Observations On The Correlation Between Gold Price And Rates... Or The Complete Lack Thereof

One of the specious and false memes circulating among the faux-punditry, which is undoubtedly based on a few months worth of amateur observations, is that gold is supposed to correlate inversely with interest rates. Presumably the logic goes something like this: instead of buying gold, it makes more sense to take one's money and buy $4.99 grande lattes, as it will be $6.99 tomorrow. So sell now. Fair enough, and on the surface this almost makes sense. Too bad it is completely wrong. If those same people who base their observations on one quarter of a business cycle maybe had the tools to extend their analysis a little further back, they would find that gold correlates with 10 year rates... in absolutely no way (with one very notable exception).

Exhibit A: Correlation plot between gold and the 10 Year since 1980.

Exhibit B: Tabular correlation between gold and the 10 Year: not the correlation coefficient.

Exhibit C: And just to confirm, there is no correlation between gold and stocks either.

Why start at 1980 one may ask? Great question. Because going just a little back shows the one true outlier to our statement... And the one that totally blows the opposing argument out of the water. To wit: when 10 year rates exploded in the end of 1979 and early 1980, and only the last minute intervention by Paul Volcker prevent an all out out of control inflationary episode (when the 10 Year moved from 9% to 13.% in 6 months), gold...doubled, and hit its all time inflation adjusted prices of over $800/ounce. In other words, a surge in rates resulted in the biggest break out in gold in history.

Gold price in 1980:

And 10 Year rates in 1980:

So hopefully this will end all debate over how the price of gold correlates with rates. It doesn't. What it does correlate with, is the propensity of the US economy to go down the shitter, and will certainly surge in a comparable demonstration of a self-imposed gold standard by the time the bond vigilantes come to the conclusion that it is time to redecorate the living room furniture. Ironically, the only thing that can crash the price of gold is if Bernanke, just like Volcker before him, does the right thing, and proceeds with the biggest tightening episode in recent US history. Everything else is smoke and spurious correlation (as for the probability of Bernanke tightening, that is worth another zero-word post altogether).