We often hear that Gold prices are driven by real interest rates. Rising real interest rates are said to be bad for Gold because it increases the opportunity cost of holding the yellow metal. This makes sense intuitively as Gold pays no interest or dividend, and will therefore be less attractive as compared to risk-free bonds when real interest rates are higher.
But Gold is a complex animal, influenced by a multitude of factors, only one of which is real interest rates. How much do changes in real interest rates alone impact the the price of Gold? And is it only the change in real interest rates that’s important or the absolute level as well? Let’s take a look…
Since 1975 (when Gold futures began trading), there has been an inverse relationship between Gold and real interest rates. Gold has generated positive returns during periods of falling real interest rates and negative returns during periods of rising real interest rates. This is true whether we look at monthly changes (+13.9%/-3.9% during falling/rising periods) in real interest rates or year-over-year changes (+11.0%/-0.3% during falling/rising periods).
Data Sources for all charts/tables herein: Stockcharts.com, FRED
The odds of a positive return for Gold are significantly higher when 10-year yields are falling as opposed to rising.
Changes in real interest rates clearly have an impact on the price of Gold. But how often does this relationship hold?
With a correlation of -0.39, more often than not Gold and real 10-Year yields are moving in opposite directions. You can observe this tendency in the chart below.
Note: Year-over-year percent change in Gold is divided by 20 in this chart to more closely align with changes in 10-year Treasury Yields.
But more often than not is far from always. Gold and real 10-Year Yields have historically moved in opposite directions only 56% of the time. That means in 44% of rolling one-year periods they are actually moving together, with Gold moving higher in spite of a rising real 10-year yield or lower in spite of a falling real 10-year yield.
Thus far we’ve limited our discussion to changes in real yields. What about absolute levels – is there any relationship there? What we find is that Gold has performed worse during periods of high real yields and better during periods of low real yields.
Breaking it down further, we find wide divergences at the extremes. In the top decile of real yields (above 5.8%), Gold has produced an annualized return of -4.7% versus a +32.7% annualized return in the bottom decile of real yields (below -0.3%).
What environment are we in today?
Very low (9th decile) but gradually rising real yields.
Over the past year, real 10-Year Treasury yields have risen by 0.62%, from .02% to 0.64%. At the same time, Gold has advanced 6.1%.
Is that at odds with the data suggesting they are negatively correlated? Not at all. Remember, a correlation of -0.39 does not imply anything close to a perfect inverse relationship. Gold has moved in the same direction as real interest rates 44% of the time historically. This is just the latest example.
In explaining movements in the price of Gold, real yields are only one part of a complex story. All else equal, higher/rising real rates seem to be worse for gold than lower/falling real rates, but when it comes to markets all else is never equal.