't be the case as we move into 2025." Analysts have steadily downgraded the odds of a recession over the past few months, with Bloomberg's Recession Probability Forecast Index now showing just a 30 percent chance by August 2024. "

Ultimately, the trio said gold's future performance largely depends on the Fed's actions and broader economic conditions.

“In the context of the two possible scenarios under which the Fed could cut rates: a soft landing versus a hard landing, our primary price objective appears to account for the latter, where the US recession drives gold demand.

"In the more likely soft landing scenario, gold is likely to underperform real interest rates, but still benefit from the overall decline in opportunity costs."