Real Interest Rates and Gold

Our readers know this stuff so this post is just for reinforcement. A story from yesterday's Financial Times:

QE worries drive Treasury rates up

The US Treasury will have to pay a positive real interest rate on new 10-year borrowing for the first time in 18 months as investors get cold feet about a possible slowing of the Federal Reserve’s bond buying programme.

Bond investors are ditching Treasury inflation-protected securities, or Tips, pushing the inflation-adjusted or “real” Treasury yield above zero. It was minus 0.75 per cent as recently as April....MUCH MORE

One of the charts accompanying the article:

As usual I was reminded of something, in this case a post at Forbes' Great Speculations column from early May:
What Gold Says About Interest Rates And Vice Versa

Bond guru Bill Gross of PIMCO says interest rates are set to rise now that the “30-year bull market in bonds ended in April.” But if you believe the gold market, the interest-rate cycle in fact turned higher two years ago. At least for the time being.

Gold famously offers a natural hedge against inflation ravaging the other assets in your retirement fund or savings portfolio. It only acts as an inflation hedge when you need it, however. Because if bonds or cash in the bank are beating inflation all by themselves, there’s less need for gold’s precious scarcity.

It wasn’t, for instance, until the real yield offered by 10-year U.S. Treasuries cracked below 2% per annum in 2001 that gold bullion finally shook itself out of its two-decade bear market, begun when real rates leapt to near-double digits to choke off inflation at the start of the 1980s. The real yields on both 10-year U.S. Treasuries and U.K. gilts, after you account for official inflation rates, then kept on falling, finally bottoming at 30-year lows – just as gold peaked – almost two years ago.

Okay, the CPI data are dubious, and real rates are still really miserable. But the direction of travel has, for now, moved against gold investment in favour of the yield offered by fixed income. “We actually began to reduce our position in July of 2012,” says Steve Cucchiaro of Windhaven Investment Management,previously the eighth largest holder of shares in the SPDR Gold Trust (GLD), but no more....MORE

The picture would be clearer if they used nominal rather than adjusted gold prices but you get the point.

Izabella Kaminska at FT Alphaville has been posting on the connections between interest rates and finance and commodities and monetary policy for the last few years. There are dozens of posts with some of the recent ones being:
ECB is technically ready for negative rates
Game of negative rates
On crossing the ECB interest-rate streams
The ECB, negative rate confusion and the prepay tax option
What is the opposite of helicopter money?
Cash-for-gold at negative rates
The negative rate bluff
Why negative interest rates are a bad idea, by Capital Economics
We told you negative rates were a big deal

Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry.
Though, for a long time we’ve felt very much alone with this obsession....

and many, many more.