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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