Understanding Gold Prices

To understand how, it helps to start with a simple example. Pretend there was an asset that had no risk of default and a real – that is, inflation-adjusted – value that varied over time but did so around some constant level. In other words, this asset has no credit risk and in the long run maintains its purchasing power. How much would investors pay for it? Whatever the amount, it would likely vary over time with the level of real yields available in high quality, nearly “default-free” assets (such as U.S. Treasuries). That is, when real yields on other such assets are high, investors would likely want a bigger discount to the long-run estimated real value of the hypothetical asset. Conversely, when real yields are low, the opportunity cost of owning the asset drops and investors would likely be willing to pay a higher price relative to the asset's long-run estimated real value.

In essence, this guides how PIMCO thinks of gold. And the market seems to view gold this way as well; over nearly two decades, gold prices have been heavily influenced by the level of 10-year U.S. real yields (see Figure 1).

Figure 1: Gold prices are heavily influenced by 10-year real yields.

As of 30 April 2024

Source: Bloomberg, PIMCO data

To understand how, it helps to start with a simple example. Pretend there was an asset that had no risk of default and a real – that is, inflation-adjusted – value that varied over time but did so around some constant level. In other words, this asset has no credit risk and in the long run maintains its purchasing power. How much would investors pay for it? Whatever the amount, it would likely vary over time with the level of real yields available in high quality, nearly “default-free” assets (such as U.S. Treasuries). That is, when real yields on other such assets are high, investors would likely want a bigger discount to the long-run estimated real value of the hypothetical asset. Conversely, when real yields are low, the opportunity cost of owning the asset drops and investors would likely be willing to pay a higher price relative to the asset's long-run estimated real value.

In essence, this guides how PIMCO thinks of gold. And the market seems to view gold this way as well; over nearly two decades, gold prices have been heavily influenced by the level of 10-year U.S. real yields (see Figure 1).

Figure 2: Movements of real-yield-adjusted gold prices versus spot prices.

As of 30 April 2024

Source: Bloomberg, PIMCO data

To understand how, it helps to start with a simple example. Pretend there was an asset that had no risk of default and a real – that is, inflation-adjusted – value that varied over time but did so around some constant level. In other words, this asset has no credit risk and in the long run maintains its purchasing power. How much would investors pay for it? Whatever the amount, it would likely vary over time with the level of real yields available in high quality, nearly “default-free” assets (such as U.S. Treasuries). That is, when real yields on other such assets are high, investors would likely want a bigger discount to the long-run estimated real value of the hypothetical asset. Conversely, when real yields are low, the opportunity cost of owning the asset drops and investors would likely be willing to pay a higher price relative to the asset's long-run estimated real value.

In essence, this guides how PIMCO thinks of gold. And the market seems to view gold this way as well; over nearly two decades, gold prices have been heavily influenced by the level of 10-year U.S. real yields (see Figure 1).

What’s Behind Gold’s Appeal?²

Gold is considered a durable store of value and a hedge against inflation.
Gold tends to rise during periods of high inflation, as well as economic and geopolitical uncertainty.
Gold reached nearly $2,075/ounce (in non-inflation-adjusted terms) in 2020 as the COVID-19 pandemic spread and spiked again above $2,000/ounce during the onset of the war in Ukraine. In 2024, gold reached an all-time high of over $2,200/ounce (in non-inflation-adjusted terms), driven by sticky central banks buying.

Disclosures

Unless stated otherwise, information contained herein is as of 30 April 2024. The information may be stale and should not be relied upon.

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors.

There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, investment product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Investors should consult their investment professional prior to making an investment decision.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world.

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Understanding Gold Prices

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