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The gold price had a rare week of strong performance, and U.S. real interest rates are the reason why.

The bullion price is highly sensitive to changes in inflation-adjusted (or real) U.S. rates. When real rates are high, the gold price routinely falls. Holding gold is less attractive as an investment if strong inflation-adjusted returns are available in the bond market. (Note: on the chart below, real rates are plotted inversely to better show the trend).

The reverse is also true. When real rates are low, gold is a far more attractive investment and the price climbs.

After the financial crisis, the U.S. Federal Reserve created the ideal conditions for gold investors by steadily pushing U.S. real rates lower. The real ten year yield, for instance, dropped from 1.87 per cent in June of 2009 to -0.33 per cent by February 2012.

With little competition for investor attention, the gold price rocketed higher by 86 per cent during the same time period.

The Fed's decision to begin withdrawing monetary stimulus in May 2013 caused an immediate, nasty sell-off in gold as interest rates began to climb.

Last week, bond prices rallied after a prolonged period of weakness. The result was lower real yields and, true to form, a rally in gold from $1,237 (U.S.) to $1,270.

Gold investors should continue to follow U.S. bond markets in the hope that lower yields will push the bullion price higher.