Real Interest Rates and Gold

The comments below are an edited and abridged synopsis of an article by Richard Mills

Several factors influence gold prices (mainly the US dollar, gold ETF inflows/ outflows, inflation rates, bond yields, safe-haven demand, physical gold demand, gold supply), but none is more reliable than real interest rates.

Real Interest Rates and Gold | BullionBuzz | Nick's Top Six
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The demand for gold moves inversely to interest rates—the higher the rate of interest, the lower the demand for gold; the lower the rate of interest, the higher the demand for gold.

This is because when real interest rates are low/below zero, cash and bonds fall out of favour because the real return is lower than inflation. Gold offers a return greater than inflation by its rising price, or no loss of purchasing power.

Gold is destined for the next leg up once investors realize the US dollar is being massively devalued.

Consider: gold prices move higher when the dollar drops. Right now, the US dollar index is holding around 90, but what happens when people realize the federal government has depreciated the dollar by spending $6.5 trillion using borrowed money, plus the Fed’s $7 trillion, meaning the purchasing power of the dollar has been cut in half? The equivalent of half the $28-trillion national debt? And with trillions more of debt to come, there is only one way for the dollar to go.

Up for discussion: Commodities are strong; money-printing mayhem; drowning in debt; inflation is already here and rising; a falling dollar; and buy the dip.

In conclusion: Higher inflation is good for gold especially if Treasury yields don’t get too high, a situation that would give negative real interest rates. Historically, when yields go negative, gold goes up.

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