According to this indicator, the price of gold could rise even further

Last week, the gold price in euros reached its highest level in a year, supported by high inflation rates in the US. This week, the price fell again after it was announced that Jerome Powell had won a Second Term as Governor of the U.S. Federal Bank. In dollars, the price of the precious metal fell below $1,800 per troy ounce this week. Does that mean the price increase is over?

Investors have been concerned for some time about further rising inflation in the U.S. Prices of goods continue to rise due to higher energy prices and Logistical problems. Despite this, US interest rates remain low. In recent months, we have seen an increase in the 10-year yield, but this is nothing compared to the speed at which inflation is rising. As a result, money is losing its purchasing power at an ever-increasing rate.

Gold Price vs Interest Rate

Last week we published on Holland Gold a Comprehensive analysis by Jan Nieuwenhuijs on the correlation between gold price and interest rates. This shows that the price of the precious metal moves in line with real interest rates. That is the interest rate after correction for inflation. For example, if the interest rate is 2%, but inflation is 6%, the real interest rate is -4%. On balance, you will lose 4% of purchasing power per year.

The graph below shows the development of this real interest rate over the past few years. Since the end of 2018, it has steadily decreased from +1% to -1%. In the same period, the price of gold rose from $1,200 to $1,800 per troy ounce, an increase of no less than 50%. This increase can largely be explained by the development of interest rates. If the real yield on government bonds falls, the Buy gold Attractive.

Strong correlation between real interest rates and gold prices (Source: St. Louis Fed)

Gold price to $2,000 per troy ounce?

Interest rates on government bonds have risen somewhat in recent months, but inflation has risen much faster during this period. For example, inflation in the US rose to 6.2% in October, the highest level since 1990. This means that money loses purchasing power faster and that it is therefore more attractive to buy gold. Especially with a negative real interest rate, because gold does not have a negative interest rate.

Let's put the Gold price If we compare this to the current real interest rate, we can see that there is still a gap to be bridged. If we continue the trend of recent years, the gold price could rise even further to $2,000 per troy ounce at current real interest rates. Whether that actually happens depends on inflation expectations, of course, but also on external factors. Think, for example, of a change in the monetary policy of central banks or a geopolitical shock. If central banks reduce their support programs, the gold price could also come under pressure again.

Disclaimer: Holland Gold does not provide investment advice and this article should not be considered as such. Past performance is no guarantee of future results.

This contribution was made from Geotrendlines