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The Last Boomer
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I am not a professional investor. I got interested in the financial markets about 6 years ago and started reading voraciously books on finance and investing. 

  • Gold And Interest Rates 2 comments
    Dec 24, 2012 1:30 PM

    About a year ago I read a post by Paul Krugman on the price of gold and its relationship with other investments. Building upon a paper from Salant and Henderson ("Market Anticipations of Government Policies and the Price of Gold"), Krugman believes that the gold story is basically about the real interest rates and concludes that "the price (of gold) has risen because the expected returns on other investments have fallen".

    In the current post I examine the statistical relationship between the 10 yr treasury constant maturity rates and the gold price.

    Interest Rates and Gold Price

    I use two time series.

    Monthly gold prices courtesy of and monthly rates on the 10 yr treasury bonds. Both series start in December 1969. The chart below shows the natural logs of the two time series plotted against each other. The price of gold is measured on the left y-axis and the treasury rates on the right y-axis.

    (click to enlarge)

    A casual look at the chart above shows that the relationship between interest rates and gold prices has been changing over time. The correlation between the two time series is -0.44 over the entire time period from Dec 1969 to Nov 2012. The negative correlation means that when the interest rates decrease the price of gold increases. If we take only the period since the beginning of 2000 to Nov 2012, the correlation is -0.84. It looks like gold attracts buyers when the return on other investments like Treasuries goes down.

    So, in order to assume further gold price appreciation, one needs to assume further declines in the Treasuries' yields. How likely is that? Are the treasuries' yields more likely to go up or down? Currently the real yields on the 10 yr treasuries are actually negative. With the yields that low, the likelihood that they'll go further down is not very high. My bet is that as the economic growth gradually accelerates, the yields will start inching up over the years to come. With government bonds and other investments offering increasing returns, the gold prices most likely will go down if the historical relationship between interest rates and gold prices holds.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (2)
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  • ibrowning85
    , contributor
    Comments (21) | Send Message
    Interesting....What units are the gold quoted in on the chart?
    10 Jan 2013, 06:50 PM Reply Like
  • The Last Boomer
    , contributor
    Comments (1049) | Send Message
    Author’s reply » Gold is in natural logs of the actual gold prices. Using the natural logs allows for a better comparison on a chart.
    14 Jan 2013, 10:25 PM Reply Like
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