One of the few things that is commonly believed about this is actually true is that gold tends to become more valuable when the real rate of interest tends to fall and less valuable when the rate real interest tends to increase. Moreover, although the trend in real interest rates is only one of seven inputs to our Gold True Fundamentals (GTFM) model and generally does not have a larger effect than the other inputs, over the three months, it has clearly been the dominant fundamental influence. on the price of gold in USD. This led us to ask ourselves: have there been times in the past when the change in the real interest rate has taken precedence over all other considerations?
Before we answer the question above, we’ll reiterate a point we’ve made many times in the past, which is that the only way to get an accurate reading of the trend in real interest rates in the United States is US is via Treasury Inflation-Protected Yields (TIPS). Unfortunately, the market did not exist before 2003, so there is no way to measure the performance of real interest rates in earlier periods. In particular, it would be extremely useful to know the performance of real interest rates during the 1970s (the last time “inflation” was widely considered “public enemy No. 1”), but the information is simply not available. It is tempting to calculate the real interest rate that prevailed in past periods using what is available, for example by subtracting the year-over-year change in the CPI from the nominal interest rate. However, you cannot compensate for the lack of a legitimate number by using a fake number.
As far as we can tell, in the 19.5 years since the inception of the TIPS market, there has only been one other multi-month period in which the rate trend real interest rates caused a significant change in the price of gold which was contrary to the global fundamental. background. This period was from March to October 2008, which is the first of three real interest rate hikes (10-year TIPS yield) shown in the following chart. From March to October 2008, the global fundamental environment was favorable for gold, but the rise in real interest rates was large enough and fast enough to overcome the bullish influences on the price of gold in usd.
Incidentally, the second of the three real interest rate hikes shown on the chart occurred from April to September 2013. This one is ineligible because it occurred when growth expectations economy were rising and the overall fundamental was bearish for gold.
Like the surge in real interest rates from March to October 2008, the one that began on March 8 of this year occurred alongside the collapse in economic growth forecasts. The difference is that while the spike in TIPS yield in 2008 was due to falling inflation expectations, the spike in 2022 was due to rising nominal interest rates.
Despite gold’s generally bullish fundamentals, in 2008 the price of gold in USD terms remained in a downward trend until the TIPS yield peaked. Gold then quickly retraced its decline and gold mining stocks rebounded like beach balls that had been held underwater. Based on how things are going, it’s likely something similar will happen this year.