Monday, April 11, 2016

Why Is Gold Up In 2016? It's Probably Just Negative Real Interest Rates In the U.S.

Gold prices react strongly to the upside when real rates are negative for the currency you use to denominate the gold price in, the numéraire.

We looked at the phenomena a few times in 2013:
So Why is Gold Down? Look To the Real Interest Rate
Barron's on Gold and Real Interest Rates
Gold and Real Rates: "What Determines the Return on Gold?"
Real Interest Rates and Gold

Here's Kitco's six month gold chart:

And here's the April 8 Wall Street Journal story that was making the rounds yesterday:

By One Measure, U.S. Rates Are Already Negative
Yield on 10-year Treasurys, adjusted for inflation, falls below zero for first time since 2012
Negative interest rates have swept the globe, from Switzerland to Sweden to Japan.
By one measure, they’re here in the U.S. too.

The 2016 rally in government bond prices has taken U.S. real yields, which subtract inflation from the 10-year Treasury yield, below zero for the first time since 2012.

The 10-year U.S. Treasury yield was recently 1.72%, which is below the latest reading on the core consumer-price index of 2.3%. By this metric, the real U.S. 10-year yield is -0.58%.

Inflation is the main threat to bondholders. Many look at real yields because they reflect the real purchasing powers investors obtain from investing in fixed-income assets. The fact that investors are willing to buy the 10-year note without enough compensation for an uptick in consumer prices has been confounding many analysts. Some are concerned that this leaves the bond market vulnerable to jolts if sentiment sours.

About a quarter of government bonds in Japan and Europe have nominal yields below zero, reflecting policy makers’ embrace of negative interest rates in their latest bid to reflate stagnant economies.
Germany’s 10-year bond is yielding below 0.1%, raising the prospect that it too may soon trade at negative rates. The European Central Bank has increased its purchases, intensifying the investor scramble for safe bonds.

Though negative nominal interest rates don’t appear imminent in the U.S., investors say the gravitational pull of low rates overseas stands to pull real yields here further into negative territory, by pushing down nominal yields....MORE