Gold, the 'Fear Trade' and Mr. Market

25 Pages Posted: 25 Jan 2014

Date Written: January 21, 2014


Recent history shows a high correlation between interest rates (both nominal and real) and the price of gold. Does this mean that 1) interest rates drive the price of gold, 2) gold drives interest rates, or 3) some unobserved factor has driven both the price of gold and interest rates. One possible unobserved factor is a “fear factor”. As the price of gold rose the amount of money invested in gold surged and as interest rates fell the amount of money in bond funds rose. This makes sense if investors truly believe that “less is more” and actively seek low prospective returns. However, another possibility is that a bull market in fear drove bull markets in both bonds and gold. If there is a “fear factor” then a decline in the level of fear will create a possibly unrewarding environment for gold and bonds. A challenge for investors is that, just as no one has ever spotted Warren Buffett’s Mr. Market, no one can unambiguously measure and spot fear.

Keywords: Gold, gold funds, nominal interest rates, real interest rates, Warren Buffett, bond fund AUM, fear trade, Mr. Market

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

Erb, Claude B., Gold, the 'Fear Trade' and Mr. Market (January 21, 2014). Available at SSRN: or

Claude B. Erb (Contact Author)

TR ( email )

CA 90272
United States

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