Explanations of "Gold" investment-related terms A to Z

Bill Clinton, George W. Bush and George Washington are on a sinking ship. As the boat sinks, George Washington heroically shouts: “Save the women!” George W. Bush hysterically hollers: “Screw the women!” Bill Clinton's asks excitedly: “Do we have time?”

There are a number of ways to define a price bubble (also referred to as a speculative bubble, economic bubble, asset bubble or financial bubble). The simplest definition says that a price bubble is an upward deviation of the market price from the asset's fundamental value. In other words, the bubble means an upward price movement over an extended range which then implodes.

A price extension is a method of obtaining targets for swings in the market. It is based on past moves and Fibonacci retracement levels and it allows investors and traders to extend the previous moves and identify the targets for potential next moves in the market. Price extensions can be used to analyze and make price predictions for many markets. For instance, when applied to gold, they can provide one with gold price predictions.

Purchasing Power Parity (PPP) allows us to compare economies more effectively than nominal purchasing power. It enables us to assume that all people are using the same currency and that prices all over the world are the same, helping us measure the affluence of each country in a comparable way. This provides a clearer picture of the global economy.

The put-call parity is useful as part of a hedging/ speculative strategy for a trader who wants to participate in the futures market. The put-call parity explains the relationship between the prices of put and call options in the same category-in other words, options with the same strike price, expiration date and underlying price.

A derivative that provides you with leverage during downtrends, while limiting your risk. The catch is that you have to be right on time.

Quantitative easing is an unconventional monetary policy of buying financial assets in the market, which increases central bank reserves beyond the level needed to keep the short-term interest rates at zero. First used by the Bank of Japan in the early 2000s, it was adopted by the Fed and other major central banks (e.g. the Bank of England or the European Central Bank) after the global financial crisis of 2007-2008 in order to provide financial institutions with liquidity and lower the long-term interest rates (since the short-term rates were already at zero).

But wait, what? Quantitative tightening? Was it not supposed to be quantitative easing? Well, no. It’s the reverse. Quantitative easing is an unconventional monetary policy of buying financial assets in the market, which increases central bank reserves beyond the level needed to keep the short-term interest rates at zero. It was the central banks’ response to the Great Recession.

However, as the economy recovered, the Fed started to normalize its monetary policy. Initially, it began tapering, i.e., slowly reducing the amount of money it puts into the economy. As investors worried about the effects of a reduced monetary stimulus, the bond yields spiked. The period of market turmoil after Ben Bernanke announced the Fed’s intention to taper, was called “taper tantrum”. In 2014, the Fed ended buying new assets, but it still reinvested the interests and principal payments received from the bonds held on its massive balance sheet. And finally, in October 2017, the U.S. central bank started unwinding of its balance sheet. The program was called “quantitative tightening” to emphasize that it was the reversal of the previous quantitative easing.

A rally is a period during which prices in the financial markets go up. Rallies tend to be of shorter duration-- days, weeks or months -- than bull markets, which can last for years. For instance, a rally in gold might be gold's upswing that remains in place for a week or a month, while an upswing that lasts a decade would be called a bull market.

GDP? Industrial production? Yield curve? Who cares? At the end of the day, what really matters is how much money you bring home. Or, to be more precise, how much real stuff you can buy for money that inflows your bank account each month. This is what we call real income – it’s income adjusted for inflation. We make this correction to measure the amount of goods and services individuals can purchase. For example, if one’s salary increased 2 percent over the year, but inflation was 3 percent, the real income of that person actually decreased by about 1 percent. Hence, real income is a more useful indicator of people’s well-being than nominal income.

Interest rates quoted in the markets are nominal, so one typically has to adjust them for inflation. Inflation determines the difference between nominal and real interest rates. Nominal interest rates are before taking inflation into account, while real rates are nominal rates adjusted for inflation. As there are several inflation indices (and many maturities), there are many measures of real interest rates. However, analysts often use yields on Treasury Inflation Protected Securities (TIPS), which are indexed to inflation (CPI) and their par value rises with inflation, as a proxy for real interest rates. Investors should remember that real interest rates are much more important for the gold market than changes in nominal interest rates, including the federal funds rate.

A donkey walks into a bar. “Where’s the horse?” asks the barman. “Recession,” says the donkey.