Real Interest Rates move inversely of Gold. Gold's next move will be dependent on a continually decreasing Real Interest Rate.
From 2000 to 2011, Gold increased from $260 to $1900. In 2000, Real Rates were roughly at 5%. In 2011, Real Rates were at -1.7%. A significant drop in Real Rates contributed to Gold's price appreciation.
From 2015 to 2020, Real Rates decreased from 2% to -0.5%. Gold appreciated from $1000 to $2000. Will Real Rates continue to churn lower to lift Gold?
Before inflation broke out in March 2021 inflation was at 1.5%. One year later inflation is at 7.5%. Since March 2021, Gold saw an increase from 1675 to 1900. This increase is due to a decrease in the real interest rate. Real interest rates decreased from -0.5% to -6%.
Real interest rates are at around -6% mainly due high inflation readings. With the inflation rate moving higher and bond yields staying tempered, Real Rates went deeply negative. However, with such a drastic decrease in real interest rates; Gold didn't move too much higher. Why is this?
My guess is that it is because nominal interest rates have not declined much. Only when nominal interest rates decline is there a greater incentive to take on the "cost of carry". If an investor is looking to take on the opportunity cost of carrying a yieldless asset; there is no guaranteed payment. Profit is only realized by an increase in value during the carrying period. When investing in yieldless assets you want to make sure that the opportunity cost is zero resulting in a positive carry.
Real Interest Rates = US10Y - Inflation rate.
When the US10Y rate is lower say it decreases from 3% to 2% and say the inflation rate is 2.5%. At 3% yield on the US10Y we profit 3%-2.5%=0.5% however when the US10Y decreases to 2% we lose 2%-2.5%=-0.5%. When the difference is negative you do not want to be holding cash or treasuries. Gold is the better alternative. As the US10Y increases faster than the inflation rate, the cost of carry is greater and yields become more attractive. Without any yield, Gold investors need to rely on the price of gold to appreciate faster than inflation . When nominal yields ( US10Y ) decrease it gives way for a larger real interest rate - appreciating gold's value.
If inflation slows down, real interest rates will increase dropping Gold's value. If nominal rates decline, real interest rates will decrease. If inflation rises, real interest rates will decrease. If nominal rates increase, real interest rates will increase. And real interest rates move inversely of Gold.
The topping pattern forming in Gold since 2020 is eerily similar to the 2011 topping pattern. I believe the inflation rate will start to come down a lot faster than any decrease in the 10 year note; leading to more positive real interest rates. How much lower can real interest rates decrease so, Gold remains bullish??
From 2000 to 2011, Gold increased from $260 to $1900. In 2000, Real Rates were roughly at 5%. In 2011, Real Rates were at -1.7%. A significant drop in Real Rates contributed to Gold's price appreciation.
From 2015 to 2020, Real Rates decreased from 2% to -0.5%. Gold appreciated from $1000 to $2000. Will Real Rates continue to churn lower to lift Gold?
Before inflation broke out in March 2021 inflation was at 1.5%. One year later inflation is at 7.5%. Since March 2021, Gold saw an increase from 1675 to 1900. This increase is due to a decrease in the real interest rate. Real interest rates decreased from -0.5% to -6%.
Real interest rates are at around -6% mainly due high inflation readings. With the inflation rate moving higher and bond yields staying tempered, Real Rates went deeply negative. However, with such a drastic decrease in real interest rates; Gold didn't move too much higher. Why is this?
My guess is that it is because nominal interest rates have not declined much. Only when nominal interest rates decline is there a greater incentive to take on the "cost of carry". If an investor is looking to take on the opportunity cost of carrying a yieldless asset; there is no guaranteed payment. Profit is only realized by an increase in value during the carrying period. When investing in yieldless assets you want to make sure that the opportunity cost is zero resulting in a positive carry.
Real Interest Rates = US10Y - Inflation rate.
When the US10Y rate is lower say it decreases from 3% to 2% and say the inflation rate is 2.5%. At 3% yield on the US10Y we profit 3%-2.5%=0.5% however when the US10Y decreases to 2% we lose 2%-2.5%=-0.5%. When the difference is negative you do not want to be holding cash or treasuries. Gold is the better alternative. As the US10Y increases faster than the inflation rate, the cost of carry is greater and yields become more attractive. Without any yield, Gold investors need to rely on the price of gold to appreciate faster than inflation . When nominal yields ( US10Y ) decrease it gives way for a larger real interest rate - appreciating gold's value.
If inflation slows down, real interest rates will increase dropping Gold's value. If nominal rates decline, real interest rates will decrease. If inflation rises, real interest rates will decrease. If nominal rates increase, real interest rates will increase. And real interest rates move inversely of Gold.
The topping pattern forming in Gold since 2020 is eerily similar to the 2011 topping pattern. I believe the inflation rate will start to come down a lot faster than any decrease in the 10 year note; leading to more positive real interest rates. How much lower can real interest rates decrease so, Gold remains bullish??
Comment:
Gold is moving up due to lower rates
Comment:
clarifiication: lower nominal rates
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Comment:
Now as rates Go up, Gold goes down.....
