By David Goldman :
Why should gold and Treasury bonds go up together? Gold is an inflation signal and bonds are a deflation hedge. At first glance it seems very strange for both of them to rise together. Why should this be happening?
The answer is simple: bonds are an option on the short-term interest rate, and gold is a perpetual put option on the dollar. Both rise with volatility.
It's like the old joke about the thermos bottle: "How does it know if it's hot or cold?" If the policy compass is spinning and there's no way to predict how governments will react, you don't know whether to hedge for inflation or deflation, so you hedge for both. By put-call parity, if there is huge volatility in the policy responses of governments, the option-value of both gold and bonds goes up.
Gold price vs 10 Year Treasury, Year to Date
The definition of a bond, by the way, is a strip of options on the short-term interest rate. If you knew for certain that the short rate would be zero forever, than the yield on a perpetual bond also would be zero, and so forth. Gold, I have argued for years, is not a gauge of the price level but an option on the collapse of the dollar's reserve status.
See also The Truth About Vitaros on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
