In the past week, gold prices have soared, reaching up to USD$1,550 per ounce. Since gold is a way investors use to tackle inflation, we wonder what this could mean for investors.
By using the Cross-Correlation Model available in MAF Cloud, you would be able to understand the relationship between two variables, gold and TIPS, also known as the Treasury Inflated-Protected Securities. With this, you would be able to identify a trend between gold prices and TIPS yield.
|Gold (COMEX) vs 5-Year TIPS yield||Gold (COMEX) vs 10-Year TIPS yield|
As you can see from the Cross-Correlation Model, gold prices and TIPS yield are significantly negatively correlated (-84.27%, -77.53%). Based on the model, TIPS yield could possibly explain the rise and fall of gold prices due to the high negative correlation between both markets. This indicates that when gold prices increase, TIPS yield would fall. TIPS yield is affected by normal yield and inflation rates (CPI), and either factor could affect the increase or decrease of TIPS yield.As shown above, between 2015 to 2016, gold prices seemed to be undervalued as compared to TIPS yield. However, at the end of 2018, gold prices were starting to match TIPS, and as of 2019, gold prices could be seen as reasonably priced when comparing to the yield shown in the graph.
It is evident from the graphs above that gold prices have increased drastically over the past few months:
Looking at the graph above, gold is still a good form of investment to hedge against inflation but would it be a viable option for providing profit-earning opportunities?
What would you predict about the changes in the price of gold? Do you think that the price of gold would remain constant, increase or decrease?
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