Summary An examination of how Gold prices and the US dollar are related. Gold prices are typically denominated in US dollars and this implies that the exposure gained from buying/selling gold is influenced by changes in the exchange rate for US dollars. Videos to watch before 1. Why is gold a currency? Transcript In this video we are going to try to answer the question: what is the relationship between the price of gold and the US dollar? The short answer to this question is that the price of gold is inversely related to the US dollar. The long answer involves the following example. Setting up an example Let’s assume that in the world there are only three currencies. We
Summary This video discusses why being on the Gold Standard implied that a country had a fixed currency exchange rate with another country on the Gold Standard. We also discuss how the fixed exchange rate meant that interest rates between two countries had to be similar to prevent a flow of gold from one country to the other. This made it difficult for a country to have an independent monetary policy. Videos to watch before Why are interest rates so important for an economy?
Summary A historical look at why Britain, at the time the center of the banking world, abandoned the Gold Standard. After WWI, it became harder for Britain to deflate its economy and incomes to compete in the world export markets and this nullified a key mechanism by which the Gold Standard operated. Eventually a run on the British pound caused the Bank of England to go off the Gold Standard. Videos to watch before What restrictions did the Gold Standard impose on member countries? How did the Gold Standard benefit world trade? How did the Gold Standard limit gov’t spending? Why did the Gold Standard control inflation so well? Why did the Gold Standard make it hard to create jobs?
Investors have shown significant interest in shorting treasuries recently. Some investors are choosing to express this view by buying levered ETFs that promise twice the inverse return of an underlying government bond index. Investors in these ETFs are holding them for longer than 1 day and are therefore, in addition to betting on the direction of the underlying, also making a complex bet on its path and realized volatility. In this article we examine some evidence that investors are behaving this way, and in the next article we examine the complex nature of the bet they are making. Investors in levered ETFs linked to treasuries are mostly short The chart below shows Assets Under Management (AUMs) in levered ETFs whose
We often hear the phrase that gold is an “inflation hedge”. If gold were the perfect inflation hedge, then the rate of inflation would be perfectly contemporaneously correlated with changes in gold prices. Is this actually true? Gold vs. realized inflation The chart below shows the inflation rate (CPI Yoy) vs. the one year change in the price of gold. Its clear that the lines seem correlated back in the 70’s and 80′s and somewhat correlated in the previous 4 years, but have a variant relationship in the middle. For example, in the early 90′s inflation was ~5%, but gold prices were basically flat and in the late 90′s inflation was at 3%, while gold prices were not increasing. This
When you buy/sell gold what exposure to macro economic forces do you get? We think there are primarily two factors that will influence the performance of gold in the long term: 1) What will happen to the attractiveness of keeping money in paper currencies in general For hundreds of years people have seen gold as a store of value. For a long time, it was used as a currency in itself and then when paper money was created it was what backed the paper money. All through out the period when the world was on the gold standard, the reason people thought paper currency had any value is because they believed that they could exchange that paper currency for gold.