A significant driver of investment demand for gold is real interest rates. Real interest rates are nominal interest rates minus inflation. When investors are unable to get a satisfactory real return on their investments, they turn to gold to preserve purchasing power. Gold does not pay interest, does not benefit from productivity gains in the economy, and has a carrying cost (storage, ETF fees, etc.). But when real rates are negative the opportunity cost of gold falls. Short term real rates have been negative for most of the last four years as gold has appreciated 40%. Going forward the question is whether or not real rates will stay low.

(Read more: Plenty of room to grow for ETFs against mutual funds)

The chart above shows an inverse relationship between the one year real interest rate and the price of SPDR Gold Trust (GLD), an ETF that seeks to replicate the price of gold bullion, over the last six years. Prior to 2001 the relationship between real rates and gold prices is not as strong since when real rates are above 2% the opportunity cost of holding gold is significant.

In September, the Cleveland Fed reported that the one year real interest rate had fallen to -2.20% from -1.57% a month prior. GLD was up 5.97% in that timeframe. This price movement is indicative of the impact of real rates on GLD’s price.

(Read more: Yield Curve Steepening After Fed Doesn’t Taper)

Real interest rates are driven by central bank monetary policy in the short run and real growth expectations in the long run. With central banks around the world such as the Federal Reserve engaging in zero interest rate policy, short term nominal rates have been driven to near-zero which has forced short term real rates negative.

The Real Yield Curve shows the market’s expectation for real rates going forward. According to the curve, investors expect negative real rates for the next five years. Although the front end of the curve continues to be negative, over the last year the middle and back end have turned positive. This has resulted in a fall in demand for gold as an investment since the opportunity cost of holding a non-interest bearing asset has increased.

The price of gold is an important driver of performance for gold miners ETFs (GDX, GDXJ, and PSAU) and mutual funds that focus on precious metals such as SGGDX. Look into these products if you’re interested in levered exposure to gold.