With the next global crisis dead ahead, gold will stand tall as the chaos unfolds.

Gold and Interest Rates
By Ronald-Peter Stoeferle, Incrementum AG Liechtenstein
June 28 (King World News) – In our 2015 In Gold We Trust report we already examined the relationship between gold and interest rates. The conclusion of our analysis was that rising nominal interest rates did not necessarily imply a decline in gold prices. We also pointed out that real interest rates are a more important driver of gold prices. We want to build on this and expand our analysis with respect to real, i.e., price inflation-adjusted interest rates…

The following chart shows the trends in the real federal funds rate and the gold price since 1970.

It turns out that time periods in which real interest rates are in negative territory for most of the time (highlighted in blue on the chart) go hand in hand with very strong gold prices. In the time period 1970 to 1980 gold climbed from 34,90 to a peak of 850 USD, in an environment of mostly negative real interest rates. The same applies to the 2003-2017 time period, in which gold rose from 356 to 1,260 USD (as of end of May2017). That represents a cumulative performance of approximately 9% per year. Conversely, markedly positive real interest rates create a relatively difficult environment for gold, as the period 1980 to 2003 makes clear.

The performance of different asset classes in different real interest rate environments is relevant from an investment and portfolio hedging perspective. The following table shows the average monthly performance of gold, silver, the S&P 500 Index as well as the Dollar Index since 1970 in a variety of real interest rate environments (in terms of the real Fed Funds rate).

The historical record indicates that gold and silver performed best in times when the real federal funds rate was in a range from -1% to +1%.

While gold performs best when real rates are negative, silver has problems with an environment of negative real rates. That makes sense intuitively, if one interprets the real federal funds rate as a proxy for expansionary or restrictive monetary policy.

A negative real federal funds rate (price inflation > federal funds rate) traditionally signals that monetary policy is accommodative or expansionary. By contrast, a clearly positive real federal funds rate (federal funds rate > price inflation) indicates a restrictive or hawkish monetary policy. As silver has a sizable demand component as an industrial metal in addition to monetary demand, it is no surprise that its performance often differs from that of gold. One must also keep in mind that silver tends to attract more speculative interest, not least because it is the smaller market. As the table also illustrates, volatility in silver tends to be far pronounced than in gold, i.e., it both outperforms to the upside and underperforms to the downside…..more here