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IPFS News Link • Gold and Silver

Why The Gold Price Is Sinking

•, by Jan Nieuwenhuijs

The gold price is inversely correlated to the "real interest rate," as derived from the 10-year Treasury Inflation Protected Security (TIPS). The 10-year TIPS is a U.S. government bond that protects the owner from consumer price inflation. If the TIPS interest rate, for example, is 1% and annual inflation 3%, the owner of the bond receives 4% interest (1% + 3%). The owner of the bond is always protected against inflation.

In the chart below you can see the correlation between the gold price and the 10-year TIPS rate. Note, the axis of the 10-year TIPS rate is inverted in the chart, because when the TIPS rate falls, the gold price rises, and vice versa.

According to bond market math the 10-year TIPS rate equals the nominal 10-year Treasury interest rate minus inflation expectations.

TIPS rate = Treasury rate – inflation expectations

Since March 2020, inflation expectations have been rising and so did the price of gold. But, from March until September the nominal 10-year Treasury rate barely moved (around 0.6%), after which it began to rise. Since October 2020 the 10-year Treasury rate is rising in a fashion that makes the TIPS rate go up, and thus gold down. At the time of writing the 10-year Treasury rate is roughly 1.6%.

The above is a very brief update on what is happening in the gold market. Currently, I'm working on a few articles that require a lot of research, but I wanted to give you a heads up on the gold price and its interaction with the bond market. We will discuss the correlation between the gold price and real interest rates in-depth in a forthcoming article.