What should be the real rate now ?

Understanding the Relationship Between Gold and Real Interest Rates

Gold and real interest rates have a close relationship that can tell us a lot about the economy. Real interest rates are calculated by subtracting inflation from nominal interest rates. For example, if the nominal rate is 7% and inflation is 5%, the real interest rate would be 2%. This measure helps us understand the true cost of borrowing money or the actual return on investments after accounting for inflation.

How Gold and Real Rates Have Moved Together

When we look at the historical data, there is a strong correlation between gold prices and real interest rates. In the past, as real interest rates moved, gold prices followed closely. For example, from 2011 to 2021, when real rates were between 0% and 1%, gold prices mirrored this trend. This close connection has been a reliable indicator of how gold should behave based on real interest rates.

The Recent Disconnect Between Gold and Real Rates

However, in 2022, something unusual happened. Real interest rates were increased, but gold prices didn’t follow the expected pattern. Instead, gold prices continued to rise even as real rates went up. This is odd because historically, when real rates rise, gold prices tend to fall. The chart showing this data might seem confusing at first, but it highlights a significant shift in the usual trend.

What This Means for Future Interest Rates and Gold

This unusual behavior suggests that something is off in the current economic scenario. Based on the past correlation, real interest rates should have come down sharply, but they haven’t. This could mean that the reported inflation rates are not reflecting the true inflation that people are experiencing. If the true inflation is higher than reported, then the real interest rate could actually be negative when adjusted correctly.

The Potential for a Change in Interest Rates

The disconnect between gold and real interest rates could be signaling that the current high interest rates might not last. If inflation goes up while interest rates are reduced, the gap between real rates and gold prices might close again. For instance, if inflation increases by 2% and interest rates drop by 2%, the real interest rate would decrease, aligning more closely with the current gold prices.

Gold’s Signal to the Economy

Gold is giving a strong signal that interest rates might need to come down soon. This is because gold typically rises when real interest rates are low or negative, as it becomes a more attractive investment compared to other assets. If interest rates do not come down, gold’s rise suggests that the economy could face challenges, as high rates could stifle growth. On the other hand, if rates drop as suggested, gold prices might stabilize or even increase further.

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