Gold Prices Miss Out on Interest Rate Rally Amid Real vs Nominal Yield Divergence

The recent decline in U.S. Treasury yields has left many wondering why gold prices haven't surged alongside. On September 21, during the Asia-Europe session, U.S. Treasury yields across the 2- to 30-year maturity spectrum continued to drop, while the U.S. dollar index pulled back.

Gold initially dipped before rebounding toward the close as the dollar weakened, ultimately trading near $4,365. According to the Fiscal Theory of the Price Level (FTPL) framework, when real interest rates fall, gold may decline if it is seen as less attractive than bonds or other assets due to higher holding costs.

However, the FTPL suggests that even as holding costs rise, gold prices can still increase. This is because a government's ability to service its debt is more closely tied to real interest rates than nominal rates. When real interest rates genuinely decline, the opportunity cost of holding gold is reduced.