Gold exchange traded funds are caught in a two-day pullback on decreased expectations the Federal Reserve will soon unveil more economic stimulus. However, some gold bulls see a long-term buying opportunity here near $1,600 an ounce on negative real interest rates and further easing from central banks.

Real interest rates are determined by a bond’s yield minus the rate of inflation. “This is why high interest rates are not necessarily negative for gold; it’s the real rate that impacts what gold will ultimately do,” say metal analysts Alena Mikhan and Jeff Clark at Casey Research.

Since 1970, gold has performed very well when the real rate on 10-year Treasuries has been negative. [ETF Spotlight: Gold]

“Gold climbs when real interest rates are low or falling, while high or rising real rates negatively impact it. This pattern was true in the 1970s and it’s true today,” the analysts wrote in a report this week. [Why Gold ETFs Could Regain Their Mojo]

“The reason for this phenomenon is straightforward. When real interest rates are at or below zero, cash or debt instruments (like bonds) cease being effective because the return is lower than inflation,” they added. “In these cases, the investment is actually losing purchasing power – regardless of what the investment pays. An investor’s interest thus shifts to assets that offer returns above inflation… or at least a vehicle where money doesn’t lose value. Gold is one of the most reliable and proven tools in this scenario.”

The largest gold ETF, SPDR Gold Shares (NYSEArca: GLD), fell 1.4% on Wednesday following the previous day’s Fed minutes sell-off to drop below the 50-day exponential moving average. [Silver ETFs Fall on Fed, QE3 Outlook]

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