We have written about the surprising lack of gold price gains with the surge in inflation. A reader has commented that it is the real rate of interest that is important, not inflation. Unfortunately, the data does not seem to show a close relationship.

If the real rate of interest is positive there is a cost with holding a non-interest bearing asset such as gold. Similarly, if the real rate of interest is negative, the opportunity cost of holding gold is diminished. A graph of the real rate in the US versus gold seems inconsistent with this opportunity cost story. While there is a relationship around some key periods, the gold real rate story is not strong in the short-run. In the longer-run, the surge in gold was tied to a decline in the real rate, but the relationship is not linear. There will be surges in gold prices during a crisis or when there is a decline in real rates below 1-2%. It is the surprise in inflation that matters.

 

 

 

 

 

 

 

 

 

 

The relationship between gold and the dollar is stronger as evidenced by the graph. The increase in the dollar more closely matches the decline in gold prices during the post Financial Crisis period.

Gold is closely tied to expectations across a number of factors, and the emphasis on each factor is not constant.