Gold discussion seems to bring out the worst in people. Hate it or love it; there are no fence sitters here. Yet gold, we should remember is just another asset, one that should have its time and place in portfolios. Negative real interest rates, as all savvy investors should understand, implies that this time is now; and as a true diversifier – unlike broad commodity indices that in fact amplify overall risk – gold demands also its place in investors’ portfolios.
The chart below shows how when real interest rates are negative, the subsequent return for gold has a huge bias to being positive. We use inflation expectations to deflate the nominal rate as using year-over-year CPI, the conventional way, is inherently backwards looking, therefore this is inadequate for capturing investment decisions, which are based on expectations, not just recent history.
I would encourage you to read our January 2012 HindeSight Letter – The Myth of Commodity Diversification for more on this topic.