Sunday , 23 June 2024

To What Extent Is Price of Gold Affected By Changes In U.S. Monetary Policy? (+2K Views)

This article presents a historical analysis of the impact of U.S. monetary policygold-and-currencies announcements on the price of gold in U.S. dollars over subsequent 3-month periods beginning with the Federal Reserve’s extra-ordinary 75 basis point Fed Funds rate cut in January 2008 and the most significant central bank policy announcements since. The findings are very interesting, indeed.

The above introductory comments are edited excerpts from an article* by entitled Gold And U.S. Monetary Policy.

The article goes on to say in further edited excerpts:

In previous reports we have looked at the relationship between the gold price in dollars and the real 10 year interest rate and found a strong inverse relationship between the level of the real interest rate and the level of the gold price.

In this analysis we plot changes in the gold price over the 3 month period following the day of the announcement against the change in the 10 year real yield. We include the real yield in the analysis as a way to scale the strength of the policy announcement’s impact on market expectations and then relate this measure of strength to the change in the gold price.

All things being equal, the greater the impact of the policy on real yields the greater would be the expected change in the gold price. Note that the real interest rate used in the analysis is observed directly from the yield on the 10 year inflation linked Treasury (and represents the yield on the 10 year nominal Treasury bond less the market’s inflation expectations over the life of the bond).

Source: Bloomberg LP; Treesdale Partners calculations; past performance is not indicative of future performance.

The monetary policy events and the resulting changes in the gold price and the 10 year real yield are shown in the table above and are also plotted in the chart below. We have also included a chart point to show the data for the most recent 3 month period and which is highlighted in red below.

Source: Bloomberg LP; Treesdale Partners calculations; past performance is not indicative of future performance; the red chart point represents the change of the most recent 3 month period.

Although the chart is not able to tell us about the causal relationship between the change in the gold price and the change in real rates it does appear that there is a relationship between the two. Two patterns are apparent:

  1. the largest changes in the real yield following the monetary policy announcement have been associated with the largest moves in the gold price and
  2. the slope of the data points also suggests that negative changes in real yields are associated with positive changes in the gold price and positive changes in real yields with negative changes in gold.


To summarize, the key take away for gold investors searching for clues as to the potential impact on the gold price as the Federal Reserve prepares to end its policy of QE in October and normalize monetary policy, is that:

  • an important data point into their investment process should be the observed/potential impact of these policy changes on real yields.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

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One comment

  1. Remember the US does not exist in a vacuum, here is yet another reason that the value of Gold may surprise many investors before Xmas: