Do Falling Yields Mean Rising Gold? No.

Stocks aren’t the only thing on the verge of fully erasing some mid-year volatility. Gold, while not quite as far along in its recovery, is also rebounding—inspiring enthusiasm for the yellow metal to climb past prior highs. And why should gold do so now, with inflation easing and geopolitical jitters easing?^[i] Several recent articles point to the prospect of falling interest rates. But we don’t think this holds up any better than the other alleged reasons to own gold.

Falling-rate gold bugs’ rationale is this: If the Fed cuts rates and/or long-term US Treasury rates fall, high rates will no longer poach demand from no-yield gold. Investors will flock to its sparkle and push prices up, up, up and away. It is a simple theory with a veneer of logic, but the beauty of simple theories is that they are often simple to test. This one certainly is, and it doesn’t pass.

If falling rates are good for gold, then we should expect a long-term chart of gold and interest rates to show them moving in opposite directions the vast majority of the time. Yet as you will see in Exhibit 1, that isn’t the case. Gold and 10-year US Treasury yields have moved together on numerous occasions. Rates fell throughout much of the 1980s and 1990s. So did gold. There was also a strong link in the mid-to-late 1970s. Rates fell to generational lows in the 2010s, but gold sagged. Since 1973, when gold began trading freely, their correlation is -0.07.^[ii] Considering -1.00 would mean a perfectly inverse relationship and 0.00 would mean no relationship (with 1.00 meaning they always move together), -0.07 means there is next to no connection, with gold moving opposite rates a wee bit more often than not. Random and functionally meaningless.

Exhibit 1: Gold and Interest Rates

Source: FactSet, as of 11/27/2023. Gold spot price and 10-year constant maturity US Treasury yield, monthly, 12/31/1973 – 10/31/2023.

We suspect those basing a gold forecast on rates are leaning too hard on the fact that both hit inflection points on August 6, 2020. That is the date long rates bottomed and gold hit its most recent all-time high. Since then, rates rose and gold struggled, making it easy to presume there is a fundamental link and extrapolate it forward. But we don’t think this withstands much scrutiny. For one, both inflection points happened during lockdown-mad 2020, when volatility hit the stratosphere, sentiment went apocalyptic and the Fed was intervening massively. Two, even during this window, the correlation isn’t much more compelling—just -0.23. Three, while rates are up over four percentage points during this period, gold is very close to flat. Volatile along the way, but flattish cumulatively. So if one of market history’s biggest long rate rises didn’t destroy gold, we have a hard time seeing why falling rates would suddenly be some massively bullish driver. (Side note: Flat gold prices over this period also tarnish the theory gold is an inflation hedge, considering the hot inflation rates we saw over that span.)

Lastly, we would be remiss if we didn’t point out that while gold has tarnished since mid-2020, stocks are up nicely. Even with last year’s bear market, the S&P 500 is up 43.4% and the MSCI World Index has delivered 34.5%.^[iii] This is because—unlike gold—stocks are a stake in businesses’ future earnings power and society’s overall wealth creation. Gold isn’t and can never be this. It is simply a commodity with few industrial uses, outsized exposure to sentiment, high volatility and no power to generate interest or dividends. As you likely gleaned from Exhibit 1 and the yellow line’s huge swings, investing successfully in gold requires extraordinary timing, which is virtually impossible on a repeatable basis when sentiment plays so large a role in price movement. To us, that isn’t a solid foundation for a retirement portfolio.