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Historically, Gold prices and US Treasury Bond yields have shared an inverse relationship, with rising yields weighing on Gold prices due to higher opportunity costs of holding a non-yielding asset such as bullion whilst strengthening the US Dollar at the same time.
However, some periods in the past show a fascinating convergence in which both interest rates and Gold moved in the same direction. This study will review these periods to help us understand why Gold and interest rates have and can move together.
A review of the historic trends shows several instances in which Gold and interest rates went up and down together. This is an unusual observation but these exceptions show why it should not be assumed that rising interest rates are bad for Gold prices and vice versa
A unique period in history where an oil embargo caused chaos across markets. Gold traded at $131/oz in December 1976 and surged to $760/oz by January 1980, a 480% rise. During the same time yields on the 2-year US Treasury Bond increased from 5.31% to 11.3%, a massive increase in both Gold prices and interest rates. The oil embargo led to continual high consumer prices, rising unemployment and concern over the economy. Gold rose more than four-fold
Starting at $401.25/oz in March 2004, Gold rose 59% to $638/oz by April 2006. 2-year Treasury bond yields went from 1.5% to 4.99% during the same period. Consumer price inflation was beginning to accelarate during this time which caused the Federal Reserve to begin rising rates. Rising energy prices caused concern over further consumer price inflation in the future causing bonds to fall and gold to rise
The period from 2017 to 2018 provided another example of gold and 2-year Treasury yields rising together. Treasury yields rose from 1.22% in early 2017 to 2.47% by mid-2018, reflecting the Federal Reserve’s consistent rate hikes. Gold pricesgained over 10% after trading at $1,203/oz in march 2017 only to trade at $1,328 a year later. Inflation worries had resurfaced with the US CPI in 2017 moving above 2% for the first time since 2012
Between June 1976 and December 2024 the US Treasury Bond 2-year yield and Gold price has a correlation coefficient of -0.582 meaning the two assets generally moved in opposite directions. The strenght of the relationship was not very strong given the abovementioned periods. Overall, we can say Gold generally shares a negative relationship with 2-year bond yields
A review of the 10-year US Treasury Bond yields and Gold price has highlighted that it is not just the 2-year yield which has tseen the unusual pattern of rising interest rates and Gold prices
June 2003 – June 2006: A significant period which saw Gold prices soar 73.8% despite yields on the 10 year Treasury bonds rising from 3.19% to 4.998%. The price of Gold started the period at $352/oz and closed at $611.80/oz. Gold prices were rising from very depressed levels, the People’s Bank of China was acquiring Gold on the open market during this time. The large interventions from the Federal Reserve which helped the US economy recover from the bursting of the dot-com bubble but quantitative easing began to devalue the US Dollar which supported the Gold price
September 2021 – March 2022: A seven-month period of rising Gold prices and 10-year bond yields. Gold managed a 17.3% gain whilst interest rates on the 10-year Treasury Bonds rose from 1.46% to 1.87%. The period saw a surge in inflation caused by loose monetary policy in response to the lockdowns. US CPI spiked during this time to highs of 8% causing investors to shun the bond market in favour of inflation-proof Gold. In turn this caused Gold to rise as yields on Treasury Bonds rose
May 1984 – Jun 1985: Gold prices began the period at $394 and slid to $315 whilst 10-year yields fell from 13.61% to 10.49% at the end of June 1985. This means the Gold price fell 26% as interest rates were down significantly. Two factors stand out as causing this, first the US economy had recovered from its double dip 1981-1982 recession and the high consumer price inflation seen in 1978-1981 was subsiding which reduced the demand for bullion
Jan 2014 – November 2015: Another period of declining Gold prices and 10-year bond yields occurred during this time in which Gold shed 12.2% as interest rates dipped from 2.96% to 2.32%. The official rate of inflation had slowed to close to 0% at this time and Gold prices were still in a bear market from its 2011 peak. With little concern for higher consumer price inflation, investors were keen to buy Treasury Bonds which pushes the bond price up and the yield down
Gold prices can rise with higher interest rates when the market is fearful of higher consumer price inflation. Inflation destroys returns on bonds and so when the bond market senses increasing inflation it results in less demand for bonds. Falling bond prices cause the yield to rise by default. The Gold market often rises when inflation expectations increase
Investing in British Gold
The Gold Britannia coins are the Royal Mint’s flagship fine Gold coin and is available at low-premiums, buyback guarantee and no Capital Gains Tax to pay when selling
