Gold and Precious Metals

Almost every commodity gets consumed: oil is burned, wheat is eaten, copper is wired into a building. Gold is different — nearly all the gold ever mined still exists, sitting in vaults, jewelry boxes and central bank reserves. That means gold's price is barely driven by "running out" the way an industrial commodity's can be. Instead it trades on something closer to a currency's logic: what does it cost to hold, and how much is safety worth right now.

The opportunity-cost framework

Gold pays no coupon and no dividend. Holding it means forgoing whatever a bond or bank deposit would have paid. That forgone interest is gold's true carrying cost, which is why gold prices track real interest rates so closely: when real rates fall (nominal rates fall, or inflation rises faster than nominal rates), the opportunity cost of holding non-yielding gold shrinks, and gold tends to rise. When real rates climb, gold competes against an increasingly attractive yield on cash and typically falls.

Gold also carries a persistent safe-haven bid: during financial crises, currency devaluations, or geopolitical shocks, demand for gold as a store of value that isn't anyone else's liability spikes, sometimes overwhelming the real-rate relationship entirely.

Worked example

Suppose 10-year TIPS (inflation-protected Treasury) yields — a common proxy for real rates — sit at 1.8% and gold trades at $2,000/oz. The Fed signals faster rate cuts than expected while inflation stays sticky, and real yields fall to 1.0%. All else equal, the reduced opportunity cost of holding gold pushes it up to roughly $2,150/oz, a 7.5% move driven entirely by the interest-rate backdrop, with no change in physical gold supply or jewelry demand at all.

What this means in practice

Central banks hold gold as a reserve asset precisely because it carries no counterparty risk — unlike a bond, nobody can default on gold. That's also why gold demand tends to rise when investors worry about currency devaluation or sovereign credit risk. Traders watch real-yield data (TIPS yields, breakeven inflation) as much as they watch gold-specific supply data, because on most days the interest-rate channel dominates the price far more than mine output or jewelry demand does.