Learned from the FT 9.28.2020

Why are silver and gold a hedge against inflation?

This question came up reading a story on recent silver prices in Monday’s paper. Here’s the quote:

Precious metals are often seen as a protection against inflation.

After some googling, here’s what I came up with.

Precious metals have intrinsic value because of their scarcity and real world use cases. It doesn’t seem like there’s a financial mechanics reason why the price of gold goes up to outpace inflation. It seems like people just in general believe that gold will keep it’s value better than other assets during inflation, and so they flock to buy it, and then the price goes up because of the increased demand, and it’s a self fulfilling prophecy.

Cancer detection moving the way of liquid biopsy

I think cheap, non-intrusive tests that screen for most/all serious diseases is the future of healthcare. Catching life threatening illness early is often the difference between being able to successfully beat it or not. I can only imagine the lives this technology will eventually save. Maybe mine.

The Illumina-founded liquid biopsy company Grail is currently running early versions of this type of test on 100k people, having obtained a breakthrough therapy designation from the FDA last year.

Grail specialises in the emerging field of liquid biopsy: taking a blood sample to test for cancer. By detecting tumour DNA in the bloodstream, the technology can identify more than 50 cancers, including where they are located in the body, with a false positive rate of less than 1 percent. The aim is to develop a product that will detect cancers early and in a less intrusive way than traditional biopsies, which involve taking a tissue sample. However, creating such a product takes time, because false alarms are a risk when people without symptoms are tested. The company’s test is still in very large trials — including one with 100,000 participants. Last year, it received a breakthrough designation from the US Food and Drug Administration, which aims to accelerate the review of new products.

What is a margin call?

Another term from one of this week’s papers that I had to look up. This in an opinion piece about the need for more regulation in US Treasury markets.

However, when Covid-19 triggered a scramble for cash, including ditching Treasuries, the trading ecosystem was unable to cope with the selling spree. Treasury yields jumped and the spread between Treasury futures and bonds ballooned. This triggered margin calls for hedge funds that had borrowed hundreds of billions of dollars in the short-term repo market to bet on the difference narrowing, exacerbating the dislocation.

A margin call is when the value in an investors account falls below the amount required by their broker, whom the investor has borrowed money from to bet on the market. When the investor’s account falls below a certain amount, called the “maintenance amount,” the broker will demand the investor deposit more cash or securities to bring the account above the amount.

Price controls in your back pocket

Countries can stockpile a commodity and use it to control prices when it becomes necessary to do so.

The country reported its first case of African swine fever in 2018. Since, more than 100m pigs have been lost, pushing pork to record highs. China has sold frozen meat from its reserves into the domestic market to try to curb prices.

Why do bond prices rise when yields fall?

Another question from a story questioning the performance of the long-considered-safe 60/40 portfolio.

A mix of equities and bonds split 60/40 has generated a compound annual growth rate of 10.2 per cent in the US since 1980. It is up 7 per cent this year — the S&P 500 has returned 4.2 per cent, including the reinvestment of dividends, and the Bloomberg Barclays index of US Treasuries has returned as much as 11.3 per cent, as official interest rates have been taken to zero. Bond prices rise as yields fall.

The price of a bond will rise if yields on similar bonds fall. For example, a bond yielding 5% due in 5 years is more valuable than another bond due in 5 years yielding ony 3%. If most of the bonds on the market are yielding only 3% interest, any bonds yielding an interest rate higher than that will be more valuable.

Matt Roll @mroll