Knowledge Center

When will Gold Shine Again? Look at Real Yields

investing-my-money | Read Time: 3 minutes

By David Navarro, CFA® | Published: June 2021

When will Gold Shine Again? Look at Real Yields

Gold is one of the most debated topics in investing. Some experts love it, others turn away. Investors focus on numerous factors that drive the price of gold. One common factor is supply and demand. Another common factor is uncertainty in the markets and one that is less obvious but seems to have more predictive power over the last decade, is real yields.

Interest rates are typically quoted in nominal terms. Real yields are the yield on a security when you take inflation into account. For example, a bond with a nominal yield of 5% and inflation running at 3% would have a real yield of 2%. They have serious implications for investing, as negative real yields push investors to take on risk because an investor would not be able to receive a rate of return over inflation. .

The chart above uses the 5-year treasury rate minus the 5-year breakeven inflation rate as a gauge for real yields. Based on the chart, it is evident how the price of gold moves opposite to the change in real yields. A couple of things can explain this inverse relationship. First, rising real yields point to improving economic conditions and future growth for an economy. Gold, in some areas, is viewed as a fear indicator. If economic conditions worsened, investors would be inclined to purchase gold based on those views. Second, real interest rates represent the opportunity cost to investing in anything other than interest bearing securities. Gold provides no yield. If real interest rates are rising, that makes the opportunity cost of holding gold much higher, thus suppressing the price. Importantly, the price of gold was at an elevated level when real yields were negative. The 2011 to 2012 period real yields went into negative territory, pushing the price of gold into the $1,800 range. More recently, real yields were approaching negative territory heading into the pandemic and were forced there from the global shutdown, pushing gold higher to $2,000.

It is critical to point out that the Federal Reserve has a major hand to play in real yields. The Federal Reserve has been buying treasuries on a monthly basis, while at the same time signaling to the market it will let inflation run higher for longer; in essence, creating a synthetic ceiling on nominal yields and squeezing real yields lower. Investors must be cognizant of these dynamics in overall investing, but especially when it comes to investing in gold. Nevertheless, if you are an investor that incorporates gold into your portfolio, it seems visible from the past decade that if you are able to gauge the future path of real yields it would assist in producing positive returns for gold in your portfolio.




About the Author – David Navarro, CFA®
David Navarro, CFA® is the Director of Research at West Capital Management, a subsidiary of WSFS Financial Corporation. West Capital Management focuses on developing custom planning and investment strategies tailored to each client’s unique circumstances and greater ambitions. David graduated with a B.S. in Finance from Rutgers University. He can be reached via email at dnavarro@westcapital.com.



This communication is provided by West Capital Management (“WCM” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that WCM believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investment products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

WCM is the business name of WSFS Capital Management, LLC. It is an SEC registered investment adviser that maintains a principal place of business in the Commonwealth of Pennsylvania. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from registration requirements. For information about WCM’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. WSFS Capital Management, LLC, is a wholly owned subsidiary of WSFS Financial Corporation.

 


Important Steps for Proper Retirement Planning

Important Steps for Proper Retirement Planning

Many of us are familiar with using a map to reach an unknown destination or following directions to assemble an item. Think furniture from a certain Swedish store. Without the map, we’d have a tough time finding our destination and without the directions we’d have an even more challenging time assembling the furniture.

Read More
Market Minute

Market Minute: The Latest on the Markets and Economy

The markets and the economy are ever-changing, making it hard to keep up sometimes. Let WSFS help you make sense of it all. Tune in to our Market Minute update from Andrew N. Davis, CFA®, Director of Research at West Capital Management, a subsidiary of WSFS Financial Corporation.

Read More
Ways to Prepare for Receiving an Inheritance

Ways to Prepare for Receiving an Inheritance

An estimated $60 trillion is expected to be transferred from baby boomers to their heirs in the coming years. The passing of a loved one, sometimes unexpectedly, can be especially stressful. Receiving an inheritance can further compound the emotional strain, particularly if you are settling the estate, dealing with creditors, and organizing the assets.

Read More
Emerging Markets: Ripe for an Upswing?

Emerging Markets: Are They Ripe for an Upswing?

With the majority of market chatter engulfed in the inflation debate, certain asset classes have been a focus for portfolios. Typically, investors flock to commodities during times of high or expected high inflation. Another asset class that can help mitigate inflation risks in a portfolio is emerging market equities.

Read More
Ways to Prepare for Wealth Transfer to the Next Generation

Ways to Prepare for Wealth Transfer to the Next Generation

An estimated $60 trillion is expected to be transferred from baby boomers to their heirs in the coming years. Accordingly, it is always important to meet with a financial advisor to ensure that the “great wealth transfer” is a smooth one for you and your loved ones. The more proactive you are, the more likely you are to achieve your goals of reducing taxes, giving to charity, and the list goes on.

Read More