Gold: Short End U.S. Rates Matter More Than Long End Real Yields

In the years following the GFC, short end yields in the US were contained for an extended period of time as the Fed committed to keeping rates on hold. Given the static nature of the short end, and the shift of monetary policy implications further out the curve through QE programs, long end US rates became the focus. When discussing the drivers of gold prices, long end US real rates (the yield on inflation protected bonds) was the critical factor. However over the past couple of years, the Fed has hiked rates twice, and we now have live meetings with an active short end. This has reduced the impact of long end real rates on gold, and instead shifted the focus to the short end. We now form our view on gold prices overwhelming based on short end rates, as opposed to long end yields. Our bearish view on gold prices is derived from a Fed hike in June.
The Historical Correlation
Looking back at the relationship between gold prices and US real rates there is a solid case. We wrote about it at length through 2010-2012 ( The Key Relationship between US Real Rates and Gold Prices) and specifically how it replaced the typical inverse relationship between the USD and gold that had been observed in the past. We will use simple regressions from GLD, the gold ETF and TIP, an ETF that tracks the performance of TIPS - Treasury Inflation Protected Securities - in effect real yields. Over a long term time frame the regression appears solid, with an R-squared value of 0.7742 - meaning that... Read more