There are a handful of reasons, but I want to highlight one
– real interest rates are really, really low.
The real interest rate is what you get once inflation is taken into
account. For example, the interest rate
is 4% and inflation is 1.5% the real rate is 2.5% (note: actual equation is not
as straightforward, thus real rate shown is for the sake of simplicity). So why does this matter?
One of the drawbacks of holding gold is that you are paid
nothing when you purchase it. If I hold
a bond, for instance, I am paid an interest rate bi-annually for providing my
capital. On the other hand, if I hold
gold, not only I am not paid for providing capital, but it costs me capital to
hold it (e.g. a safe).
Today the real interest rate on a 10 year bond (10 year
yield taking into account 10 year inflation expectations) is at roughly .20%,
close to an all-time low. In fact, real
rates have been trending down for a long time.
During that time, gold has increased in value. The negative correlation, while moderate, is
pretty clear:
The negative correlation picks up as real yields fall for a
sustained period, although interestingly is uncorrelated when real yields drop
below 1. That maybe indicates something
else drives prices as the benefit from a low opportunity cost of holding gold
is being reduced.
