Gold: Massive drop in real rates explains most of the current rally – NFB

Analysts at the National Bank of Canada look into the possible key drivers in gold prices. They concluded the most important driver is real interest rates. They consider that with more fiscal stimulus coming in the US, the downside in the metal is limited. 

Key Quotes:

“Bullion tends to shine in periods of turmoil and this time is no different. Yesterday, the price of gold reached a new milestone thanks to a staggering rise of 28% so far in 2020. Our analysis has shown that the price of gold is best explained by four key variables in the past decade: the U.S. dollar (broad dollar index), stock market volatility (VIX), real interest rates (10-year TIPS), and inflation (CRB food price index).”

“Our model estimates that no less than $253 dollars of the $421 increase can be attributed to the massive drop in real rates. The yellow metal has a propensity to rise when real interest rates decline as it reduces the opportunity cost of holding it.”

“With Congress set to unleash yet another round of fiscal stimulus to be financed by the Federal Reserve, we expect negative real interest rates to endure for the foreseeable future. Bullion has a limited downside in such an environment.”