Bond Yield

Sir, gold ka kya lagta hai?

(This cartoon has been generated through ChatGPT).

(The image has been generated using ChatGPT). 

Let’s start this one with an anecdote.

On February 1, while recording a video, the makeup guy on set asked me the quintessential Mumbai question, but with a twist: Sir, gold ka kya lagta hai? (Sir, what do you feel about gold)?

At its heart, it seemed like the most innocent of questions. I could have answered it by just saying: aur upar jayega (it will go up more) and gotten done with it. At that point gold was quoting at around Rs 82,000 for ten grams. On April 23rd, it was selling at around Rs 96,600 per ten grams.

But that’s my trouble in life. I am unable to say things which help people outsource their decisions and thinking to me. And that explains why I never got around to becoming a financial influencer even though I have the perfect profile for it.

As I usually do in such situations, I just smiled and said something along the lines of, ‘I can’t predict the future,’ before quickly shifting my attention to someone else nearby.

So, what’s the point of this anecdote? If you are the kind who is looking for clear and crisp explanations on gold – where I confidently predict that the price of the yellow metal will hit Rs 1,20,000 per ten grams by June or that it will cross $5,000 per ounce (one troy ounce equals 31.1 grams) by the end of this year or during the first three months of 2026 – then you are at the wrong place my dear. Please stop reading this immediately and do something better with your time, like scroll reels on Instagram.

So, what do I plan to write about in this piece? To put it simply, the price of gold has been going up primarily due to all the uncertainty that the American President Donald Trump has managed to build up in the global economic, trade and financial systems through his tariff tantrums.

Now, this is nothing new. The mainstream media has been talking about this for a while, with cliched use of phrases like global turmoil, global headwinds, global shock, etc. But what they haven’t managed to do is to explain how this uncertainty has ended up driving up the price of gold and how it makes any future predictions on the direction of the yellow metal very difficult to make.

That hasn’t, of course, stopped the folks in the business of managing other people’s money (OPM) from making bold predictions. After all, their job often involves bending the truth, especially in times like these when their audience craves clear, confident takes they can latch on to — effectively outsourcing their decision-making to the OPM wallahs.

I am not an OPM wallah and so, at the risk of reiteration, I don’t really need to make clear, crisp and confident statements about gold or anything else for that matter. But then I will try explaining to you what’s happening with gold in as few words as possible.

Or as Dmitry Grozoubinski writes in Why Politicians Lie About Trade, I will not rely on the density of the subject matter to peddle easy answers, simple narratives and misleading twaddle.

Here is a chat GPT summary before we start:

In a world craving certainty, one man’s ego has become gold’s best friend. As Trump’s tariff chaos rattles global trade, traditional safe havens like the United States (US) dollar and treasury bonds have lost their shine. Enter gold — the metal surging not from clear trends, but sheer confusion. This piece unpacks how political volatility, misguided protectionism, and economic noise are pushing investors toward gold, even as predictions remain murky. No bold forecasts here — just a grounded look at why uncertainty, not clarity, is the real driver. And why good investing is less about certainty and more about preparedness.

The uncertainty

Donald Trump has been trying to disrupt the way global trade has been carried out over the decades. Sure, it’s not the most perfect or even the fairest system out there — but then, very few large, complex systems ever have everything neatly figured out. But on the whole it’s a system which has worked reasonably well.

Trump — and a lot of his supporters, the Make America Great Again (MAGA) crowd — aren’t thrilled with how global trade has panned out. They see it as a big reason why manufacturing has shrunk in the US, taking a whole bunch of jobs down with it.

Now, take a look at the following chart. It plots the share of manufacturing in the American economy over the years. This makes the piece longer, but hang in dear reader, this is important context for what comes next.

Over a period of 20 years, the share of manufacturing in the American economy has fallen from around 13% to less than 10%. Trump and his administration plan to address this by implementing high tariffs on countries from which they import stuff. This, they believe, will lead to a situation, where companies will start manufacturing in the US again, and that in turn, will Make America Great Again.

Now, I have tried to explain in detail in other pieces which have appeared during April, why anything like that is not going to happen. Getting into all that detail isn’t really possible here, but I will summarise a few points.

