Why real interest rates affect gold prices



4. All else equal, central bank buying is supportive of gold. Another consideration is that while gold is hard to value, it has performed better in certain environments. Historically, gold has done best when real or inflation adjusted interest rates are low, as they are today. The reason is: when real rates are low there is less of an opportunity cost, in the form of foregone income, to holding gold. To the extent central banks, including the ECB and BOJ, maintain an accommodative monetary policy; all else equal this should be supportive of gold.

Market Realist – The graph above shows real interest rates and gold prices in the last ten years. The bank prime loan rate serves as a proxy for nominal interest rates. Nominal interest rates minus the inflation rate result in real interest rates.

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Gold (GLD)(IAU) prices have moved up when real interest rates remained low. With the bond (BND) buying program ended last month, the Fed could increase rates soon. This will increase real rates if inflation remains constant—which seems likely, given how inflation has remained below 2% despite the Fed’s efforts to move it higher. The rising real rate decreases the attractiveness of investing in gold since investors would rather invest in more attractive bank deposits.

But U.S. (SPY)(IVV) and international equities (QWLD) may still provide better returns. The recovery in major global economies should gain momentum over the next few years.


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