While all are talking about the roaring Equity markets, Gold has silently hit the all time high.
Lets discuss what’s moving the gold prices in this 🧵
Do hit the ‘re-tweet’ and help us educate more investors. (1/8)
Lets discuss what’s moving the gold prices in this 🧵
Do hit the ‘re-tweet’ and help us educate more investors. (1/8)
(Q1) What really moves gold prices?
It’s not just inflation but a combination of Inflation & Interest Rates that moves Gold prices. Real Rate of Return like we call it moves the gold prices (2/8)
It’s not just inflation but a combination of Inflation & Interest Rates that moves Gold prices. Real Rate of Return like we call it moves the gold prices (2/8)
(Q2) What is a real rate of return?
Real Rate of Return in simple language is,
- Interest Rate – Inflation.
- If bank FD is paying you 5% & inflation is 6%, your real return is 5% - 6% = -1%
- If inflation is 3%, your real return is 5% - 3% = 2% (3/8)
Real Rate of Return in simple language is,
- Interest Rate – Inflation.
- If bank FD is paying you 5% & inflation is 6%, your real return is 5% - 6% = -1%
- If inflation is 3%, your real return is 5% - 3% = 2% (3/8)
(Q3) What’s the relationship between real rates & gold prices?
(a) Negative Real Rates (-1% in the above example) is supportive of gold prices
(b) Positive Real Rates (2% in the above example) works against gold prices (4/8)
(a) Negative Real Rates (-1% in the above example) is supportive of gold prices
(b) Positive Real Rates (2% in the above example) works against gold prices (4/8)
(Q4) Why?
(a) Gold is a non interest-baring instrument i.e. does not pay any fixed interest.
(b) Hence, whenever rates drop, you make less fixed interest by investing incremental money in fixed income & hence it moves to Gold & When rates go up, you want to invest incremental money in Fixed income & not gold
(c) Hence, assuming inflation to be constant, you will invest more in Gold when Interest rate falls to 4% & inflation is 6% = -2% real rate and you will invest less in Gold when interest rate rises to 7% & inflation is 6% = 1% real rate (5/8)
(a) Gold is a non interest-baring instrument i.e. does not pay any fixed interest.
(b) Hence, whenever rates drop, you make less fixed interest by investing incremental money in fixed income & hence it moves to Gold & When rates go up, you want to invest incremental money in Fixed income & not gold
(c) Hence, assuming inflation to be constant, you will invest more in Gold when Interest rate falls to 4% & inflation is 6% = -2% real rate and you will invest less in Gold when interest rate rises to 7% & inflation is 6% = 1% real rate (5/8)
(Q5) Apart from Interest Rate & Inflation, does $ affect gold price?
Yes. Gold is traded in $. When $ increases, gold becomes expensive & hence demand is expected to fall & hence the price comes down But When $ drops, gold becomes cheap & hence demand is expected to rise & hence the price is expected to go up (6/8)
Yes. Gold is traded in $. When $ increases, gold becomes expensive & hence demand is expected to fall & hence the price comes down But When $ drops, gold becomes cheap & hence demand is expected to rise & hence the price is expected to go up (6/8)
(Q6) What’s happening to Gold right now?
(a) Globally interest rates are expected to top out. Market is expecting rates to start falling; & hence fixed income investors are starting to allocate more to Gold over fixed income
(b) When rates fall, the currency is expected to soften as well. With this view, the expectation also is that $ will soften & hence that’s also positive for gold. (7/8)
(a) Globally interest rates are expected to top out. Market is expecting rates to start falling; & hence fixed income investors are starting to allocate more to Gold over fixed income
(b) When rates fall, the currency is expected to soften as well. With this view, the expectation also is that $ will soften & hence that’s also positive for gold. (7/8)
If you think this 🧵 added value, do consider ‘re-tweeting’ the first tweet of this 🧵
Also follow me at @KirtanShahCFP, as I write around
- Macros
- Equity
- Fixed Income &
- Personal Finance & #Investing
Also follow me at @KirtanShahCFP, as I write around
- Macros
- Equity
- Fixed Income &
- Personal Finance & #Investing
Loading suggestions...