Rates pose risks but also unlock opportunites for gold

“A sustained increase in interest rates beyond the aforementioned thresholds may materialise if there were to be a shift in inflation dynamics not seen in decades. Such an event would trigger meaningful changes to interest rates, with an increased opportunity cost to holding riskier assets such as stocks. As risk assets sell off, gold’s value as a contributor to portfolio return comes into focus, particularly several months into the inflation cycle. ‘Reflation’ periods such as we are seeing today, marked by resurgent economic growth alongside rising inflation and interest rates, have seen other major commodities outperform gold in the first six months. However, on average since 1991 gold has caught up and in fact, outperformed other sectors and commodities by the second and third years.”

Chart courtesy of the World Gold Council • • • Click to enlarge

USAGOLD note: The snippet above outlines just one of many scenarios the World Gold Council covers in the report linked above. Though the chart above emphasizes the correlation between yields and the price of gold, the real rate of return (yields minus the inflation rate) exerts an even greater influence. It is likely to become even more of an issue as the reflation mentioned in the snippet above progresses.