The chart below shows the US real interest rate over the past 60 years. The shaded areas are periods in which gold experienced a bull market. As you can see, these periods occurred when real interest rates were low or negative and highly volatile. By contrast, the gold bear market of the 1980s and 1990s occurred when real interest rates were higher, positive, and relatively steady. (Prior to the late 1960s, the gold price was still heavily influenced by the Bretton Woods system and gold prices were fairly flat.)
Source: Plan B Economics
While this does not prove the causality of the relationship, it makes sense intuitively. Gold performs well during periods of negative real interest rates because there are fewer alternatives for investors seeking to preserve capital and purchasing power. If a US Treasury bond provides a negative after-inflation yield, can it still be considered a safe haven? Most sophisticated investors would answer "no," because it's a money-loser right out of the gate (and has a lot of downside risk if nominal yields rise).
Additionally, real interest rate volatility implies that investors are uncertain about Treasury prices and future inflation. This could be caused by financial conditions that are strained beyond the realm of the normal business cycle, such as an unresolved global banking crisis or unsustainable debt. We're facing both of these crises today.
The Big Picture
Even during periods of negative real interest rates, there are times when US Treasuries perform well in comparison to hard assets - usually during short-term periods of financial stress when investors are scrambling. However, under normal conditions, a US Treasury bond can be expected to provide a total return that is close to its coupon rate, which today is below the rate of inflation.
Any investor using real interest rates to gauge the gold bull market must look through short-term fluctuations to see the secular trend. And today - while the US is overloaded with debt and the Federal Reserve is printing money without hesitation - the secular trend of negative real interest rates remains intact.
What does this mean for the current gold bull market? One day, the gold bull market will end, but given the current outlook for continued negative and volatile real interest rates, the evidence suggests that day is well in the future.
Mark Motive is the pen name of a respected business journalist. He is the author and editor of Plan B Economics, a source for insights into finance and economics. Follow him on Twitter for free eBooks, documentaries and more: @planbeconomics read full article here
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