Current Macro Factors Driving Gold and Silver Prices
Declining US real interest rates
The three-month US real interest rate (nominal rates adjusted for inflation) declined in May. The yield on three-month Treasury securities fell to 0% in May and June from 0.1%–0.2% in April. The CPI (consumer price index) for May was 0.03%, so the real interest rate was -0.03% for May over 0.11% for April.
Tracking interest rates
In the above analysis, we’re using the three-month Treasury bill rate minus the YoY (year-over-year) change in the CPI for US real interest rates. The CPI measures the price paid by consumers for a basket of consumer goods and services.
Real interest rates and gold
Gold is used as an investment alternative because investors perceive it as a way to protect money’s purchasing power. As an investment, gold must compete against other investments that are available in the market.
The interest rate is a major factor because it determines the attractiveness of investment alternatives. If the real interest rate—interest rate adjusted for inflation—goes up, then the demand for those interest-yielding assets increases and the demand for gold falls and vice versa.
Gold prices have an inverse relationship with real interest rates. As a result, decreasing real interest rates are positive for gold prices and gold-backed ETFs such as the SPDR Gold Trust ETF (GLD).
Falling real interest rates are also positive for companies including AuRico Gold (AUQ), Alamos Gold (AGI), and Iamgold (IAG). They’re also positive for funds including the Market Vectors Gold Miners ETF (GDX). Together, these three companies contribute 2.9% toward GDX’s holdings.
Investors interested in making directional bets on interest rates should look at the iShares Barclays 20+ Year Treasury Bond Fund (TLT).
China is the largest gold consumer. In the next part of this series, we’ll look the Shanghai Gold Exchange withdrawals data to find out what’s happening with the current gold demand in China.
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