Ask some gold bugs why Gold has not broken out yet and you will probably get the usual answers. Some will say it's due to manipulation or price suppression. Others will mention the current rally in the US Dollar (while neglecting that the previous decline in the greenback was unable to take Gold to a new high). Few would say the fundamentals are not in place. No one can know for certain but Gold's fundamentals have not improved over the past year and are not where they need to be to support a breakout.

The vast majority of history shows us that Gold is inversely correlated to real interest rates (or real yields). It makes perfect sense because Gold has been money for thousands of years. When real rates decline, the real return on money in the bank or in a treasury bill or note decreases. Gold benefits. The corollary is also true. Rising real interest rates indicate stronger real return on money invested in the aforementioned instruments. That's negative for Gold.

Real interest rates have actually strengthened for nearly 18 months, as the chart below shows. Gold has performed well during that period because of weakness in the US Dollar as well as some anticipation of an escalation in long-term yields.

Given the rise in real interest rates, it is not a surprise that investment demand for Gold has been weak. Gold bugs frequently trumpet strong demand from China and how tight the physical Gold market is but in reality, investment demand is what drives bull markets. Investment demand tends to respond to or follow negative and/or declining real interest rates.

One way of measuring investment demand in real time is by following the amount of Gold held in the GLD trust. As we can see below, investment demand (by this metric) confirmed the rebound in Gold in the first half of 2016. However, it has essentially been flat over the past 18 months as Gold rebounded from the low $1100s all the way to $1360.  

Gold & Tons in GLD Trust