Principles: Opportunity Cost of Carry (Gold) vs Yield (US10Y)

When investing in US Treasury Bonds you are guaranteed money in the form of yield. However, if an investor is looking to take on the opportunity cost of carrying a yieldless asset; there is no guaranteed payment. Profit is only realized by an increase in value during the carrying period. When investing in yieldless assets you want to make sure that the opportunity cost is zero resulting in a positive carry.

Real Interest Rates = US10Y - Inflation rate.

When the US10Y rate is lower say it decreases from 3% to 2% and say the inflation rate is 2.5%. At 3% yield on the US10Y we profit 3%-2.5%=0.5% however when the US10Y decreases to 2% we lose 2%-2.5%=-0.5%. When the difference is negative you do not want to be holding cash or treasuries. However, as the US10Y increases faster than the inflation rate, the cost of carry is greater and yields become more attractive. Without any yield, Gold investors need to rely on the price of gold to appreciate faster than inflation. When nominal yields (US10Y) decrease it gives way for inflation to catch up with it- appreciating gold's value. That is why in the chart. When the US10Y yield increases, Gold declines. When US10Y decreases, Gold increases. Furthermore, when the US10Y finishes a move in a certain direction it allows for Gold to follow that direction. This is explained further in the attached idea. So if you believe US10Y rates continue to increase, you should not be buying Gold unless you think the inflation rate will move even faster. You can look at the TIPS bond yield to gauge inflation expectations. When investing in markets, investors should pay attention to the tradeoff between collecting a yield or collecting profits by carrying.