1) Trump has been selling tariffs as an idea where the exporting country will pay taxes to the US government. That’s not how it works. Tariffs are paid by the importer, who in turn passes them on to the end consumer. Of course, the exporter may choose to absorb a part of the tariffs and choose to make lower profits, but the kind of tariffs that have been implemented, especially on China, that’s unlikely to happen. This basically means that the major cost of the tariffs will be borne by the American consumer, leading to higher inflation in the US economy.

2) Now, let’s say that the tariffs make imports unviable, so, won’t the American consumers end up buying stuff being made in America? America does not have sufficient capacity to replace many imports, especially when it comes to consumer durables, everything from cars to electronics.

3) Can’t America start building new factories to produce domestically? Yes, nothing stops them. But factories cannot be built overnight. They take time. Plus, the kind of flip-flops Trump has been indulging in, it’s very difficult to see entrepreneurs make large investment commitments. It might simply make more sense for them to wait out Trump’s term. Also, there is a question of human skills being available in volumes that are needed to carry out this kind of manufacturing.

4) One of Trump’s flip flops has been to leave out smartphones, computers, and certain other electronic devices imported from China from reciprocal tariffs, which at the time of writing this stood at 245%. A Fortune report points out that in 2024, the US imports from China of smartphones, laptops and the components needed to make them amounted to $174 billion. This works out to around 40 percent of their overall goods imports from China. If the 245% tariff had stayed, Apple’s business model would have been killed pretty fast, given that it still has 80% of its production capacity in China.

5) Further, it’s worth remembering that no one forced entrepreneurs to move manufacturing out of the US to other countries. They did so out of their free volition. Indeed, it was simply cheaper to produce stuff in other countries. Howard Marks founder of Oaktree Capital Management explained the other side of the equation in a recent note: “Between 1995 and 2020, US consumer durable prices declined by 40% in real terms.”

The point is that if all the stuff that the US imports is produced in the US again it will cost a lot more. Or as Marks put it: “Even if tariffs are set high enough in the future to render US-made goods cheaper than imports-cum-tariffs, the prices will be higher…than Americans are used to paying…For example…a smartphone made in the U.S. might cost $3,500.”

There are many more points that can be made here but we are nearly 1,400 words into the piece and we still haven’t started talking about gold. Dear reader, how you must love the guys who tell you everything clearly in 30 second reels.

Anyway, getting back to the point. The big risk here is that how do entrepreneurs rely on someone as non-serious as Trump. There are chances that he might withdraw the tariffs, coming under all the pressure that is being mounted on him. He has already made compromises on the China front by leaving out smartphones, electronics etc., from reciprocal tariffs. Reciprocal tariffs on all other countries have been suspended.

Further, there are chances that the next US president who comes along might withdraw the tariffs. Or that Trump might not last this term. Or that he might simply double down on the tariffs.

The point being that there is too much uncertainty in the situation. And that’s one thing that companies don’t like at all, especially when they are expected to set up new factories. Uncertainty hurts proper planning.

In fact, the reason businesses and businessmen try and get close to politicians – like many American billionaires have tried getting close to Trump – is because they don’t want their business to be impacted by any uncertainty or they want to be forewarned.

Trump’s actions have increased the uncertainty tremendously in the global economy and the trade system. In the end, Trump’s tariff tactics aren’t grounded in sound economics but in a distorted self-perception — his blind spot – he thinks he knows, but doesn’t. And in that dangerous gap between perception and reality, global economic stability is being held hostage to one man’s ego or the fact that he doesn’t know that he doesn’t know.

So, what about gold?

And this, dear reader, brings us to the yellow metal everyone keeps asking about.

In uncertain times money moves to gold and its price goes up. Now, that would be a very simplistic way of explaining things. Indeed, gold is a safe haven, but this time around things are a lot more complicated than just that.

The US dollar has an exorbitant privilege. The global financial system that emerged after the Second World War had the US dollar at the heart of it. This led to a bulk of international trade being carried out in dollars – like a bulk of oil is bought and sold in dollars.

