Skip to main content

Gold and "Summers-Barsky" theory

There was an excellent article on gold by John Dizard in the past weekend edition of the Financial Times.

Dizard's column piece, though brief, gave an informed overview of the metal's ongoing bull run, while assessing the possibility of a coming correction in the gold price.

In, "Gold is a bright prospect for the bold", Dizard draws on the opinion of one long-bullish portfolio manager and the ideas found in the "Summers-Barsky" theory to chart gold's future course.

"Mr Palmedo is one of the adherents of what gold people call “Summers-Barsky”, a theory of the relationship between gold and real returns on investment developed by two Harvard professors in 1985. One of them, Lawrence Summers, went on to become US Treasury secretary, president of Harvard University and, ultimately, an FT columnist.

Summers-Barsky, as described in their dense econometric paper, tracked and modelled the price of gold from 1730 to 1985 against interest rates, price indices and, for the latter years, equity returns.

Essentially, the professors found an inverse relationship between the price of gold and the real returns people can earn on their financial and industrial capital. As they put it: “The willingness to hold the stock of gold depends on the rate of return available on alternative assets.” Gold is a way to preserve capital, not increase it. If you can earn high rates or profits, you will be induced to sell gold and invest it in productive capital or interest-bearing paper."

Have a look at the full article at the link above.

Meanwhile, if there is a gold correction coming in the near future, it will likely have to wait another day.

Bloomberg reports that gold and platinum reached new record highs in earlier trading today, as a declining dollar fueled demand for precious metals and agricultural commodities.

Still, with speculative long positions increasing in gold, some analysts are becoming more cautious and increasingly expectant of an upcoming correction. We'll be watching.

Popular posts from this blog

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL!  Please bookmark our new web address at Financetrendsletter.com Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner .   Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead! As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter . You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter).  Stay up to date with our real-time insights and updates on Twitter .

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi

William O'Neil Interview: How to Buy Winning Stocks

Investor's B usiness Daily founder and veteran stock trader, William O'Neil share d his trading methods and insights on buying winning stocks in an in-depth IBD radio interview. Here are some highlights from William O'Neil's interview with IBD: William O'Neil's interest in the stock market began when he started working as a young adult.  "I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."    He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.