Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for March 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for March 2024 (Final)
1st ETF 2nd ETF 3rd ETF

Gold Price and U.S. Interest Rates

| | Posted in: Gold

Do recent reactions of gold price to interest rate-related U.S. economic announcements (rising on rate-suppressing news) mean that gold acts like a bond? In their September 2013 paper entitled “What if Gold is a Bond?”, Claude Erb and Campbell Harvey re-examine the relationship between gold price and interest rates as proxied by U.S. government bond prices. Using monthly spot gold price, 10-year U.S. Treasury note (T-note) yield and U.S. Treasury Inflation-Protected Securities (TIPS) yield as available during January 1975 through August 2013, they find that:

  • Since the inception of TIPs trading in 1997, lower real and nominal U.S. interest rates relate to a higher nominal gold price. In both cases, the R-squared statistic is above 0.72, indicating that changes in interest rates explain at least 72% of the variation in gold price.
  • If this recent negative relationship persists, an increase in interest rates to a moderate 4% means that gold price would fall below $1,000.
  • However, since the beginning of 1975, the correlation between gold price and nominal T-note yield is negative, positive or non-existent during different subperiods (see the chart below). This inconsistency undermines belief that gold consistently acts like a bond.

The following scatter plot, taken from the paper, relates gold price to nominal T-note yield during three subperiods since the inception of legal gold futures trading in the U.S., as follows:

  1. January 1975-September 1980: gold price increases sharply (to an all-time high in real terms), with the relationship between gold price and T-note yield significantly positive.
  2. October 1980-August 1999: nominal gold price persistently declines, with no significant relationship between gold price and T-note yield.
  3. September 1999-August 2013: gold price generally rises, with a strong negative relationship between gold price and T-note yield.

Essentially, the relationship between gold price and T-note yield is positive, negative or non-existent depending on the subsample.

gold-price-vs-tnote-yield

In summary, evidence since 1975 does not support belief in a persistent relationship between gold price and U.S. interest rates.

Cautions regarding findings include:

  • Results perhaps suggest an unexplored non-linear relationship between gold price and interest rates.
  • The analysis is U.S.-centric.

See “Future of the Price of Gold” for broader speculations on the price of gold by the same authors.

Login
Daily Email Updates
Filter Research
  • Research Categories (select one or more)