Why do real interest rates impact gold?
Gold is used as an investment alternative. Investors think that it protects money’s purchasing power. As an investment, it has to compete against other investments that are available in the market. The interest rate is one of the biggest components. It determines the attractiveness of the other investment alternatives.
Real interest rates are adjusted for inflation. As real interest rates rise, other investments usually become more attractive. This reduces the demand for gold and vice versa. Gold usually holds an inverse relationship with real interest rates.
Tracking interest rates
For the U.S. real interest rates, we’ll use the three-month Treasury bill (or T-bill) rate minus the year-over-year (or YoY) change in the Consumer Price Index (or CPI). The CPI measures the prices consumers pay for a market basket of consumer goods and services. The CPI data is released by the Bureau of Labor Statistics (or BLS) on a monthly basis.
Increasing U.S. real interest rates
The three-month real interest rates are still negative. However, they’ve started increasing due to falling inflation in the U.S. For September, the CPI was 1.7%. It was the same in August. It was 2% for July and 2.1% for June. The real interest rate for September was the same as August. It was -1.68% for August—compared to -1.98% for July and close to -2% for June.
Gold prices have an inverse relationship with real interest rates. As a result, rising real interest rates are negative for gold prices and gold-backed exchange-traded funds (or ETFs) like the SPDR Gold Shares (GLD).
Rising real interest rates are also negative for companies like Goldcorp Inc. (or GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Kinross (or KGC), Yamana Gold (or AUY), and ETFs like the Gold Miners Index (GDX).
In this scenario, investors can also look for ETFs that invest in U.S. Treasury bonds—like the iShares 20+ Year Treasury Bond ETF (TLT).