Gold prices hit new highs earlier this month, propelled by record low interest rates in many regions, inflation worries, and mounting government debt. Yet PIMCO’s valuation model indicates gold remains attractively valued, even at these levels.
Valuation on a real-yield-adjusted basis
Our framework is based on our assessment that while many factors influence the price of gold, only one explains the majority of moves over the past decade: changes in the real (i.e., inflation-adjusted) yield of government bonds. As we’ve written previously, gold, by its nature, essentially has a real yield of zero – so just as currency movements are driven by real yield differentials, so should be the price of gold. (We refer to real rather than nominal yield because gold prices have historically tended to rise with U.S. inflation.)
Since about 2006, gold has traded like an asset with nearly 30 years’ real duration (meaning that a 100-basis-point move lower in U.S. Treasury real yields has translated to a roughly 30% increase in the price of gold). From a market perspective, as real yields on U.S. government bonds rise, one would expect investors to marginally prefer those assets, moving out of gold and into U.S. Treasuries and Treasury Inflation-Protected
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