About Gold

About Gold ?

There seems some “irrational” movements of gold price since the end of 2023.

How gold should be priced? What factors affect the pricing of gold. Here below are some of my reading and insights.

Typical Determinants

Typically, the gold price is considered to be correlated with a list of factors:

  1. Inflation

    In counter with the inflation.

  2. Long-term Real Interest Rate

    TIPS, the Treasury Inflation-Protected Securities, is considered to be the real-interest rate, as the inflation rate is counter-deducted. The long-term rate, specifically 10-yr rate, is preferred as we generally assume holding the Gold in a long-term investment horizon. The long-term Real Interest Rate is considered as the opportunity of holding gold. Therefore, the higher rate, the greater the cost of holding golds, and less demand of gold. Price decrease thereafter.

  3. US Dollar

    The Brandon Wood System links the gold price with US Dollar, with 35USD = 1 ounce Gold. Since the collapse of Brandon Wood System, there is not a fixed exchange rate between USD and Gold anymore. However, USD is still the most important determinant of gold price in that the unit of Gold price is still USD/ounce. It is also like an exchange rate, the more per ounce value of gold is, the more USD/ounce should be. Or, contrastively, the weak USD is, the more USD/ounce shall be.

  • US Dollar Index

    The US Dollar Index might be consider an proxy of the strength and weakness of US dollar. However, as US dollar is the weighted geometric mean of the exchange rates of six major currencies compared to the US dollar:

    • Euro (EUR) – 57.6% weight
    • Japanese yen (JPY) – 13.6% weight
    • British pound (GBP) – 11.9% weight
    • Canadian dollar (CAD) – 9.1% weight
    • Swedish krona (SEK) – 4.2% weight
    • Swiss franc (CHF) – 3.6% weight

      The USD Index is actually a composite of weighted average of above listed currency. The increase of US dollar index means USD is appreciated w.r.t. above currencies. I.E. if USD appreciates w.r.t. EURO, then USDX is likely to increase.

      Therefore, an increase in USDX means appreciation of USD, and then USD/ounce shall decrease, gold price decrease.

  1. Risks / Uncertainty

  2. Demand and Supply from Central Banks.

    We ignore the impact of demand and supply from individuals and industries, but focus on the demand of Central Banks. Like what those CB did during February and March 2024 would increase the demand of gold price.

Empirical Research

Refer to the research report from CICC, a four-factor model is established. The authors specified the relationship between gold and those four factors, one by one.

  • The dependent variable: Gold Price. (Also, attention that they focus on the gold price, not the return as machine learning usually do)

  • Explanatory Variables:

    • US Real Interest rate

    ​ Capture the Opportunity Cost of holding gold. Similar as the explanation in the above section.

    • US Dollar Index,

    ​ Similar as the explanation in the above section.

    • Central Bank Net Gold Purchasing,

    ​ The supply side is limited, demand is mainly driven by the Central Banks of US, China, EU, JP, etc.

    • US Gov Debt Level.

    ​ This factor represents the credibility of US dollar or US government. The greater US Debt level, the less credit-worthy the US gov is. Then, the more desire of holding gold as the counter party of US Dollar credibility.

    The Statistic table is shown below.


​ The author argue that people do not need to consider the spurious regression though the R-squared is incredibly high. They state that the reason is that they are only considering the model like a co-integration model. They have tested the integration of the residual term, and find that the residual is stationary. High R-squared means there are less left in the residual.

​ Their explanation is like the Bull Shit. However, we just ignore the bull shit econometric modeling and statistic figure in the above table, as we are not doing academic. Let consider the predictable power and the implication of the model.

​ Here below is their simulated result and the real gold price movement. Let’s investigate is their model perform as good as stated in their report. Also, let’s see how ML way could perform.


Code Example


USD流转 信用 硅谷银行




随着时间段变长,中长期市场会超额印钱速了美元贬值,一般情况下,每次贬值到一定程度的时候都会加息让美元回流。因为加息之后收益利率变高,投资者可以买美元存银行或者换美元买美国其他资产,带来USD需求增加,让在外流动的美元减少,推动美元升值。然后US付利息。财政费用支出增加(财政部,cb配合,以及us gov资产负债表研究 wait to be done)。

QE+QT Circulate

吸收到一定程度后,USD升值,市场中的USD量达到适当(quasi-equilibrium)水平后,可以重复QE QT过程。

综上:QE+QT结合相当于:投资者(其他国家)把钱存入银行(US),银行(US)给投资者利息,然后用投资者的钱,买投资者(其他国家)的资产。In short, US用付利息(money)去买世界的goods and services。 但是,所谓利息,不过是张纸,或者说credit paper罢了。

