For investors looking for an attractive entry point into gold, you should know what you are up against. There is a false belief among the investor community that gold is an inflation hedge. Make no mistake – this is wrong. It is a fallacy.

I am an advocate of holding a small percentage of gold in an overall diversified portfolio because of its non-correlative properties to other asset classes. There will come a day when everything in an investor portfolio is down, and it is precisely during these broad asset class swoons that gold performs its function – of easing the pain. But consider the following chart.

The white line is the real 10-year yield, and it is inverted. So as real yields move higher, the line will move lower. The orange line is spot gold. As you can see, gold is highly correlated to real yields. Inflation is only a small part of the equation. If nominal yields on Treasuries rise more slowly than inflation expectations, then real yields will fall, and this is bullish for gold. Alternatively, if nominal yields rise faster than inflation expectations, real yields will rise. The latter case is what has been happening over the last couple of months, and gold has continued to sell off.

Just for reference, the 10-year real yield was .7% at the beginning of the year. If we end the year unchanged (like nominal yields appear to be on target for), the recent swoon in gold is about 2/3rds over. And if the recent Trump Tantrum is indeed a reversal of the multi-decade bull market in bonds, look out below. The point is, gold investors should know that gold not an inflation hedge – it is a real rate hedge. When real rates plummet (like they have done over the last decade), it is bullish for gold. When real rates increase (like they have done over the last couple of months), gold plummets. To take a speculative position in gold is to believe that inflation expectations will outperform nominal yields.