20190108-Gold Price vs. Interest rate


Nominal Interest = Real Interest Rate + Inflation

Many people believe that the price of gold is inversely related to interest rates. However, it is only partially true. In fact, gold prices are driven not by nominal rates (which are not adjusted for inflation), but by real rates (which are nominal rates adjusted for inflation). 

The adverse relationship between real interest rates and the gold price is quite well-established in the literature and was confirmed by a few empirical exercises. The biggest booms in the gold market occurred in negative real rates environments, first during 1970s, when both nominal interest rates and inflation rates were high, and later in 2000s, when both nominal interest rates and inflation rates were low. (Wendy:  meaning low real interest rate)   In 2015, the price of gold fell on the expectations of the Fed hike and the resulting appreciation of the U.S. dollar against major currencies, and on the rise in U.S. real interest rates.

The CEO of First Majestic in the SGT Interview was saying that right now gold price is kept down by the strong dollar.    Also that gold price is related to real interest rate and not nominal interest rate.
So right now, if the Fed keep raising nominal interest rate while keeping the inflation rate down, that means real interest rate is going up and dollar will be strong and this is bad for gold price.

To recap, the three elements that affect gold prices are:

Real Interest rate
Inflation
US Dollar

Gold price v. real interest rate  - negatively correlated
Gold price v. US Dollar - negatively correlated


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