The Tactical And Structural Thesis For Gold Miners

One of the most misunderstood trades in the world of “macro” investing is undoubtedly the gold market. We see it all the time – the media and public “experts” tell us what is driving the price of gold on any given day. It’s the US Dollar, it’s a constitutional crisis, it’s growth expectations, it’s even geopolitical tensions with overseas foes. Without a doubt, the rise and fall of gold has been attributed to every single one of these factors at one point or another.

But there is one more factor that is perhaps the most misleading – nominal interest rates. In fact, a piece recently published by Bloomberg which attributed several big bank strategists touched on a few of these causes. But at its core, the rationale for weaker gold prices was predicated on a bond yield rally delivering a ‘fatal blow.’

There’s only one major problem with this argument and all of the above-mentioned factors – none of them are the primary driver for the price of gold.

Gold has long been touted as an ‘inflation’ hedge. But if one were to study the history of gold, it quickly becomes evident that it is not necessarily a great inflation hedge. Why? Because the price of gold isn’t dependent upon inflation alone. Its value is derived by the return one can achieve through other long duration assets after factoring in inflation.

Yes, we’re talking about “real” interest rates. In its most basic sense, real rates are determined by subtracting inflation from nominal interest rates.

The only problem with this basic interpretation is many pundits calculate real yields by subtracting stale Consumer Price Index (CPI) data from current nominal yields. You can almost think of this as buying a brand-new truck because it was on sale two years ago. Operating off stale data is often a recipe for disaster.

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