The Decreasing Correlation of Gold with Real Yields.

 

For a long time, gold price movement  had a significant negative  correlation with real yields. That is, when real yields move up, gold price moves down and vice versa. What are real yields? Real yields are nominal interest rates minus the rate of inflation. So, if your bank deposit pays 1% and inflation is 2% then your bank deposit rate of return is actually negative, and vice versa. So if real yield rises the gold you hold which doesn't pay any interest, falls. Real yields are measured by the US TIPS bonds (Treasury Inflation Protected Security). 

But Bhanu Baweja , Chief Strategist of UBS Investment Bank, recently put up a paper showing that gold price is becoming less sensitive (lower correlation) to real yields. Why? Because the world is becoming such a dangerous place that you won't be bothered about gold not yielding any interest payment. You are holding gold for security, a hedge against inflation, and a rise in gold price as fiat currency (not only USD, but also Euro, JPY) loses value. In the charts above you can see the UBS chart and my chart are about the same. The top chart is my chart, the bottom chart is UBS chart.  The distance between the gold and silver clusters and the diagonal line which represents real yields shows how far the divergence between gold/silver price and real yields is. The further the distance , the less the correlation. And the different colors of the clusters show the different periods with Red in my chart being the most recent period. 

My enhanced version of the UBS chart shows not only gold and silver(silver=triangle, gold =circle)  but has a 3rd cluster that shows this move has accelerated recently (Sep 2025 to present). You can also see that Silver is even more less correlated to changes in real yields.

What are the implications for Fed interest rate hike (16 Sep, Singapore time 0200hr 17 Sep) ) and BOJ hike (18 Sep, Singapore time Noon 18 Sep)? The market has already priced that in. My personal view  is that tomorrow, Tuesday and Wednesday we may see more signs of Japanese insurers, pension funds, banks, corporations selling their USD assets and repatriating the money back to invest in Japanese government bonds and stock market. Watch for decline of USD/JPY and DXY. Throughout all this, gold and silver prices will rise. But there may be short bouts of selling as US investors and funds sell their gold to cover margin top-ups and losses. However the uncertainty lies in what US Treasury Scretary Scott Bessent may do in the next few days given that US Treasury yields are at an untenable 30yr=5.36, 10yr=4.97, and even 2yr=4.63. Something's got to give.