Finally, real rates have historically had little to no impact on equity returns.
As such, I wouldn’t advocate selling gold to buy gold miners, and I continue to advocate maintaining a strategic allocation to gold through funds that access the physical metal such as the iShares Gold Trust (IAU).
Market Realist – Real rates don’t impact equity returns. They have little impact on gold miners.
The graph above compares the S&P 500 Index (SPY)(IVV) with the real interest rate over the last 20 years. We used the year-over-year, or YoY, change in the CPI (consumer price index) to track inflation.
However, low inflation could support equities, as long as it isn’t due to deflationary pressures. Deflationary pressures hurt the economy due to a lack of demand.
As you can see, unlike gold (GLD), equities aren’t correlated to real interest rates. As we saw in the first part of this series, gold does very well when interest rates are low. Gold doesn’t do well when interest rates are high. However, gold miners (GDX) have a relatively low correlation with real interest rates. Gold miners are equities.
If real interest rates remain subdued, gold could continue to outperform gold miners.
To sum it up, gold could continue to outperform gold miners as well as equity markets. Equity markets could be choppy for some time now. With Treasuries (TLT) looking quite expensive at the moment, gold seems to be the only “cheap” safe haven.
Please read Market Realist’s series A two-pronged case for holding gold for more on why gold prices could continue to rise.