Two Markets Diverge: TIPS, Gold & Growth
Gold has been highly correlated with real interest rates in the past. In particular the relationship between the 5 Year TIPS yield and gold has been very tight. This chart shows the 5 Year TIPS yield and the inverse of gold prices. As you can see, the relationship has recently broken down; real rates and gold are both rising.
What does this mean? Well, real yields are generally an indicator of real growth expectations but they are also influenced by expectations for Fed policy. Of course, that is two ways of saying the same thing - if you assume the Fed has a clue what future growth will really be. (I'll pause for a minute while you wipe your beverage from the screen.) Gold, on the other hand, is kind of the anti-growth indicator. When people are buying gold they are not making a big bet on the future but rather trying to protect their gains from the past. So there seems to be a disagreement between gold and the TIPS market regarding future growth. TIPS say growth will get better while gold begs to differ. If you believe TIPS yields are up mostly because of Fed expectations then you might say the difference of opinion is between the gold market and the Fed. I don't think they will both be right so will gold rise or will TIPS yields fall? Some of both? Place your bets....
