These days, it is almost impossible not to talk about gold or bitcoin - for me, these two assets are close in what they offer investors. So I do just that. What strikes me most is the extreme divergence that has emerged in a traditionally very strong relationship.
Historically, there has been a particularly strong relationship between real interest rates and the price of gold. The higher the real interest rate, the lower the price of gold. A high real interest rate means that the opportunity cost of an asset that does not generate cash flow becomes higher. On top of that - excluding inflation shocks - real interest rates are often associated with higher economic growth, something that risky investments such as equities and high yield bonds generally benefit from.
However, the chart below shows that this year the relationship between the two has weakened considerably. Real interest rates have risen to their highest level in years, while gold recently recorded a new all-time high.
When I bring up the disruption, temporary or otherwise, of this historical relationship, I increasingly hear the same answer. Since just about every investor is only concerned with the end of the Fed tightening cycle and the interest rate cuts that should follow as early as March next year, it now makes more sense to look at the relationship between gold prices and implied Fed interest rates, derived from Fed Fund Futures.
Since I like to be inspired by the thoughts of others - sticking to your own beliefs for too long is a terrible investment strategy - I have also created a graph of the gold price and interest rate that can be derived from the Fed Fund Future for December 2024.
It takes a good dose of imagination to argue that Fed Futures now play a more relevant role in gold price movements than real interest rates.
That leaves the question of where does the divergence come from? Let me start by saying that I do not think this relationship is history after decades in force. I expect more of a temporary divergence, after which that relationship will regain strength. What about that gap? When I see how investor attention to gold has increased in recent years, the increasing uncertainty about our financial system and especially the mountain of debt built up in it and, finally, how central banks are stubbornly continuing to buy up gold, there is a rebalancing going on at a high portfolio level where the relationship between nominal and real assets is becoming less skewed.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His chart of the week appears every Monday on Investment Officer Luxembourg.