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It only took a $70 rise in gold prices and a 6% slump in the stock market for Wall Street to turn bullish on bullion.

“[Now] the current environment,” says a note from tipsters at Bank of America-Merrill Lynch, “is one where the precious metal is regaining its prominence as a portfolio hedge.”

You might have liked reminding of gold’s use as a portfolio hedge before the S&P sank and gold prices jumped.

But markets make opinions. And putting the stock market to one side for a moment, one of the widest-held opinions on gold is that it moves in the opposite direction to interest rates.

This makes sense, because gold pays you no income. So if bonds or cash-in-the-bank start offering improved returns, gold becomes less attractive. (It also suffers a loss of speculative puff too, because rising rates mean hot-money traders have to pay higher costs to run a bullish position in the futures or options market.)

Of course, rising interest rates only really offer better returns if they beat inflation. So what really works as kryptonite to gold prices — or so considered opinion says — is when the real rate of interest goes higher, adjusted for the cost of living.

real 10-year US T-bond yields versus the Dollar gold price
Real 10-year US T-bond yields versus the Dollar gold price

Recent history backs this up. Over the last 15 years, and looking at all 5-week periods, gold and real interest rates — meaning here the annual yield offered by 10-year Treasury bonds, adjusted for the bond market’s 10-year inflation expectations — have moved in the opposite direction 64% of the time.

In the half-decade starting 2013, that rose to 70% of the time. Gold’s inverse connection with real rates hit record strength in 2017.

But 2018 has seen a big shift, as we noted back in July. It has only grown bigger since then.

Since New Year’s Day, gold and real 10-year rates have now moved in opposite directions only 55% of the time on a 5-week basis.

Over the last 3 months, that figure has fallen to 50%, keeping gold near $1,230 per ounce as real 10-year rates have risen from 0.77% to 1.06%.

That’s the highest real interest rate on 10-year Treasury bonds since February 2011. A move of that size would now put gold down below $1,120 per ounce if it had happened between 2013 and 2018, costing investors $3.85 for every 1 basis-point rise in real 10-year rates instead of the mere 3 cents dink it has got in reality since late-July.

What to make of gold trying to shuffle off its chains of real-rate kryptonite?

First, such a move was to be expected given how tight those chains had grown. Because as BullionVault said in September 2017: “From a negative correlation [that]strong — very nearly perfect [last]spring, and [then]still stronger than the positive daily correlation of gold with silver prices — a retreat looks statistically likely, if only short term.”

So second, the link between real rates and gold is likely to reassert itself sometime soon. Only this time, it may prove good for gold prices. Because the market’s 2018 forecast that interest rates are going to rise faster than inflation looks set to meet its own power-sapping kryptonite.

Private investors are certainly looking afresh at the gold market, too. This month has marked a clear break with 2018’s pattern of bargain-hunting and then profit-taking. Because even as prices rose, net demand on our peer-to-peer trading exchange has jumped 7-fold over the last week from its previous 52-week average, reaching well over 5,000 ounces. We haven’t seen such a positive response to a rising gold price since Trump’s election followed the UK’s Brexit referendum shock in 2016.

What changed to make price-wise investors chase gold higher as real interest rates tick up? Well you saw what just happened to the stock market, right? And did you see Trump’s new impersonation of Turkey’s President Erdogan, telling his “independent” central bank to stop raising rates?

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