There is a clear negative correlation between gold prices and US real interest rates. When real interest rates rise, gold prices tend to fall. This is also reflected in the pullback of gold prices this year.
Since its peak in March, gold prices have fallen by 20%. During the same period, the 10-year nominal yield in the United States once rose by more than 4%, and the 10-year real interest rate in the United States rose to 1.6%, the highest level since 2010.
However, although the U.S. 10-year real interest rate is above its 1.17% peak in 2018, gold is currently trading at $1,667/oz, which is well above its 2018 low of $1,200/oz. This raises a question: Will gold's pullback lag behind changes in real interest rates? Will gold make up for the next decline?
In this regard, Goldman Sachs analyst Mikhail Sprogis gave a negative answer in a report on September 28.
First of all, Goldman Sachs believes that there is no evidence that gold does not respond to real interest rate changes:
regression analysis of changes in gold prices and gold ETF with changes in real interest rates, and we found no significant evidence of pricing lag. It seems that gold and gold ETFs are adjusted based on real interest rates at the same time.
In addition, we estimate that every 1% increase in the 10-year U.S. real interest rate will often lead to a 10% drop in gold denominated in US dollars under other conditions. By this standard, the rise in real interest rates in the United States since February should have caused the equilibrium gold price to drop by 26%, which is roughly consistent with the adjustment of gold prices from peak to trough of 22%.
Secondly, Goldman Sachs pointed out that gold prices depend not only on changes in real interest rates, but also on concerns about growth:
In 2013 and 2018, the bottom of gold prices appeared before the top of the 10-year U.S. real interest rate. For ETF, the evidence is more complicated. In 2013, ETF capital outflows lasted for a while after the real interest rate peaked, while in 2018, these capital outflows stopped before the real interest rate peaked.
In our opinion, the difference between the two periods is due to different U.S. growth dynamics and concerns about recession... In 2013, strong U.S. economic momentum caused a decline in the probability of recession, and investors moved from defensive assets to risky assets. At the end of 2018, the U.S. economic growth weakened and the possibility of a U.S. recession increased significantly. As a result, the U.S. stock market performed poorly, and investors turned to defensive assets such as gold.
Finally, Goldman Sachs said that most of the demand for gold comes from consumers in several major emerging markets. Therefore, if you want to make a historical comparison, prices need to be adjusted based on the relative purchasing power of these emerging market consumers. From this perspective, gold prices do not have the risk of overestimating:
Considering the growth of the purchasing power of the dollar in emerging markets (though the dollar has strengthened, the nominal purchasing power has always been considerable) and the increase in mine supply, gold prices do not look that high.
2018 lows are still below current levels, but the consensus assessment of recession risk is also significantly higher. This may be why at the current price level, we are seeing emerging market consumers and central bank buy when prices fall.
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