Generally, the real interest rates are negatively correlated with the gold price, i.e. the rising interest rates adversely impact the yellow metal.
Based on this adverse relationship between real interest rates and price of gold, the Elfenbein Gold Model shows that whenever the dollar’s real short-term interest rate is below 2%, gold rallies, and whenever the real short-term rate is above 2%, the price of gold falls. Another rule of thumb is that gold moves eight times stronger than the difference between real interest rates and 2%. If the model is correct, the Fed’s future interest rates hike may be detrimental for the price of gold.
However, there are many objections to the use of such a simple model, and generally to the adverse relationship between gold and real interest rates. Here we look at the main 7 reasons.