Bond Yields

Would like to hear the best joke in the world? “Bond yields can only go up from here!”. This is what many investors believed for years. But they were constantly wrong, as the chart below shows.

But what is a bond yield at all? The bond yield is a return on investment, expressed as a percentage, for a bond. In other words, they are interest rates offered by bonds. The bond yields are inversely related to the bond prices. The lower the price, the higher the yield, and vice versa. Because both gold and Treasuries are considered to be safe-haven assets, there is a positive correlation between gold and bond prices, and negative correlation between gold prices and bond yields. This is because there are opportunity costs of holding gold, which does not bear any yield, so capital flows from gold to bonds, when yields become sufficiently high, and it flows in a reverse direction, when bond yields become too low.

Bond Yields and Gold

However, the data does not confirm the positive relationship between gold and the bond market. The chart below presents the price of gold and the 10-year Treasuries (we took the yields and inverted them).

As one can see, the price of gold was rising in the 70s, despite the fact that bond prices were falling and rates were surging. Since the 1980s, there has been a long upward trend in bond prices, seemingly not related to changes in the gold market, as the shiny metal was in a bear market during the 1980s, the 1990s and in the last few years, and in a bull market during the 2000s.

This is because what really matters for gold, are real interest rates, not nominal yields (high and accelerating inflation rates affect gold and bonds differently). The chart below shows gold’s significant negative relationship with real interest rates (the 10-year inflation indexed Treasury rate is a proxy for U.S. long-term real interest rates). Actually, the mirror reflection seen in the chart suggests that the real interest rates are one of the most important drivers of the gold prices.