Once goods and services were bought and sold internationally in dollars, countries also ended up with their international reserves being primarily held in dollars. (A self-plug: Anyone wanting to get into further detail can read the second volume of my Easy Money series of books.)

Essentially, while other countries have to earn dollars in order to pay for anything priced in the US currency, the US has the option of simply printing them.

This did one more thing. The US dollar also became a safe haven. Every time there was some big global economic or financial trouble money moved into the US dollar. In fact, I remember in 2011, when the safest triple AAA rating of the US was downgraded, money moved from other parts of the world into the US dollar. And this is how things worked, until this time around.

Now, what does it mean when we say that money moved into the US dollar? It basically means that investors, particularly large financial institutions, sell financial securities they had investments in – get dollars for them or convert that money into dollars – and buy US treasury bonds. Treasury bonds are financial securities issued by the US government in order to finance its fiscal deficit—the difference between what it earns and what it spends.

This is how in times of trouble money would end up in dollars and thus in treasury bonds. Once the demand for treasury bonds went up, their prices would go up as well. Once their prices went up their yield to maturity or the yearly return investors could expect if they bought the bond and held on to it until maturity, would fall. This is because the yield or the return on a bond is inversely proportional to its price.

Along with this money would end up in gold as well and drive up gold prices. But this dynamic has been broken this time around.

Why? The answer to this question is quite complicated, but I will try and keep it simple. With the uncertainty that Trump has managed to create, he is chipping away at the exorbitant privilege of the US dollar, and many large investors — including central banks — are probably not happy looking just at the dollar and the treasury bonds as a safe haven investment, like they used to in the past. This can be gauged from the fact that the return or the yield to maturity on the ten-year US treasury bond has gone up during the course of this month.

On April 4th, the yield had stood at 3.99%. It briefly even crossed 4.5%. At time of writing this on April 24th, it was at 4.35%. What does this mean? It basically means that there isn’t enough demand for these bonds. Hence, their prices are falling and the yield as a result has gone up. At the same time, the US dollar has also lost value against other major currencies of the world, suggesting that money might be moving out of the US.

So, the dynamic of the US dollar being a safe haven investment has actually been weakened this time around. And this implies that a lot more money is going into gold, explaining its rapid rise in price.

The future

On April 22nd, the price of gold briefly crossed $3,500 per ounce, its highest level ever. On April 23rd, the day’s lowest price was around $3,260, implying a fall of close to 7% from April 22nd’s high to April 23rd’s low.

Why did this happen? During the course of the day on April 23rd, talk about Trump reducing Chinese tariffs started to go around. There was also talk about the US reducing automobile tariffs. By the end of the day all of that was denied. As I write this on April 24th, gold touched the day’s high of $3,368 per ounce and is currently selling at around $3,340 per ounce, bouncing back up.

Indeed, uncertainty has driven up the price of gold, and it’s this uncertainty that makes it very difficult to predict its future course with any certainty. What Trump might do and say on any given day depends on which side of the bed he gets up from. Or people speculating about which side of the bed he has gotten up from.

So, where does that leave us? It brings me back to the points that I keep making. Proper asset allocation is the most important thing in investing. Also, you can’t start planning for uncertainty once uncertainty strikes. Which is why, at any point of time, it’s as important to have money invested in bank deposits, in gold, as it is to have money invested in stocks and equity mutual funds.

Of course, this comes at a cost. Take my case. The weighted average investing period of my investments in gold mutual funds is currently around 1,765 days. For much of this period, if I had this money invested in Indian stocks, it would have probably grown more. But then stocks started falling since September and gold started going up. Off late, both stocks and gold have been going up. And honestly, I can’t see the future, like many OPM wallahs claim to.

In the end, gold’s rise isn’t about certainty — it’s about chaos. It reflects a world where traditional safe havens are fraying, and where ego often trumps economics. I won’t pretend to know where gold goes next, because that’s not the point. What matters is recognizing that unpredictability is now a feature, not a bug, of the global system, at least until Trump is around. And the only real hedge against uncertainty is preparation — through diversification, discipline, and resisting the urge to chase headlines. So no predictions here. Just a reminder: don’t outsource your thinking. Especially not to someone trying to sound certain.

