What’s the ideal environment for gold? It’s a question that defies a clear answer, since the interplay of the various factors that drive the metal’s price is constantly changing.

Take the issue of real interest rates (i.e., bond yields minus the rate of inflation). The conventional wisdom holds that negative real rates are beneficial to gold. If investors can’t gain a positive real return from bonds, the thinking goes, it makes gold more attractive. On the flip side, positive real rates are supposed to be a headwind since they draw capital toward fixed-income investments and away from gold.

In theory, this should matter right now given that 10-year real interest rates — after sitting in negative territory since December 2011 — have surged with the recent rise in Treasury yields. Using the 10-year TIPS as a gauge, real yields stood at -0.62% on May 2 — the day before the current spike in yields began. Yesterday, they stood at 0.75% — far above their May low and substantially higher than their 0.37% level on Aug. 12. Five-year real yields now stand at -0.13%, up from -0.6% in mid-July and -1.37% at the start of the year.

Given the historical relationship between the gold price and real yields, this rapid move would seem to be a catastrophic event for the metal. But in reality, gold — as measured by the SPDR Gold Shares (GLD) — has rallied nearly 14% since June 27. Not only that, but gold declined more than 21% in the interval from December 2011 through May 2013, a time that was dominated by negative real yields.

What’s going on here?

For one, short-term real rates do in fact remain negative. With the fed funds rates near zero and the Federal Reserve demonstrating no inclination to raise them any time in the next two years, real yields remain firmly below zero on the short end of the curve.

In addition, the World Gold Council has shown that the impact of real U.S. interest rates has diminished over time, and that a multitude of other factors influence gold’s performance to a larger extent now than they did in the past. The WGC’s findings were published in a July 2013 piece titled, “Gold and US interest rates — a reality check,” which can be viewed here following a brief process to establish a login ID.

The continued belief in the influence of U.S. real rates, says the WGC, is based on the idea that dollar-based investment demand is the key driver of the gold price. And while that’s still an important factor — 37%, to be exact — it’s still outweighed by demand related to jewelry production (48%) and other uses (15%). Further, North America is gradually losing its influence in the gold market. The region’s share of total global demand now stands at 11%, compared with 25% for India and 30% for East Asia. In addition, the majority of the negative correlation between gold and real rates occurred in the period prior to 2001.

“Given the structural changes that gold has experienced for more than a decade,” the authors of the WGC paper write, “it is likely that the US real interest rate will be less relevant than before, particularly as demand increasingly originates in the emerging markets where domestic inflation rates are more relevant than the US inflation rate.”

This brings us back to the events of the past month.

Caution Still Is in Order

One reason why gold has been able to hold up through the surge in Treasury yields is that the move has been accompanied by a decline in the U.S. dollar. Over time, of course, gold tends to have a high negative correlation with the dollar — meaning investors can look past interest-rate trends as long as the currency markets cooperate.

However, the metal is unlikely to maintain its rally in the face of both rising bond yields and renewed strength in the greenback. In fact, this combination of events is exactly what happened in the interval from June 14 to June 27 — a time in which GLD plunged 13.8%. A rebound in the dollar is therefore the largest threat to gold right now.

It should also be noted that since 1976, the Barclays U.S. Aggregate Bond Index has finished two calendar years with negative returns: 1994 (-2.92%) and 1999 (-0.82%). In those years, gold returned -2.2% and +1%, respectively. This year, the bond index is off 3.6% as gold has fallen more than 18% — an indication that rising nominal yields are staying true to their historical role as a headwind to the metal’s performance.

Investors in gold — not to mention gold stocks and funds such as the Market Vectors Gold Miners ETF (GDX) — therefore need to avoid becoming too carried away by the current rally. Instead, keep a close eye on gold’s performance relative to other markets — they just might hold the key to determining the sustainability of the current move.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.