One of the most common objections to asset allocations to gold is that “they have no interest.” But the position of gold is still, solid, especially in times of uncertainty, in the long term, the price of gold is still going up, and one of the strongest drivers for this metal throughout. The last 50 years is the real US interest rate.


Why the real US interest rate?

Because, like other commodities, the price of gold is quoted in USD. This alone gives gold and other commodities an inverse relationship with the USD. And so, commodity prices are often considered a measure of inflation.

But nominal interest rate does not take inflation into account, for example if nominal interest rate is 1% and inflation is 2% then real interest rate is -1%. This is why gold and nominal interest rates can rise together during periods of high inflation.

At the same time, gold is also a monetary metal. It is a form of material wealth that competes directly with the USD. And this could cause both gold and USD to rise as economic uncertainty drives people to seek safety (of cash).

That is why we cannot just look at the relative strength of the USD in the foreign exchange market to explain the price of gold.

There are other complicating factors, such as the timing of major systemic risks or geopolitical tensions, so no single factor perfectly explains the gold price. But if we look at real interest rates and inflation-adjusted gold prices (hereinafter referred to as real gold prices), we can see a very strong inverse relationship. This can be seen more clearly if we look at the past 10 years chart.


We can easily see that the nominal interest rate has almost nothing to do with gold, but the real interest rate is quite different, inversely strongly with the real price of gold.

It's good to know this isn't it? However, as an investor/speculator, what we really care about is the upcoming trajectory of gold!

And to judge, we will look closely at the evolution of these three factors, over the past 1 year.


There's something wrong with the first part of the chart - when real interest rates and real gold prices go up - right? Let's explain a little on this point! This was the beginning of the epidemic disaster, CPI inflation at this time dropped sharply while the nominal exchange rate remained unchanged, however, the demand for shelter pushed money into gold without paying much attention to the exchange rate. real price now. And so there are no surprises at this point.

What's more important to my investment decisions for 2021 - as you can see on the right side of the chart - is that real interest rates are falling and gold prices are rising again.

Which leads us to the next important question: What will real interest rates be in 2021?

We know that the Fed has said it will keep nominal interest rates at their current low levels for many years. That makes inflation an important variable, as it will determine the trajectory of the real exchange rate while the nominal rate remains constant.

And for the precious metal, signs of inflation abound, from soaring commodity prices to stock market bubbles. And even the CPI has started to go up.

Not stopping there, the Fed has made it clear that they will let inflation heat up for a while, and even do not think that post-Covid inflation this summer is real and requires a response.

Therefore, the possibility of a sharp drop in real interest rates this year is very possible and that makes me really bullish on gold.

Silver could benefit as well, but it's also supported by strong industrial demand, so silver could have a great year even if I'm completely wrong about real interest rates.

The original article is quite long and I would like to pause the first part here, the rest will discuss more deeply about interest rates, the Fed's money printing moves and the possibility of an inflationary spiral, as well as adjustment moves. Gold recently, please pay attention to follow up.

Part2: Deeper Understanding of The Gold Market - Don't Misunderstand The Current Drop.

Wait, isn't the price and it's plunging and losing the 1,800 mark?

Remember that the Fed currently does not have a YCC policy - try to control all bond yields. The Fed's nominal interest rate remained unchanged, but only long-term bond yields (especially 10-year ones) rose sharply. The market is concerned about inflation.

This is a "yield-curve widening," indicating that the Fed has a serious problem.

They want to keep rates low to help the economy recover. Everything the Fed has been saying for years, if not decades, has made it clear that maximizing employment is the higher priority of the Fed's two goals (full employment and stability). pricing).


Gold is gradually losing important milestones

Bottom line: Higher bond yields pull capital out of the stock market and tend to slow economic growth, the opposite of what the Fed would expect.

If you have read my articles for a long time, you will find that I often avoid making bold predictions about the future. However, in the current situation, I don't see any way the Fed can avoid intervening in the long-term bond market. A form of "yield curve control".

So how will the Fed be able to control it? What the Fed can do is enter the market as a participant. They will sell bonds to lower the price and thus increase the yield. Or it buys them to push yields down.

In this case, the Fed's large purchases of long-term bonds could push their yields lower, overpowering the natural market response to higher inflation, thereby flattening the yield curve.

But where does the Fed get the money to do that?

The Fed has a money printer :D, but now they don't even need to spend money on paper and ink to make money, they just need to tweak the database! That is to make money out of…nothing.


So the problem is solved?

Not so simple. This injection of money has one obvious consequence (except for the modern MMT fanatics): more inflation! And expectations of more inflation would push bond yields higher, which would force the Fed to buy more bonds to keep interest rates low, which would raise inflation expectations even higher…and so on. , a deadly inflationary spiral.

Not talking about hyperinflation, although it can still happen if the Fed gets out of control.

Very confident that we will see higher inflation in the near term, even if the economy continues to struggle and unemployment remains high.

That means real interest rates will remain low for years, which is good for gold and silver.


This is why it is thought that gold will not only retest all-time highs but it could also set new all-time highs.

Also, expect silver to have even better performance. It still hasn't rallied as much as gold and it's always outperformed gold at the end of the metal-currency bull market.

Conclusion: To think it would be a mistake to assume that higher long-term bond yields are bearish for precious metals, and this is an opportunity for those who see that.