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Precious metals stocks had such a miserable 2013 that many investors are unaware of the sector's strong start to 2014. The reason, as usual, is U.S. interest rates.

Year to date, the gold price has climbed 22.5 per cent and an even stronger 26.6 per cent in Canadian dollar terms. Six of the top ten positive contributors to S&P/TSX Composite performance are precious metals stocks; Goldcorp Inc., Barrick Gold Corp., Silver Wheaton Corp., Franco-Nevada Corp., Yamana Gold Inc. and Agnico Eagle Mines Ltd.

This week's chart compares the price movement in gold bullion to inflation-adjusted (real) U.S. interest rates. In short, the rule is when U.S. real rates fall, gold climbs.

U.S. Treasury 10-year real yield vs Gold spot price (U.S. dollar)

SOURCE: Scott Barlow/Bloomberg

The value of the U.S. dollar play a key role in the close relationship between interest rates and precious metals. When the U.S. bond market offers attractive real returns, money flows into U.S. Treasuries from overseas. The inflow causes the greenback to rise, and because gold is priced in U.S. dollars, the gold price falls.

As Warren Buffett famously pointed out, gold bullion does not provide dividends or other form of cash flow. So, because dividend yields and earnings tend to go up with real interest rates (otherwise, investors would just buy bonds) the opportunity cost of holding gold is also a factor in the bullion price.

When interest rates are low, the opportunity cost of holding gold is low - gold investors are not foregoing big dividend yields elsewhere. When rates rise – as they did in 2013 – investment assets move out of gold, depressing the price, and into bonds and other yield-bearing assets.

As the chart shows, the real yield on the benchmark ten year Treasury bond has fallen 21 basis points year to date. (This doesn't sound like a lot, but it represents a 25 per cent decline in inflation-adjusted yields). Gold, holding to the real rates down/gold up rule, has performed well.

Investors in precious metals should watch the U.S. bond market carefully. If U.S. economic growth slows and Treasuries' yields fall, a higher gold price is likely in the cards.