Editor's note: Jimmy Zhu is a chief strategist at Singapore-based Fullerton Research. The article reflects the author's opinion, and not necessarily the views of CGTN.

The price of gold broke above 1,900 U.S. dollars per ounce for the first time since 2011 on Friday, not far away from its all-time high at 1,921 U.S. dollars nine years ago. Poor sentiment on the economic outlook and negative real rates are the main drivers. Analysis shows that gold may continue to move higher if the pandemic shows little sign of easing.

The coronavirus started spreading globally since beginning of the March, the correlation between the S&P 500 index and gold stood at 0.83 in this period, while these two had a negative correlation in 2019. 

Such correlation has confused many traders: Is gold still considered a safe-haven asset?

Analysis shows that increasing correlation with the stock market doesn't mean gold has lost its safe-haven status. Certain amount of market participants continue to buy gold when their outlook on the upcoming economic activities are pessimistic – even as stock prices are approaching the pre-pandemic level.

Some data shows that sentiment on the growth recovery is still very poor. Citi U.S. economic surprise index is at 236.20 now, close to the highest level in history. 

Rising surprise index usually indicates the actual economic data is better than the earlier estimates, but it can also be argued the other way: Market sentiments on current economic outlook are far below the actual growth condition.

In other words, even with the improving economic data in recent months, many forecasters don't believe the recovery path will be smooth. 

Such kind of pessimistic sentiment can help explain the continued rise in gold prices. When the investors' outlook on the recovery is less certain, they will seek to increase those safe-haven assets holdings, such as gold and bonds into their portfolio, to hedge the risk.

Though investors don't expect the impact of the second COVID-19 wave on the economy to be less than the first one, fears of government shutting down some of the economic activities weigh on market sentiment. If the recent surge in new COVID-19 cases continues, there could be more inflows rushing to buy gold.

The S&P 500 index is now only five percent away from its historical level in February, but one important gauge shows that fears in Wall Street remain much higher than the normal levels before the pandemic. 

VIX, or volatility index, currently stands at 25.8, from around 15 in February, and much above the average level at 17.4 in the past 10 years. 

A higher VIX indicates higher uncertainties in the capital market and higher price volatility. Usually VIX below 12 is considered to be low, a level above 20 to be high, and a level in between considered as normal.

Negative real rates

Negative real rates in U.S. bonds are another key reason driving the gold rally. Currently the U.S.' real 10-year yield based in core CPI is at -0.53 percent. Real rates mean the difference between the government bond yield and the country's inflation.

Lower real rates can be caused by either lower government bond yield, or higher inflation, or both. When government bond yield offers a lower rate, investors' enthusiasm on such type of notes will decrease if all other macro conditions remain the same. They will seek other alternative investment instruments – gold and silver are some of them.

On the other hand, the Fed has injected trillions of dollars in liquidity into the financial system. In theory, such unprecedented amount of monetary stimulus is expected to accelerate the inflation growth in the future. 

Gold is also one of the ideal investment tools to hedge against inflation. Besides that, aggressive liquidity injection by the Fed is seen as a negative factor to the U.S. dollar, causing its value to be diluted. 

The dollar index is at 94.4, the lowest since September 2018, and lower the dollar usually means higher gold prices given their consistent high negative correlation.

Real interest rates are very important for gold prices than changes in any other rates, such as policy rates. Generally, real interest rates are negatively correlated with the price of gold. Analysis shows negative correlation between the U.S. 10-year real rates and gold stood at 0.72 over the past 20 years.