Over the past few decades, the primary driver of global gold prices has been the level of inflation-adjusted or ”real” interest rates. If you understand this, then you’ll begin to further understand why gold prices are poised to move significantly higher in the months and years ahead.

Let’s begin with an explanation of real interest rates. From the Investopedia website: ”A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate reflects the rate of time-preference for current goods over future goods. The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate.”

Thus, you can calculate the real or inflation-adjusted rate of return on a fixed income investment by subtracting the inflation rate from the stated, nominal rate of the bond. See below:

• (U.S. 10-year note yield of 0.70%) - (a 2% annualized inflation rate) = -1.30% ”real” return

• (U.S. 10-year note yield of 0.70%) - (a -2% annualized inflation rate) = +2.70% ”real” return

In general terms, a fixed income investment with a positive real return, provides income while also protecting the buyer’s purchasing power. However, a fixed income investment with a negative real return, guarantees a loss of purchasing power over time. As such, a regime of negative real interest rates makes investments in hard assets such as gold, much more attractive.


And why is gold more attractive during periods of negative real rates? Let’s start with the old adages of ”you can’t eat it” and ”it doesn’t pay interest”. Well, when compared to a bond with either a negative nominal or negative real rate, the fact that gold pays no interest is no longer important. And bonds are designed to simply return your principal at maturity. Over the same time period, your gold investment may appreciate and grow, thus making gold more attractive in terms of total return.

But it’s more than that. The U.S. treasury bond is the primary, Tier One asset of the investment world. Institutions and governments hold U.S. debt in their reserves as a safe haven store of value. However, what if this supposed ”safe haven” actually guarantees a loss of purchasing power over time? Does that make it less desirable as a core holding? If that answer is yes, then the primary beneficiary as competition for U.S. treasuries is physical gold. We can observe this trend in real time by monitoring global central bank gold demand, which set multi-decade records in 2018 and 2019.


We can also observe this trend in real time by crafting a chart that plots the dollar gold price with real interest rates. Many free websites have this capability and the chart included with this article was created at Barchart.com. As a proxy for real rates, I’ve used the ETF with the ticker symbol ”TIP”.

This fund holds U.S. Treasury Inflation-Protected Securities or ”TIPS”. These bonds are designed to increase or decrease in value based upon the U.S. inflation rate as measured by the Consumer Price Index. In short, when inflation is rising, the TIP should move higher and, as such, a higher TIP price implies that real interest rates (if nominal rates are held unchanged) are moving increasingly negative.

Note the clear and obvious correlation between the TIP and the price of gold as determined through futures trading on the Comex in New York. The chart below plots the past twelve years of Comex gold in candlesticks and the TIP price as a blue line:

OK, so now that you understand the relationship between real interest rates and the gold price, let’s conclude by explaining how and why the gold price is likely to move significantly higher in the months ahead.

As you likely know, the U.S. Federal Reserve began an extraordinary debt monetisation scheme in March of this year. In response to the Covid Crisis and the unprecedented economic slowdown that ensued, The Fed has actively monetised nearly $3T in new U.S. government debt. This has expanded The Fed’s balance sheet by over 50% in just the four months of March-June.

As a tool for managing this surging level of U.S. debt, The Fed has begun to consider the use of Yield Curve Control or ”rate caps”. This is a policy that The Fed has used before...employing yield curve control during the period of 1942-1951...which is the last time that total U.S. debt reached a similar debt-to-GDP extreme.


And now the Federal Reserve’s Open Market Committee (FOMC) has openly admitted that it is considering the implementation of a new Yield Curve Control regime, perhaps as soon as later this year. At the conclusion of the FOMC meeting in June, Federal Reserve chairman Jerome Powell stated that the possibility of a Yield Curve Control program ”remains an open question” and admitted that the FOMC had ”received a briefing on the historical experience with yield curve control”.

Since these public statements and Fed history suggest that Yield Curve Control may be coming, let’s consider what this policy might mean for real interest rates and, by extension, gold prices.

It’s likely that the imposition of a rate control program would institutionalise negative real rates for the duration of the program. Why?

In a ”normal” environment, interest rates move up with inflation pressures as investors demand higher nominal rates in order to compensate for lost purchasing power over time. Maybe inflation moves to 3% but if rates go up to 3%, too, then the real ”inflation-adjusted” rate remains at zero. However, let’s say that The Fed announces that they won’t allow the nominal rate on the benchmark U.S. 10-year note to exceed 1%. Now, if inflation moves up to 3%, the real rate falls to -2%. If the rate caps continue and inflation goes to 5%, the real rate falls to -4%.

And a period of higher inflation with stagnant economic growth is the very likely outcome of the Covid Crisis and the global central bank response. In fact, we should expect the years 2021-2024 to resemble the late 1970s...when high price inflation and economic malaise combined to create a period of ”stagflation”. You may recall that gold prices staged a tremendous rally in the late 1970s, moving from a low near $100 per ounce in 1977, to a high near $900 per ounce in early 1980. The relationship between real interest rates and gold provides historical understanding for this extraordinary move in prices.

So let’s put all of this back together...

Massive new deficit spending and central bank debt monetisation will invariably lead to some measure of price inflation in the months and years to come. At the same time, the U.S. Federal Reserve is likely to implement a policy of Yield Curve Control. These two factors combine to institutionalise negative real interest rates and create an environment of significant gold demand across all investor categories, leading to much higher prices for gold. As an aside, the shares of the companies that mine gold and silver should appreciate significantly, as well.


How can you prepare, protect and profit from these events? Through the acquisition of physical gold (and silver, too). The global gold market in 2020 is a hyper-leveraged, multi-hypothecated beast that owes its existence to promissory notes, leases and just-in-time delivery. Therefore, investments in vehicles such as unallocated accounts and ETFs present an unacceptable level of counter-party and default risk. Your best strategy, is to deal only in fully allocated and physically-deliverable precious metal. There are multiple dealers worldwide who will gladly help you to build a diversified portfolio and then store it for you at a safe and secure facility. If you prefer, these dealers will even ship the metal to you for personal safekeeping. With real interest rates plunging, and with global gold demand increasing, now is the time to take action and secure your own personal stockpile of physical gold.   EG

Central Banks and Other Institutions

Real Interest Rates Moving Increasingly Negative

Fed Balance Sheet Expansion Mar-Jun 2020

Dollar Gold Price and Real Interest Rates