Gold Defies Interest Rate Logic as Real Yields Near Multi-Year Highs

The gold market has reached near-record highs despite real interest rates sitting near multi-year highs. This discrepancy can be attributed to the concept of negative real interest rates and how they affect gold prices.

Negative real interest rates occur when inflation exceeds nominal interest rates, making the true, inflation-adjusted return on cash or bonds negative. Savers lose purchasing power even while their account balance grows, and gold tends to thrive in this environment.

The 1970s saw the largest gold bull market on record, with gold rising from $35 an ounce to a peak of $850 by January 1980. This was largely due to inflation outpacing short-term interest rates for extended stretches, resulting in deeply negative real rates. The rally only broke when Federal Reserve Chair Volcker pushed the federal funds rate toward 20% in 1981.

More recent periods, such as 2008-2011 and 2020-2021, have shown similar patterns. During these times, gold rose significantly as real yields declined, tracking closely with the decline in real interest rates. The firm PIMCO found that a 1-point move in the 10-year real yield lines up with roughly an 18% move in the gold price once adjusted for inflation.

However, current data shows that the 10-year TIPS real yield sits at 2.61%, near multi-year highs. This has led to a disconnect between the gold market and traditional interest rate expectations. Central banks have also been purchasing record amounts of gold, which may be contributing to its strength.