Gold and the “real” interest rate

It is well known that the USD often moves in the opposite direction to the US real interest rate. This relationship is illustrated by the following chart in which the real interest rate is represented by the 10-year Treasury Inflation Protected Security (TIPS) yield.

Note that the 10-year TIPS yield just turned negative and the previous two times this real interest rate proxy turned negative, the price of gold was at an important high. More specifically, the real interest rate turned negative in August 2011 coincided with a long-term peak in the price of gold and the real interest rate turned negative in July 2016 coincided with a medium-term peak in the price. gold.

If gold tends to benefit from a lower real interest rate, why would the price of gold reverse lower soon after the real interest rate turns negative?

10-year TIPS yield relative to the 2009-2019 gold price

10-year TIPS yield relative to the 2009-2019 gold price

Looking only at the 2016 case, the answer to the above question seems obvious, as in July 2016, TIPS performance reversed course and began to rise soon after dipping into negative territory. In other words, the downward reversal in the price of gold coincided with an upward reversal in the real interest rate. However, in 2011-2012, the real interest rate continued its downward trend for more than a year after the gold price peaked.

We believe there are two reasons why the price of gold did not register further gains in 2011-2012 after the real interest rate turned negative. First, the real interest rate is only one of many fundamental factors in the price of gold (the 10-year TIPS yield is one of the seven inputs to our Gold True Fundamentals model) , and after August 2011, the upward pressure exerted by a falling real interest rate was offset by the downward pressure exerted by other fundamental influences. Second, in August 2011, a further significant drop in the real interest rate was factored into the current price of gold.

The risk right now is that in the short term, the underlying uptrend environment, including the potential for a further decline in the “real interest rate”, will be fully captured by the current price. This risk is evidenced by the fact that the ExCom’s net long speculative position on gold futures contracts is very close to an all-time high. It is also highlighted by the fact that the RSI displayed in the lower section of the following weekly chart is almost as high as ever.

Weekly Gold

Weekly Gold

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