Some Facts in Reality

  • 中国通过出口,挣了很多Current account surplus 贸易顺差,即中国在出口商品的过程中,挣了很多USD。此时。中国世界工厂的职能使得,进口商进口中国商品的时候,对CNY需求增加,使得CNY相对升值。曾经中国对CA surplus的处理是,买gov bond,但是近年逐步增加对实体资产的持有,以及对gold的持有(2020-2021全球QE的背景下,gold储备量保证该国货币的信用水平。USD持有也有为其他国家货币提供credibility的功能,但是该功能在US超量QE的背景下逐渐下降)。持有实体资产的好处在于,不是paper currency,相对更加保值且有能力转换为生产力,受到风险时也更加稳定。
  • US QE的时候,中国也处在疫情全国quarantine的阶段,出口减少,导致全球市场上超额印发的USD没有办法购买足够的商品(中国supply少了很多,其他国家同样export少了)。此时US QE的超量不能被市场消化,US通胀大幅上涨。US为了避免hyper- inflation,加息收回USD。
  • 各国EU,Canada,UK等(JP不同)为了避免在USD升贬值的过程中被US收割资产,基本上选择和US类似节奏的升降息,以避免本国资产大幅流出。中国外汇管制,资产难以流出。 => 超额USD难以被消耗。
  • 俄乌问题+各种sanction使得如俄罗斯,伊朗等国家出现无法转账等问题,这些国家的货币流通出现困难,使得这些国家货币的credit下降。(此时这些国家对于USD的需求增加)。
  • 石油美元的勾在新能源大背景下稍微减弱,但是已经稳定。
  • etc



US QE+QT毕竟是宏观行为,但是它改变了收益率的模式。最明显的特征就是收益率曲线倒挂。长期利率低于短期利率。这导致微观层面,消费者存入银行的钱长期不如短期给的利息多,消费者缩减投资期限的情况增加。银行挤兑出现。


Diamond and Rajan’s Study about Financial Crisis 2008

The authors noted the financial crisis of 2008 was caused by mainly three reasons.

  1. U.S. financial sectors misallocated resources to real estate.
  2. Commercial and Investment banks had a large proportion of their instruments in their Balance Sheet.
  3. Investments were largely financed with short-term debts.

The following will illustrate why those facts happen.

1. Misallocation of Investment

Step 1. World Crisis pushed up risks.

The financial crisis in emerging markets, East Asia Econ Collapsed, `Russia Defaulted, South America, etc made investors circumspect.

Step 2. Capital Controls made CA surplus.

To react to those unexpected events and prevent domestic industries from the incumbents, governments started to conduct capital controls. Also, investors were unwilling to invest (they cut down investments and even consumptions) or charge a high-level risk premium. A number of countries became net exporters.

Step 3. “dot-com” bubble derived another global crisis.

Those exporters then had a current accounts surplus and transferred the CA surplus into “savings” (investment). Those savings were invested into the high-return business, the IT industry. However, another nightmare happened that is the “dot-com” bubble collapsed around the 2000s.

Step 4. CB QE and US financial innovations made a housing bubble

Central Banks QE, lowered the interest rate, which ignited demand for housing. The house price spiked. In the U.S., financial innovation (securitization) drew more marginal-credit-quality buyers into the market. The crisis manifested itself.

Step 5. Asymmetric information enforced the bubble.

Because rating agencies were at a distance from the homeowner, they could process only hard information. Asymmetric information enforced the bubble. Housing prices surged to prevent “default”.

Step 6. Securitization Iterate itself.

The slicing and dicing through repeated securitization of the original package of mortgages created very complicated securities. The problems in valuing these securities were not obvious when house prices were rising and defaults were few.

But as the house prices stopped rising and defaults started increasing, the valuation of these securities became very complicated.

2. Why Did Bank hold those instruments?

The key answer is bankers thought those securities were worthwhile investments, despite their risks. Risks were vague and unable to be evaluated.

it is very hard, especially in the case of new products, to tell whether a financial manager is generating true excess returns adjusting for risk, or whether the current returns are simply compensation for a risk that has not yet shown itself but that will eventually materialize.

Several facts manifested the problem.

  • 1. Incentive at the Top

CEOs’ performance is evaluated based in part on the earnings they generate relative to their peers. Peer Pressure, which came from holding financial instruments to increase returns, mutually increased the willingness to hold those financial instruments.

  • 2. Flawed Internal Compensation and Control

The top management wants to maximise the long-term bank value and goals. However, many compensation schemes are paid for short-term risk-adjusted performance. The divergency gave managers an incentive to take risks in the short term.

It is not said that the Risk management team is unaware of such incentives. However, they may be unable to fully control them, because tail risks, by the nature, are hard to quantify before they occur.

  • 3. Short-term Debt

Given the complexity of bank risk-taking, and the potential breakdown in internal control processes, investors would have demanded a very high premium for financing the bank long term. By contrast, they would have been far more willing to hold short-term claims on the bank, since that would give them the option to exit — or get a higher premium — if the bank appeared to be getting into trouble.

In good times, short-term debt seems relatively cheap compared to long-term capital and the costs of illiquidity remote. Markets seem to favor a bank capital structure that is heavy on short-term leverage. In bad times, though, the costs of illiquidity seem to be more salient, while risk-averse (and burnt) bankers are unlikely to take on excessive risk. The markets then encourage a capital structure that is heavy on capital.

  • 4. The Crisis Unfolds

Housing Price decreased, => MBS fall in value and becaome hard to price. Balance sheet destorted, and debt level held, and equity shrinked.

