Real Rates vs. Gold: The Direction of Travel

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?