Will Gold Prices Continue to Rise ?
Ep 1. What’s driving Gold?
(feat. Gold, Inflation, interest rate, TIPS, Bonds, and the Fed)
There’s been some buzz about gold prices rising lately, so here’s a quick overview of the situation :
1. Over the last 10 years, gold prices have been on a steady upward trend.
2. Although gold prices trend upward over time, the returns from holding gold long-term aren’t as high compared to other assets like stocks.
3. According to historical data from the Federal Reserve and U.S. markets, the average annual return on gold since 1973 has been around 7.75%. This is based on long-term performance tracking gold prices.
4. While a 7.75% return is decent, it’s lower than the S&P 500’s average annual return of about 10.49% over the same period. Stocks have historically outperformed gold when held for the long term.
5. Gold prices don’t rise consistently. Instead, they typically spike during periods of high inflation or low interest rates, as it becomes an attractive safe haven or alternative to other investments like stocks or bonds.
6. One common way to predict gold prices is by looking at TIPS (Treasury Inflation-Protected Securities), which are government bonds that adjust for inflation.
7. U.S. Treasury securities are divided into four main categories: T-Bills, Treasury Notes, T-Bonds, and TIPS.
8. Treasury Bills (T-Bills) are short-term bonds with maturities of less than one year.
9. Warren Buffett has recently been buying large quantities of 3–6 month T-Bills, roughly $10 billion per week. These short-term bonds are commonly used when the Federal Reserve adjusts interest rates.
10. Treasury securities with maturities from 1 to 10 years are called Treasury Notes, while those with maturities of over 10 years are known as Treasury Bonds (T-Bonds).
11. T-Bonds are popular among long-term investors like pension funds and insurance companies because of their stability.
12. The fourth type of U.S. government bond is TIPS. TIPS are designed to protect against inflation, as their interest payments increase with rising consumer prices.
13. TIPS adjust their interest rate based on changes in the Consumer Price Index (CPI) once a year. This means the interest payments increase when inflation goes up.
14. In the chart below, the red line represents gold prices.
15. You’ll notice that the blue line follows a similar trend to gold prices.
16. The blue line represents TIPS, and the two lines tend to move together. When inflation expectations rise, both TIPS and gold prices increase.
17. It’s important to interpret the graph carefully.
18. On the left side of the graph, the Y-axis is inverted—meaning it’s flipped compared to normal graphs.
19. This inverted axis shows that when TIPS yields fall, gold prices tend to rise, and when TIPS yields rise, gold prices fall. This inverse relationship is a key concept when analyzing gold and TIPS.
20. TIPS offer protection against inflation by adjusting for increases in consumer prices. When inflation rises, TIPS holders receive higher interest payments.
21. For example, a 10-year TIPS issued in May 2024 has a fixed coupon rate of 2.184%. This means if inflation for that year is 3%, the TIPS holder would earn a total interest rate of 5.184% (2.184% + 3%).
22. Most TIPS are issued with maturities of 5, 10, or 30 years.
23. Recently, however, gold prices have risen independently of TIPS and inflation expectations.
24. This suggests that factors other than inflation or interest rates—such as geopolitical risks or central bank buying—may be driving up gold prices.
Then, let’s then talk about ‘other factors’ which drive up gold prices recently in the next episode.
Why This Matters
Gold has long been seen as a safe-haven asset, especially during times of economic uncertainty. However, gold’s performance is highly influenced by macroeconomic factors like inflation, interest rates, and investor sentiment. Understanding how TIPS and other bonds interact with gold can give investors a better sense of where gold prices might be headed.
One liner comment…
For everyday investors, gold can offer protection against inflation and market volatility, but it may not always deliver the best returns compared to other long-term investments like stocks. Understanding the relationship between TIPS and gold prices can help you make more informed investment decisions.
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