Oh, if the makeup guy asks again, maybe I’ll just smile — or hand him this piece. Of course, he will ignore it and keep watching reels and then ask me: Sir, gold ka kya lagta hai?.

It's just another manic Monday for the Indian rupee

 rupeeVivek Kaul  
The Indian rupee crashed to an all time low level, crossing 61 to a dollar, this morning. As I write this one dollar is worth around Rs 61.2. On Friday when the foreign exchange market closed one dollar was worth Rs 60.24.
The rupee has crashed in response to return on the 10 year American treasury bond spiking to 2.73% on Friday i.e. July 5, 2013. This was an increase of 21 basis points (one basis point is equal to one hundredth of a percentage) in comparison to the return on Wednesday i.e. July 3, 2013. The bond market was closed on July 4, 2013, the American independence day.
A 10 year treasury bond is a bond issued by the American government to finance its fiscal deficit i.e. the difference between what it earns and what it spends. These bonds can be bought and sold in the open market. This buying and selling impacts the price of these bonds and hence their overall return.
The return on the 10 year American treasury bond spiked in response to better than expected jobs data. American businesses added 1,95,000 jobs in June, 2013, which was better than what the market expected. This faster than expected recovery in the job market is being taken as a signal that the American economy is finally getting back on track.
Since the start of the financial crisis in late 2008, the Federal Reserve of United States, the American central bank, has been printing dollars and pumping them into the financial system. This is to ensure that there are enough dollars going around in the financial system, so that interest rates continue to stay low. At low interest rates people are likely to borrow and spend more. Consumer spending makes up for around 71-72% of the American gross domestic product. Hence, an increase in consumer spending is very important for the American economy to keep growing.
The Federal Reserve prints dollars and pumps them into the financial system by buying bonds worth $85 billion every month. This includes government bonds and mortgage backed securities. On June 19,2013, Ben Bernanke, the Chairman of the Federal Reserve of United States, had said that if the American economy kept improving, the Federal Reserve would go slow on money printing in the time to come. He had said that it was possible that the Fed could stop money printing to buy bonds by the middle of next year.
The jobs data has come out better than expected. This is a signal to the bond market that the Federal Reserve will start going slow on money printing sooner rather than later. Several estimates now suggest that the Federal Reserve will start going slow on money printing as soon as September this year.
As and when the Federal Reserve goes slow on money printing the interest rates are likely to go up, as the financial system will have lesser amount of dollars going around. This is likely to push interest rates up. Bond prices are inversely related to interest rates. So as interest rates will go up, bond prices will fall, leading to losses for investors.
But markets don’t wait for things to happen. They start discounting likely happenings in advance.
Given this, the bond market investors are selling out on American government bonds to limit their losses. This has led to bond prices falling. Even when bond prices fall, the interest paid on these bonds continues to remain the same. This means a higher return for the investors who buy the bonds that are being sold.
So this has pushed the return on the 10 year American treasury bond to 2.73%. On May 1, 2013, the return on the 10 year American treasury bond was 1.66%.
An increase in return on government bonds pushes up interest rates on all other loans. This is because lending to the government is deemed to the safest, and hence the return on other loans has to be greater than that, to compensate for the higher risk involved.
As mentioned above, in the aftermath of the financial crisis, the Federal Reserve started to print money, in order to get the American economy up and running again. The trouble was that the average American was just coming out of a huge borrowing binge and was not ready to borrow again, so soon.
But the financial system was slush with money available at very low interest rates. This led to large institutional investors indulging in what came to be known as the dollar carry trade. Money was borrowed in dollars at low interest rates and invested in financial assets all over the world. The difference in return between what the investor makes and the interest he pays on his dollar borrowing, is referred to as the carry.
With interest rates in the United States going up, as returns on government bonds up, the carry made on the dollar carry trade has been on its way down. The arbitrage that investors were indulging in by borrowing in dollars and investing those dollars all across the world with a prospect of making higher returns is no longer as viable as it used to be.
A lot of this money came into the Indian stock market as well as the bond market. In case of the bond market the amount of return that can made is limited. Hence, carry trade investors who had invested in Indian bonds have been selling out. Between May end and now, foreign investors have sold out around $6 billion worth of Indian bonds.
When they sell out on these bonds, the investors are paid in rupees. In order to repatriate these rupees abroad they need to convert them into dollars. Hence they sell rupees to buy dollars. When they sell rupees there is a surfeit of rupees in the market and not enough dollars going around. In this scenario, the rupee tends to fall in value against the dollar.
And that’s what has happened in the morning today when the rupee crossed 61 to a dollar. As the rupee loses value against the dollar, foreign investors face a higher amount of currency risk, leading to more of them selling out. This puts further pressure on the rupee. ( you can read more about it here).
The pressure on the rupee will continue in the days to come. If American bond yields keep going up, more foreign investors will sell out of India and this will lead to the rupee continuing to lose value against the dollar. Over and above that there are several home grown issues that will ensure that the rupee will keep depreciating against the dollar. (You can read more about it here) This is not the last manic Monday we have seen as far as the rupee is concerned.
 PS: In the time that it took me to write this piece, the rupee recovered against the dollar. One dollar is now worth around Rs 60.99. Looks like the RBI has intervened to sell dollars and buy rupees.
The article originally appeared on www.firstpost.com on July 8,2013.
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Mr FM, interest rates in India should be at least 17%

