Gold seems to be sparking more attention these days, as investors have
seen the precious metal steadily rise from its December low of around $1,200,
to a new high of $1,350 just three months later.
What’s
Driving Gold?
The media has been focusing on the conflict in Ukraine and Russia as the main
driver for gold, but I think an equally important driver relates to real
interest rates.
For gold, the real fuel lies in negative-to-low real rates of return.
Historically, the gold price rises when the inflationary rate (CPI) is greater
than the current interest rate. Similarly, when real interest rates go above
the positive 2-percent mark, you can expect the gold price to drop.
Investors can watch out for two factors. See if the embers still spark
for gold. Take a look at what happened over the past year with real interest
rates and gold.
A
Year in Review
·
A year ago in March 2013, the five-year Treasury
yield was offering investors 0.88 percent, while inflation was 1.5 percent.
This equaled a real rate of return of -0.62 percent, so investors were losing
money. That month we saw gold reach as high as $1,614.
·
The five-year Treasury yield rose to 1.74 percent
in December of that year, as inflation lowered to 1.20 percent, returning a
positive rate of 0.54 percent. What happened to gold? The price dropped to a
staggering $1,187.
·
Today inflation has gone up 40 basis points to 1.60
percent while the five-year Treasury yield is at 1.53 percent. A negative real
rate of return has resurfaced. Meanwhile, gold rose to $1,350.
More
Inflation Coming?
Inflation has been off the radar for most people in the U.S., but Macquarie
Research made an interesting observation as wage growth experienced the largest
monthly increase in more than three years. Going back more than 15 years, you
can see the six-month annualized change of 3.3 percent is “the highest pace of
wage growth in over five years,” says Macquarie.
Usually, wage growth leads to an increase in the cost of goods, which
translates to higher inflation.
And, with the Federal Reserve expected to keep rates low for a period of
time to allow the economy to continue growing, it looks like real interest
rates will remain low-to-negative, which should keep investors hot for gold.
Check
out our latest Special Gold Report to
read more on how the gold price is driving Federal Reserve policy, unemployment
and inflation.
The
Consumer Price Index (CPI) is one of the most widely recognized price measures
for tracking the price of a market basket of goods and services purchased by
individuals. The weights of components are based on consumer spending
patterns.
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of a third-party contributor and the opinions contained therein do not
necessarily reflect those of Smallcappower. Smallcappower does not endorse
any investment advice provided by these third-party contributors. Please
consult your investment advisor before making any investment
decisions.
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