Gold Investments During Rate Hike Periods
Real Interest Rate The real rate is the return after inflation—generally regarded as the 10-year Treasury minus the CPI . Why do the real interest rates matter for gold? Here are the reasons: [1] Holding cost Includes storage and insurance of gold Opportunity cost Instead of holding gold, investors could be lending it (or the cash spent) out. The higher the real interest rates, the larger are the opportunity costs of investing in gold . And the lower real interest rates, the smaller are the opportunity costs, so people are more eager to hold more gold. In particular, the negative real interest rates are gold's real friends (the 1970s or the post-Lehman era are the best examples). Figure 1. Gold and real-yields (inverted) have decoupled from their historic relationship (Courtesy of stockchart.com ; 02/16/2022) Gold—a Geopolitical Hedge of Last Resort However, historically gold tends to increase during rate hike periods when gold’s negative c...