P-CHIDAMBARAMVivek Kaul
On July 3, 2013, the finance minister P Chidambaram asked government public sector banks to cut interest rates. There was nothing new about the finance minister’s diktat. He has asked public sector banks to cut interest rates, several times in the recent past. “Reduction in base (or floor) rate will be a powerful stimulus to boost credit growth,” said Chidambaram.
In a statement made today(July 5, 2013) D Subbarao, the governor of the Reserve Bank of India, came out in support of Chidambaram. “When RBI cuts interest rates, expectation is that monetary transmission will take place and banks would respond. Some have responded and some haven’t,” Subbarao said. What Subbarao meant in simple English was that when RBI cuts interest rates, the expectation is that banks will also cut interest rates on loans.
But interest rates in India are much lower than they should be given the rate of consumer price inflation and the rate of economic growth. This is one of the well kept secrets of Indian banking.
The return on a 10 year government bond as of now is around 7.4%. A 10 year government bond is a bond sold by the Indian government to finance its fiscal deficit or the difference between what it earns and what it spends.
Anyone investing in a bond basically looks at three things: the expected rate of inflation, the expected rate of economic growth and some sort of risk premium to compensate for the risk of investing in the bond. These numbers are added to come up with the expected return on a bond.
The consumer price inflation in the month of May 2013 stood at 9.31%. As per most forecasts the Indian economy is expected to grow at anywhere between 5-6% during this financial year (i.e. the period between April 1, 2013 and March 31, 2014).
Lets assume that lending to the Indian government is considered to be totally risk free and hence consider a risk premium of 0%. Also to keep things simple, lets assume a consumer price of inflation of 9% and an expected economic growth of 5.5% during the course of the year. When we add these numbers we get 14.5%.
This is the rough return that a 10 year Indian government bond should give. But the return on it is around 7.4% or half of the projected 14.5%.
Why is that the case? The reason for that is very simple. Indian banks need to maintain a statutory liquidity ratio of 23% i.e. for every Rs 100 that a bank raises as a deposit, it needs to compulsorily invest Rs 23 in government bonds.
Hence, banks(and in turn citizens) are forced to lend to the government. Similarly, Life Insurance Corporation of India also invests a lot of money in government bonds. So there is a huge amount of money that gets invested in government bonds. This ensures that returns on government bonds are low in comparison to what they would really have been if people and banks were not forced to lend to the government.
The return on government bonds acts as a benchmark for interest rates on all other kind of loans. This is because lending to the government is deemed to the safest, and hence the return on other loans has to be greater than that, given the higher risk.
The 10 year bond yield or return is currently at 7.4%. The average base rate for banks or the minimum rate a bank is allowed to charge to its customers, is around 10.25%. So most loans are made at rates of interest higher than 10.25%. The difference between the 10 year bond yield and the average base rate of banks is around 285 basis points (one basis point is one hundredth of a percentage).
If the 10 year bond yield would have been at 14.5%, then the interest rates on loans would have been greater than 17%(14.5% + 285 basis points). But since the government forces people to lend to it, the interest rates are lower. This act of the people being forced to lend to the government is referred to as financial repression.
Economist Stephen D King in his book When the Money Runs Out makes an interesting point about financial repression in the context of western economies. As he writes “our savings will increasingly be diverted to government interests, whether or not those interests really deliver a good rate of return for society.”
While this may happen in the Western societies as governments resort to financial repression to repay the huge amounts of debt that they have accumulated, it is already happening in India.
