The Main Driver of Gold
Biggest influence on the gold price investors should know.
The real interest rate on US bonds is highly correlated to the price of gold. Real interest rates are the nominal yield paid by bonds (the cash you receive) minus expected inflation. Let’s say 10 year US treasury bonds pay 1% per year but inflation is 2%, the real yield is -1% (you would lose money every year in terms of purchasing power, even though your bank account shows gains of +1%).
These real interest rates are the most important factor for $GOLD. You can see in the chart that lower real rates lead to higher gold prices.
For example from 2018 to 2020, when real rates fell from about +1% to -1%, gold went up heavily. Holding the world reserve currency becomes simply less attractive, gold as a currency gains popularity.
Correlation to inflation
There are circumstances when gold shows weakness, even though inflation expectations are up. The reason are rising interest rates on longer term bonds. So if inflation rises but you get as well more compensation for your dollar holdings (US bonds), gold doesn’t have an advantage. But if inflation rises quicker than the interest paid on bonds (-> real interest rates fall), gold shines literally.
Outlook
If interest rates rise, at one point the US would have trouble to service its already huge debt and the FED would likely lower the interest rates on long term bonds by buying a lot of them (also called “yield curve control”). This would lead to lower real interest rates again and a rise in gold.
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