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Real Rates vs. Gold: The Direction of Travel

Monday, 3/04/2013 18:31

How and why real interest rates matter to the gold price...

WALL STREET is fast deciding that gold is a sell, writes Adrian Ash at BullionVault. Because interest rates are set to rise sooner than they formerly guessed.

That view is only half-wrong. Central banks aren't about to hike the returns on cash savings, which have been a wasting asset pretty much non-stop since 2007.

But when the central banks do move to defend the real value of cash by hiking rates, gold is likely to suffer – provided those hikes actually outpace inflation. Because it's the direction of travel to watch, not any particular level.


See the two fake-outs above? The first, in the mid-1970s, saw gold prices halve in just 18 months, even though the real rate of interest stayed below zero for much of that time.

And once the direction of travel in real interest rates turned round, gold began the second leg of its 1970s' bull market, rising 8-fold between the end of 1976 and the start of 1980.

The second feint came in early 2009, when T-bond yields held steady but inflation went negative on the official CPI index at least. The gold market didn't buy for one second the idea that real rates would stay positive. The Fed wouldn't allow it, gold buyers reasoned (whether they knew it or not). Which now looks a smart call.

Since then, the very worst real rates were offered in September 2011, right when the Dollar gold price hit its current peak of $1920 per ounce. Since then real rates have crept higher. No, today's mere 0.4% might not sound like much. But it's been enough to flatline the gold bull.

Do you think the Fed will now allow or reverse these above-zero debt costs for the US Treasury?

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews, or get more from Adrian Ash on Google+

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News, RSS links are shown there.

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