Thursday, September 27, 2012

An In-Depth Analysis Of Trading Gold Relative To US Real Interest Rates

At the start of 2012 we publicly proposed two pair trades for 2012.

Nine months later and with huge changes in the market having occurred, we are revisiting our recommendation for the GLD/TIP compression pair trade, which has performed well over this period.

Our argument for this trade at the time was as follows:
“Historically US real interest rates have an inverse relationship with gold prices, a relationship which we have written about frequently. The basic premise is that when monetary policy becomes more accommodative, US real interest rates decline and gold prices rise due to the ease in monetary policy.”

Our explanation for the inverse relationship between gold and U.S. real rates is as follows:
When US monetary policy is looser, real rates fall and therefore investors buy gold for a number of reasons.

Firstly, lower real rates could imply higher inflationary expectations in the future therefore gold is bought as a hedge against this possible inflation.  (more)

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