**Real Interest Rates and Gold**
Generally,

** real interest rates are negatively correlated with the price of gold**, i.e. rising real rates adversely impact the yellow metal. For example, in the article entitled

The Golden Dilemma, Claude Erb and Campbell Harvey found very strong negative correlation between real interest rates and gold prices (from 1997 to 2012), to the tune of -0.82 (while -1 means a perfect negative

correlation). The reasoning behind this is that higher interest rates mean higher opportunity costs of holding non-interest bearing assets, such as precious metals, making them relatively less attractive. Basically, gold pays neither dividends nor interest. Thus, it is relatively expensive to hold in the portfolio when real interest rates are high, and relatively cheap when real interest rates are low. In other words, the higher the interest rates are, the higher are carrying costs.

However, the relationship is not linear. Gold prices tend to increase significantly only during the periods of negative real interest rates. This is because negative interest rates, i.e. the situation when the inflation rate is higher than the nominal interest rate (the rate which is actually paid), means that creditors are losing money, therefore they are more prone to buy gold, even though it does not bear interest or dividends. In other words, gold then reclaims its traditional role as money and a store of wealth, which will at least keep pace with inflation to preserve the purchasing power of the capital, while bonds guarantee a real loss at negative real interest rates.