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Commodities as an investment alternative

1 min. reading
Investment / 16 March, 2020

Héctor Ferreiro Portfolio Manager

What are the keystones of gold prices?

What are the keystones of gold prices?

Gold prices depend largely on the trend in real interest rates in the USA, i.e. nominal rates minus inflation. The graph compares gold (blue) with the real 5-year interest rate in the USA (orange, on an inverted scale). The lower the real interest rate, the higher the price of gold.

The commodities market is probably one the least known and most unpredictable for the majority of investors.

One trait that makes a commodity stand out is that it is the only asset without virtually no differentiation; i.e. irrespective of where it is obtained its value is the same or it is the only asset that does not generate any recurring income for investors (equities – dividends, fixed income – coupons, currency – interest rates, real estate – rentals).

Price trends depend on myriad, highly varied and different factors. The most common is the production of the commodity, geopolitical risks, and trends of the local currency.

Commodities can be grouped in the three large categories with the following main commodities:

  • Energy: oil and natural gas
  • Metals: gold and copper
  • Agriculture: soybeans and sugar

One variable that is common to commodities and perhaps the most important is real interest rates; lower real interest rates tend to be bullish for commodity prices.

Commodities show a strong correlation to certain currencies. The clearest could be:

  • The Australian dollar has a high correlation to industrial metal prices, as Australia is a major producer of these metals.
  • The Canadian dollar has a high correlation to oil prices since it is one of the world’s leading producers of this commodity.
  • The New Zealand dollar is strongly correlated to gold and agricultural goods prices.
  • The Swiss franc is also closely tied to the price of gold given Switzerland’s large gold reserves relative to its currency.

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