For investors, it’s not easy to value gold in a modern context. The most famous economist of all time, John Maynard Keynes, described it as a “barbarous relic,” best left to history classes. But there remains a small but vocal minority who believe the largely useless shiny metal should be reinstituted as the basis of all monetary policy.
There is no confusion about the recent strength in precious-metals prices, as bullion prices have jumped 10 per cent since Dec. 21, 2016. There is also little confusion as to why the rally occurred – the gold price is moving in exactly the opposite direction as U.S. real bond yields.
In addition, a hedge fund manager owning one of the strongest long-term performance track records ever, Stanley Druckenmiller, has again taken a significant position in bullion.
The first chart below underscores the extent to which the gold price has been moving directly opposite to U.S. inflation-adjusted bond yields. The grey line represents yield on the 10-year Treasury Inflation Protected Securities (TIPs), which indicates the real yield – the nominal yield on the 10-year Treasury bond minus the rate of inflation. Note that the TIPs yield is plotted inversely to better show the trend.
The pattern is clear: when real yields go down, gold goes up, and when real yields climb, gold falls. Anomalies when the lines diverge, as between February and March, 2014, when the bullion price remained elevated despite high real yields, have been short lived.
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