Every parties sold out, drived price down again and again.

Panic (no confidence) spreaded worldwide.

Interbank lendings were forzen as inadequate credits.

  • 5. The `Credit Crunch

Banks were reluctant to lend due to two reasons. One possibility is that they worry about borrower credit risks. A second is that they may worry about having enough liquidity of their own, if their creditor demands funds.

  • Dealing with the Crunch

Banks still fear threats from illiquidity. Illiquid assets still compose significant portions of banks and non-banl balance sheets. The price of those illiquid assets fluctuated largely, because liquidty asset could be easily exchanged or sold out for cash, but illiquid assets were unable to do so so that price shrinked and damaged the balance sheet. Debts held constant, but assets shrinked, resulting in shrinkage of equity, and increase in leverage and financial burden.

Coins have two sides. Low prices mean not only insolvent, but also tremendous buying opportunity. The pandic manified the expectation of insolvency, plus illiquid market condition made the fact that less money was availab to buy at the price. Selling iterated itself.

CB standed out, provided liquidty to financial institutes.

However, an interesting thing happened. CB’s intervention to lend against all manner of collateral may not be a unmitigated bless, because it may allow weak entities to continue holding illiquid assets.

Possible ways to reduce the overhand

1. Authorities offer to buy illiquid assets through auctions. `This can reverse a freeze in the market caused by distressed entities. Fair value from the aution can be higher than the prevailing market price. 2. government ensures the stability of financial system that holds illiquid assets through the recapitalization of entities that have a realistic possibility of survival. (我国,纳入国有).


Diamond, Douglas W. and Rajan, Raghuram G., The Credit Crisis: Conjectures About Causes and Remedies (February 2009). NBER Working Paper No. w14739, Available at SSRN: https://ssrn.com/abstract=1347262

Unemployment Data in the U.S. Labour Market

The statistical data of unemployment rate released last week. 3.5% in September 2022, another lowest level even in history.

The U.S. economy is encountering still hgih level of inflation. To fight the inflation, one of the target of the Fed, the Federal Fund Rate has already been increase to about 3% to 3.25% in order to slow down the economy. However, the unemployment data shows the economy is seemingly continuously heating.

There several reasons explain the over-heated labour market.

  1. Individuals have already overcome the pandemic, and the consumption, especially service, are in high demands. There is even an overshooting of demands for labours.
  2. Many people leave the labour market, and are classified as distressed workers who are not included in the calculation of unemployment rate.
  3. Immigrant policy have changed since the Trump. To increase the employment rate for those “domestic” U.S. citizens, the immigrant policy has been not that friendly. Less low-cost labours inputed into the U.S. economy drives a gap of workers.

The low unemployment rate provides the Fed another inspiration of QT.

After QE

Why QE ?

By QE, the Fed increased the money supply to stimulate the aggregate demand in 2020 and 2021.

$$ Y=C+I+G+NX $$

By QE, more money were dumped into the economy. Two mainly used methods are (1) helicopter drops, and (2) banks/firms repo and CB reverse repo.

What happens after QE ?

  • 1. Individuals got the more money in hands (mainly from Helicopter Drops in 2020) — Consumption increased. In the U.S., people who had SSN and were taxed a year before a certain time point were assured an opportunity of helicopter drops. Those money were highly likely ( and it really is) to transform to real demands in the market, because of the consumption habit in the U.S.

The Fed printed extra money and dumped into the economy. People spent those extra money to buy goods and service. Less Goods and Services were produced domestically in the U.S., while most of them were imported from Mexico, India, Russia, China, Mideast, etc. That is what I discussed before. The U.S. printed money (, which are worthless), and use “nothing” to reap goods and services from all over the world.

The above is one fact. Another is that there are still too much of money in the economy. Too much money chased too little goods. Like Milton Fridman said “Inflation is nothing but a monetary phenomenon”. There were no enough outputs (aggregate supply) to meet the increase in aggregate demand resulted from QE, then inflation surged.

  • 2. Increase in supply of money dragged the interest rate down and thus reduced the financial cost for firms. Investment increased. This case is a bit different. In China, the CB conducted also QE to stimulate the economy especially in the current situation. However, the CB’s conduction is mainly through the Banking System. In this case, money are mainly poured into firms through loans not to individuals. Individuals are hardly able to get low-cost money because on the one hand them may not have enough pledges, and on the other hand people are fear to invest in the real estate, coz the real estate bubbles are in the edge of collapse although the gov is trying to keep the mkt stable.

Pros and Cons are there. Advantages are (1) firms that got the low-cost money are most likely state owned firms. In this case, there are “relative high probability” of safety. (2) firms encounter low financial cost and could have direct impact on infrastructures. Disadvantages are also that (1) money could not be directly given to individuals, no real happiness or utility increase for those family. Family based businesses are still suffering the plunges in demands and undergo bankruptcy. (2) too much money chase too little high-quality assets that can have potential positive expected return or payoffs. Money circulates in the economy, and costs circulates as well to increase. On the one hand there is low efficiency, on the other hand extra money does not contribute to stimulate the economy. Financial System discoodinates.