Real Interest Rates Are a Major Factor Impacting Gold Prices



Tracking interest rates

For US real interest rates, we’re using the three-month Treasury bill rate minus the YoY (year-over-year) change in the CPI (consumer price index). The CPI measures the price paid by consumers for a basket of consumer goods and services. Real interest rates have been turning positive as inflation remains low and yields are increasing.

When a rate hike occurs, the entire yield curve is impacted. Short-term rates rise in response to a hike in the federal funds rate, which is a short-term rate. On the other hand, long-term rates rise in anticipation of higher inflation.

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Higher interest rates usually make newly minted bonds more attractive and diminish the value of outstanding bonds. Fed chair Janet Yellen’s comments about the possibility of an interest rate hike later this year led investors away from safe assets such as US Treasury bonds. This sell-off pushed prices lower, increasing the yields.

Real interest rates and gold

Gold is used as an investment alternative because investors perceive it as a way to protect money’s purchasing power. As an investment, gold must compete against other investments that are available in the market.

The interest rate is a major factor because it determines the attractiveness of the investment alternatives. If the real interest rate—interest rate adjusted for inflation—goes up, then the demand for those interest-yielding assets increases and the demand for gold falls, and vice versa.

Gold prices have an inverse relationship with real interest rates. As a result, increasing real interest rates are negative for gold prices and gold-backed ETFs like the SPDR Gold Trust ETF (GLD).

Rising real interest rates are negative for companies like Aurico Gold (AUQ), Alamos Gold (AGI), and Iamgold (IAG). They are also negative for funds like the VanEck Vectors Gold Miners ETF (GDX). Together, these companies contribute 2.9% toward GDX’s holdings.

Investors who are interested in making directional bets on interest rates should look at the iShares Barclays 20+ Year Treasury Bond ETF (TLT).


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