Capital Economics: Gold Still Retains Hedging Value, But Short-Term Performance Is Constrained by Real Yields and Rate Cut Expectations

(1) Strategist Thomas Mathews believes that gold still retains its value as a hedge during stock market downturns; however, its recent price volatility is comparable to the S&P 500 Index, behaving more like a risk asset than a traditional safe-haven asset.(2) Due to the impact of conflicts in the Middle East, gold has shown weak performance lately, seemingly undermining its role as an inflation hedge; nevertheless, gold remains correlated with real bond yields, and a decline in real yields is expected to boost gold prices.(3) If the U.S. economy suffers a shock and prompts the Federal Reserve to cut rates significantly, gold’s current positive correlation with the stock market is unlikely to persist, and its safe-haven function may reemerge at that time.