XAUUSD: What's it worth? The correlation to real yields
This chart compares the real yield of long term Treasuries (top) to gold in USD (bottom). The real yield is the investor in long term Tresuries expects to receive after allowing for inflation (nominal interest rate minus the inflation rate). At a glance there's visibly a strong negative correlation betweeen real rates and the price of gold over time. Research by _Erb and Harvey showed a negative 82% correlation between real interest rates and gold prices from 1997 to 2012 (The Golden Dilemma).
The real yield on long term treasuries has fallen from over 3% in 2000 to negative yield in 2012-2013. During this period of time the price of gold gained over 600%. From 2012 the real yield increased approximately 1% to 2015, while the price of gold fell almost 40% during this time. Since 2014 the real yield has remained relatively steady under 1% while the price of gold has stayed between 1200-1400.
Gold is relatively expensive when the real yield on treasuries is high, and relatively cheap when the real yield on treasuries is low. If an investor can gain a high real yield after inflation by holding a 'risk free' treasury, then the opportunity cost of holding gold is comparatively high. This makes gold relatively less attractive since gold pays neither dividend nor interest. Treasury investors lose money during negative interest rates (when inflation is greater than the nominal interest rate). This makes gold more attractive despite having no yield.
The Long-Term Real Rate Average index shown in the chart is described by the Treasury as, "the unweighted average of bid real yields on all outstanding TIPS with remaing maturities of more than 10 years and is intended as a proxy for long-term real rates." The price of gold can be compared to real yeild of treasuries from short term to long term. Another interesting comparison is the 3 month rate minus _CPI inflation.
What's your thoughts? Do you expect the real yield on treasuries to increase or decrease in the years ahead? Where do you expect the price of gold will be in the coming years?
More info:
en.wikipedia.org/wiki/Real_interest_rate
papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
pimco.ca/en-ca/insights/viewpoints/demystifying-gold-prices
The real yield on long term treasuries has fallen from over 3% in 2000 to negative yield in 2012-2013. During this period of time the price of gold gained over 600%. From 2012 the real yield increased approximately 1% to 2015, while the price of gold fell almost 40% during this time. Since 2014 the real yield has remained relatively steady under 1% while the price of gold has stayed between 1200-1400.
Gold is relatively expensive when the real yield on treasuries is high, and relatively cheap when the real yield on treasuries is low. If an investor can gain a high real yield after inflation by holding a 'risk free' treasury, then the opportunity cost of holding gold is comparatively high. This makes gold relatively less attractive since gold pays neither dividend nor interest. Treasury investors lose money during negative interest rates (when inflation is greater than the nominal interest rate). This makes gold more attractive despite having no yield.
The Long-Term Real Rate Average index shown in the chart is described by the Treasury as, "the unweighted average of bid real yields on all outstanding TIPS with remaing maturities of more than 10 years and is intended as a proxy for long-term real rates." The price of gold can be compared to real yeild of treasuries from short term to long term. Another interesting comparison is the 3 month rate minus _CPI inflation.
What's your thoughts? Do you expect the real yield on treasuries to increase or decrease in the years ahead? Where do you expect the price of gold will be in the coming years?
More info:
en.wikipedia.org/wiki/Real_interest_rate
papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535
pimco.ca/en-ca/insights/viewpoints/demystifying-gold-prices
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