Hi guys Welcome to Desk Corner One It’s DECO again with that dull voice, ~ D: This is our second ring on gold. In the last episode, We have reviewed the gold to silver ratio and how to use it correctly, Which most traditional methods may not be. As plausible as they appear, If you haven’t seen it yet Go check it out to enrich your knowledge of gold trading after this, In this episode, We will look at the price movement of gold from a closely related angle, but seldom discuss it From 2018. Until today, this indicator is very high: correlates of minus 0.95, The price of gold. Historically, this indicator has also had a strong negative correlation with the price of gold. That is why DECO believes this can be the starting point for an evaluation exercise. It may give us a new angle to analyze gold as an investment asset. Let’S start When we talk about gold, what is your knowledge of it? Traditionally, though, the gold standard has ceased to exist for nearly half a century. We still see gold as almost money. This means that the price of gold is actually similar to the exchange rate of the US dollar for one troy ounce of gold. Besides, because gold is rare, It cannot be produced in large quantities. Its value is considered very stable.
Naturally, gold turns into a safe haven asset. Let’S take a look at this chart. It displays the monthly prices of gold and two of the major US stock indices, S & P, 500 and NASDAQ Composite Index Over the past. Fifty years To facilitate comparison, We have re-established the initial values to 100. What we can see here In the long term, there is an uptrend for both the price of gold and the stock market. Additionally, its value has increased significantly over the past 50 years Until July 2020, the price of gold has increased by 51 times S & P 500 increased 32 times Nasdaq has increased by 110 times. Many people know that legendary investor Warren Buffett has considered gold awesome. A non-productive investment for many years, His gold suspension was very sharp. This gold is mined from the earth.
Then we melt it down, dig another hole, bury it again and pay people to stand around to guard it. While what Buffett says is mainly factual. I think it’s equally important to note that Intelligent nobody Or wisdom can change market power. This chart condemned a very powerful message and it is also a fact In the era of paper money When central banks print money out of thin air to their liking. The misuse of printing money has seriously damaged the purchasing power of money over time. Just think about this, Even for the most creative and productive companies in the world, We must continue to reinvest all dividends in order to outperform gold Who’s just sitting there and doing nothing ( at all ). This is also the reason Why not keep a lot of excess money for a long time. Investments in assets are the only way to protect your wealth Gold as a safe haven asset. It is easy for people to think of another common, safe haven, asset Bonds or specifically, government or treasury bonds, Treasury bonds issued by countries that are creditworthy Holders of AAA credit ratings. They are considered a risk-free asset traditionally, Which means that people think these assets are very safe, But there are clear differences between bonds and gold. This means that bonds are contracts with maturity, dates, Bonds, pay interest to investors to investors If they buy a bond and keep it until its maturity, Discount rate equivalent to the purchase price And all future cash flows will be the return.
Since yield equals the rate of return to hold during the maturity period, Bond yields are directly related to bond prices When the yield is high, the bond price is low and vice versa. Well, …! That’S enough for FINA101 …. If we look at historical data over the past 50 years, We can see that the US Treasury yields peaked in the early 1980s And it began to descend gradually. This downward trend has continued for nearly 4 decades. I’M using the 10-year Treasury yield here, because the Treasury yields are of Shorter. Ripeness has already decreased to 0 …, Because bond price and yield are inversely related. We can also conclude that the bond price has been on the rise during this period. The next question is Given a yield close to zero Is Sindh still a safe haven at all. Let’S take a closer look at the relationship between Treasury yield and the price of gold.
