In this week’s Gold Report we conduct a historical analysis of the impact of US monetary policy announcements on the price of gold in US dollars. 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 analysis looks at the resulting reaction of the gold market and the US 10 year real yield over a three month period. 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 – firstly the largest changes in the real yield following the monetary policy announcement have been associated with the largest moves in the gold price. And secondly 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.
This article was written by Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE).