by Frik Els:
A number of gold market analysts have made the case that the one major factor influencing the price of gold is US inflation-adjusted interest rates.
Some analysts go so far as to say that the correlation is so strong that the gold price can be used as a predictor of interest rates, serving as an early warning system of both the direction and magnitude of the move in rates.
In a new research note Julian Jessop Head of Commodities Research at Capital Economics published a graph showing just how strong the inverse correlation is between US 10-year real yields (Treasury Inflation Protected Securities or TIPS) and the price of gold:
The underlying reason for the relationship is that as yields rise – as is expected in the US – the opportunity costs of holding gold increases because the metal is not income producing. ...