Despite gold prices hitting record highs early on Monday, disjointed real interest rates in the U.S. mean there is some vulnerability in the precious metal's current price levels, according to Lombard Odier Private Bank.
Spot gold touched an all-time high of $1,943.9275 per ounce during Asian trading hours, as a flare up of diplomatic tensions between the U.S. and China and spikes in coronavirus cases in various major countries sent investors flocking to the traditional safe haven asset.
However, Lombard Odier Chief Economist Samy Chaar told CNBC on Monday that his team had sold half of their position in gold. Chaar said that while holding some gold was important in a world where a lot of debt is negative-yielding, the deep negativity of U.S. real interest rates creates some "vulnerability" for gold at the current price levels, since such low rates are not sustainable given the economic outlook.
Weak real interest rates are typically positive for gold and vice versa. This could generally be explained by a fall in real rates reducing the capacity for bonds to sustain their purchasing power over a certain time period. This increases the attractiveness of alternative long-term assets that seek to preserve this purchasing power and therefore cools financial demand.
"We continue to see negative real interest rates as the main driver of gold prices, so take the 10-year real interest rate (interest rates adjusted for inflation) in the U.S., it is basically -1% now, levels we haven't seen since 2011 or 2012," Chaar told CNBC's "Squawk Box Europe."
Chaar suggested that such deeply negative real rates would ordinarily indicate that no economic recovery is forthcoming and the U.S. economy will continue to contract, which Lombard Odier economists do not see as feasible or sustainable.
"We know what they are going through, we know that they have mismanaged the pandemic, but at some point the U.S. economy is going to recover and as such, real interest rates are going to follow, and that is going to be a tailwind for gold when we think about the months and the quarters ahead," Chaar concluded.