The Logic Behind the Gold Trade

I like to live my life by heuristics – those little rules of thumb that help us remember to look both ways before crossing the street and to brush after every meal. Such a mindset certainly comes in handy when developing an investment thesis, as it can keep one from making ill-informed decisions. I always put buying gold in that category, but according to a recent blog post, there may actually be some logic to the gains enjoyed by the yellow metal.

Check out “A Possible Model for the Price of Gold.” The author makes a compelling case that gold prices are akin to a highly leveraged short position in U.S Treasury bills, with a breakeven point of 2%. In other words, gold’s value is tied to low real rates. When real rates are low, gold prices can rise significantly; as real rates rise, gold prices can fall quickly.