Financial repression is a major reason behind the Congress led United Progressive Alliance (UPA) government going in for a large number of harebrained social programmes (the most recent being the right to food security, which has been brought in through the ordinance route). They know that money required for all these programmes can easily be borrowed because 23% of all bank deposits need to be invested in government bonds issued to finance the excess of government expenditure over revenue.
This is also why interest rates offered on bank fixed deposits are close to the rate of consumer price inflation, leading to a zero per cent real rate of return on investment. This is also makes people buy gold and real estate and invest in Ponzi investment schemes, in search of a higher rate of return. The cost of financial repression is being borne by the citizens of this country.
Also, the idea behind Chidambaram’s call for lower interest rates is that people are likely to borrow and spend more. And this in turn will get economic growth going again. Theoretically this just sounds perfect.
But then theory does not always match practice. Banks raise deposits at a certain rate of interest and then give out loans at a higher rate of interest. So unless the interest rate offered on deposits goes down, the rate of interest charged on loans cannot come down.
Banks are not in a position to cut interest rates on deposits as of now (As I have explained here). Hence, it is not possible for them to cut interest rates on loans. Any bank which cuts interest rates on loans will essentially end up with lower profits.
Also even if interest rates on loans are cut, it may not lead to people borrowing and spending money. There are several reasons for the same. Lets first consider car loans.
Car sales have fallen for the last eight months in comparison to the same period during the year before. High interest rates are a reason offered time and again for slowing car sales. But some simple maths tells us that can’t really be the case.
Lets consider the case of an individual who borrows Rs 5 lakh to buy a car at an interest rate of 12% repayable over a period of 7 years. The equated monthly instalment for this works out to Rs 8826. Lets say the bank is able to cut the interest rate by 0.5% to 11.5%. In this case the EMI works out to Rs 8693, or Rs 133 lower. Even if the bank cuts interest rates by 1%, the EMI goes down by Rs 265 only. If we consider a lower repayment period of 5 years, an interest rate cut of 0.5% leads to an EMI cut of Rs 126. An interest rate cut of 1% leads to an EMI cut of Rs 251. The point is that no one is going to go buy a car because the EMI has come down by a couple of hundred rupees.
This is something the people who run car companies seem to understand. As Arvind Saxena, managing director, Volkswagen Passenger Cars, told DNA in an interview carried out in late January 2013 “Fundamentally nothing has changed that should really prop up sales. If interest rates go down by 25 or 50 basis points, it doesn’t change anything overnight.”
RC Bhargava, a car industry veteran and the Chairman of Maruti Suzuki India was more vociferous than Saxena of Volkswagen when he told Business Standard in a recent interview “In India, over 70 per cent of car purchases are financed by banks. An interest rate reduction of, say, one percentage point doesn’t change a person’s decision of buying or not buying a car…With the uncertainties prevalent today, a consumer does not know what his job would be like after a year – whether or not he will have an incremental income, or even a job.”
Of course when people are not buying cars, it is unlikely they will buy homes, unless we are talking about those who have to put their black money to use. A cut in interest rates will bring down EMIs significantly on home loans. But even with lower EMIs people are unlikely to buy homes. This is because the cost of homes especially in cities has gone up big time making them totally unaffordable for most people.
The broader point is that just asking banks to cut interest rates doesn’t make any sense without trying to address the other issues at play.

The article originally appeared on www.firstpost.com on July 5, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)