Real rates up, gold down
Precious metals had another down week, with the SPDR Gold Shares ETF (GLD) falling 3% to close below $120. This brings the year-to-date return for gold to -21%, with investors fleeing precious metals in search for yield. The main driver of the sell-off was the release on Wednesday of the FOMC minutes from October. Committee members signaled their desire to end QE (quantitative easing) sooner than later, which spooked rate markets and led to the ten-year TIPS rate rising 11 basis points on Wednesday.
The high correlation between real rates and precious metals persisted, with gold continuing to act like a levered play on real rates. This has been the case for a while, and it’s the main driver of gold’s performance. The correlation has endured despite net gold buying by countries such as India and China as well as several central banks around the world.
The bear case for precious metals is still compelling
Even though the other precious metals (silver, platinum, and palladium) have industrial uses that drive their performance in part, the huge rise in rates has dragged them down along with gold in 2013. To be long precious metals here, you have to believe that real interest rates are going to go back negative again in the medium term. There are two headwinds against that scenario: the continued slow recovery of the global economy and the Fed’s desire to taper.
There’s significant momentum in rising rates, and being long precious metals right now is a very high risk proposition.
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