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The Logic Behind the Gold Trade
There may be something to gold's recent popularity
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.
The author’s logic is compelling, but I’m still convinced that the average investor who owns gold will eventually get burned. After all, the rule of thumb is that the “smart money” will sell their gold stashes to individual speculators, as this latter group is almost always the last one to the party.
You can also follow Ben Warwick on Twitter at @QESAlpha.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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