How Closely Is the Interest Rate Linked to Gold?

No cash flows to offer

Gold is an investment class that, unlike others, bears no interest or dividends. For the time frame you hold gold, or for that matter, any other precious metal, there are no intermediary returns. 

One of today’s most important factors in the determination of the price of gold is the Fed’s potential interest rate hike. As the Fed plans to raise interest rates in December, investors are flocking to the interest-bearing assets, leaving behind gold, silver, and other precious metals.

How Closely Is the Interest Rate Linked to Gold?

Retreating prices

The chart above shows historical prices of gold versus two-year Treasury yields. From 1969, the prices of gold and the Treasury yields, or interest rates, moved in opposite directions for only about 50% of the time. Therefore, the correlation between the two isn’t high. However, the typical investor sees a longer-term inverse relationship between the two, which is exactly why precious metals are falling today as we wait for the December liftoff.

ETFs such as the SPDR S&P Metals and Mining ETF (XME) and the VanEck Vectors Junior Gold Miners ETF (GDXJ) have fallen in the past month due to the retreating price of gold and other precious metals. Mining companies such as Agnico Eagle Mines (AEM), Silver Wheaton (SLW), and Primero Mining (PPP) have also fallen significantly during the past month. These three companies together determine 10.4% of the price changes in the VanEck Vectors Gold Miners ETF (GDX).