We’Ve been aware of that, since 2018, Gold price action – almost exactly approximates the Treasury yield To express this number. The correlation coefficient between the two from January 2018 through July 2020, is less than -0.95. We know that the scale of the correlation coefficient ranges from 0 to 1, Sign, ve or -ve indicates the direction of the relationship. It is rare to find such a strong relationship between two classes of assets. I can only think, Can we model gold price movement from changes in Treasury yield, So I jumped into the longest history for clues. …
I start plotting the price of gold And 10 years of Treasury returns at the end of each month of the past 50 years on the graph After collecting hundreds of data points, The result looks like this Rather than randomization. These points form a concave downward slope Which could be represented by this trend line And there I can also get the equation of this Trendline in Excel. So we can take advantage of this equation to provide a reasonable value. The gold price is below a certain treasury yield level. (, All other factors remain unchanged. ) Here is the result. We got To be honest compared to the actual gold price. This is not a perfect projection, But if we use the difference between the actual The expected gold price to assess whether gold is overvalued Or undervalued during the past fifty years, It gives fairly reasonable signals, regardless of whether gold is trading at undervalued or overvalued levels. If we use the 30 % derivation as a starting point, …
For application in real life, We can see that gold has rallied strongly since the rally after the Federal Reserve cut its price significantly By the end of July. This year It was the gold price and the treasury yield at this point. On the one hand, theoretically, if the price of gold is at this level, The implicit Treasury yield is around 1.2 %, Since the current yield is only around 0.7. We can consider this part as a margin of safety. On the other hand, if the interest rate remains at the current level, The fair value of gold is approximately $ 2,800 per ounce. This is a potential bullish trend.
Whereas I only use the number through the end of July on this chart, Real-time data of the 10-year Treasury yield is readily available. One point to note, though, Because the trendline formula takes the bill return as a dependent variable. We need to rewrite the formula to make the price of gold as a dependent variable. With this, we can quickly make a reasonable guess: …, Yes, Deep in all financial models, guesswork … There are some traditional methods of evaluating gold, While many people take comfort measures like the rate of inflation, GDP or M2 money supply. Most of these methods – don’t just have a time delay, But the metrics themselves can also differ from the actual market situation. The method used by DECO has three main advantages over traditional valuation methods: 1 ). This method is very simple and straightforward, Where there is only the formula The 10-year Treasury yield is the independent variable. 2 ). The treasury is very liquid. They are constantly priced according to market strength with minimal latency 3 ) reflects an apparently exponential growth, supported by the very low interest rate, Just like the models we have for other financial assets.
Of course, there are drawbacks to this method as well. The most obvious object When the interest rate drops, Especially when you tend to 0, The value will be raised to the maximum value. The smallest changes in the interest rate can lead to extreme volatility. Model evaluation results. Further, if the interest rate becomes -ve, The form does not return any number …. However, Gold might be the most popular asset if the interest rate falls below 0 at the end, … LOL. As we approach the next major debt crisis, We are already only one step away from the interest rate. Another disadvantage of this model is that it is too simplistic. I did not take into account other important factors, such as the relative strength of the US dollar, Which is tracked by the dollar index, Or even the ratio of gold to silver In history, when the gold to silver ratio was at extremely low levels. Usually, this indicates that market confidence in the US dollar has been lower Over the past fifty years. You have reached this level twice.
The first time was in 1979 to 1980, When we witnessed the second oil crisis. The second time after GFC was in the middle of QE. You can build your own model based on DECO’s Treasury Return model Feel free to discuss any idea you can bring up in the comments section. Finally, given the current economic situation, The Fed has already stated that it can handle higher than targeted inflation for a period of time. This is strong evidence that the Fed does not want to raise interest rates, even when inflation is accelerating
Besides, raising interest rates will only make corporate financing more difficult, Which in turn could lead to the next crisis. It may lead to a credit collapse …. Therefore, the probability of a rate hike is very low, Because this stock is very expensive. Sindh is very expensive And precious metals can be one of the few asset classes Which is undervalued at this moment. It doesn’t matter if you look at it from an evaluation perspective Or a risk hedging perspective In 2020. Gold will still be one of the most logical options for asset allocation, Even when you are at historically high levels. Definitely When it comes to investment decisions, There are always risks associated with it. Deco shares its opinion, but not any investment advice in any of its videos. You should always consult a professional financial advisor for cutting edge investment advice. This is the end of today’s post. If you liked this video Smash Like button and subscribe to my channel, So you will never miss a DECO unconventional market offering Thank you and see you next time.
