Gold and silver
21 May 2018 | By Ned Naylor-Leyland

Real interest rates are the real drivers of the gold price

Ned Naylor-Leyland, manager of the Old Mutual Gold & Silver Fund, reminds investors that as long as real US interest rates are trading in a narrow band, gold is unlikely to perform.

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To the uninitiated, the rising geopolitical tensions that have peppered the investment landscape of late should have resulted in a powerful upwards move in the gold price. But keen bullion watchers will have noted that while the oil price shot up, gold prices barely moved on President Donald Trump’s decision to pull the US out of the Iranian nuclear deal. A major geopolitical event – and the precious metal did nothing. This prompted some investors to wonder if gold had lost its status as a safe-haven asset.

Before we start questioning the role of gold and how it should perform under various conditions, let’s just remind ourselves about the real driver of the precious metal. Quite simply it is the movement in real interest rates. And by ‘real’ we, of course, mean the difference between nominal interest rates and the rate of inflation. While real interest rates are range bound, as they currently are, the gold price won’t be going anywhere fast, in our view. Latest economic data in the US showed a slight loss of momentum, a reflection of global growth generally. The latest US inflation figure came in marginally below analysts’ expectations, flying in the face of hopes from inflation bulls that US prices were on a rapidly rising trend. But while inflation may have come in lower than anticipated, so interest rate expectations of future rate rises (so-called ‘forward guidance’) have been dampened down too. Inflation expectations adjusted downwards. Interest rate expectations adjusted downwards. Stalemate… for now.

So, what will provide us with the catalyst for a move in the precious metal? Well, the correlation between the oil price and inflation could be restored again, causing US inflation to grind higher. For those whose memories stretch back far enough, there used to be some causation between these two variables. Otherwise, as we have been saying for some time now, expectations that the US Federal Reserve is going to suddenly hike interest rates four times this year could be kicked into the long grass. In which case, real interest rates may actually fall from current levels. And if that is the case, we firmly believe, we will start to see some upward movement in the gold price.

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