Truths and Misconceptions About the Relationship of Gold and Interest Rates

Truth:
Gold prices are driven not by nominal rates (which are not adjusted for inflation), but by real interest rates (which are nominal rates adjusted for inflation).

Misconception:
No relation of – gold and the federal funds rate.
Chart from 1993-2006 shows that while federal funds rate fluctuated, the gold stayed unrelated to its changes.

 

Misconception:
No relation of – between gold and nominal bond yields
10-year treasury constant maturity rate and gold price
chart from 1968-2013, confirming no direct relation.


Relationship that does exist is gold and real interest rates.

This chart shows significant negative (inverted) correlation between real interest rates and price of gold between 2003 and 2015:

Real Interest Rates are interest rates adjusted for inflation – the negative real interest rates are one of the most important drivers of the rallies in gold prices.

Inflation is a decrease in value of money caused by printing more money. 10-year inflation indexed treasury rate is a proxy for long-term US real interest rates.

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