Tag: hedging

Gold has always held an allure and with the price of gold on international markets trending upwards since October 2022 (see Figure 1: click here for a PowerPoint), people seem to be attracted to it once again. The price reached successively higher peaks throughout 2023 before surging to above $2300 per oz in 2024 and peaking at $2425.31 per oz on 20 May 2024.

While gold tends to become attractive during wartime, economic uncertainty and bouts of inflation, all of which have characterised the last few years, the sustained price rise has perplexed market analysts and economists. The rally had been expected to peter out over the past 20 months. But, as the price of gold rose to sustained higher levels, with no significant reversals, some analysts have speculated that it is not the typical short-term factors which are driving the increased demand for and price of gold but more fundamental changes in the global economic system.

This blog will first discuss the typical short-term factors which influence gold prices before discussing the potential longer-term forces that may be at work.

Short-term factors

So, what are the typical short-term economic forces which drive the demand for gold?

The most significant are the real rates of interest on financial assets. These rates represent the opportunity cost of holding an asset such as gold which offers no income stream. When the real return from financial assets like debt and equity instruments is low, the demand for and price of gold tends to be high. In contrast, when the real return from such assets is high, the price of gold tends to be lower. An explanation for this is that real rates of return are strongly related to inflation rates and investors perceive gold as a hedge against inflation since its price is positively correlated with a general rise in prices. Higher unexpected inflation reduces the real rate of return of securities like debt and equity whose value is derived from cash flows anticipated in the future. In such circumstances, gold become an attractive alternative investment. As inflationary expectations decline, real returns from financial assets should rise, and the demand for gold should fall.

The relationship between real returns, proxied by the yield on US 10-year TIPS (Treasury inflation-protected securities), and gold prices can be used to examine this explanation. Real returns rose steadily in the aftermath of the COVID-19 pandemic. Yet the price of gold, which rose during the early stages of the pandemic in 2020, has not fallen. Instead, it has remained at elevated levels for much of that time (see Figure 2: click here for a PowerPoint).

There have been short periods when changes in real returns seemed to have a high correlation with changes in gold prices. In late 2022, for example, falling real rates coincided with rising gold prices. The same pattern was repeated between October and December 2023. However, when real returns rose again in the New Year of 2024, in response to stubbornly higher expected inflation and the expectation of ‘higher-for-longer’ interest rates, particularly in the USA, gold prices continued to rise. Indeed, across the 5-year period the correlation coefficient between the two series is actually positive at 0.268, showing little evidence supporting this explanation for the pattern for the gold price.

Real returns in the USA, however, may not be the correct ones to consider when seeking explanations for the pattern of gold’s price. Much of the recent demand is from China. Analysts suggest that Chinese investors are looking for a safe asset to hold as their economy stagnates and real returns from alternatives, like domestic property and equity, have decreased. Further, there are some concerns that the Chinese currency, the renminbi, may be undervalued in response to the sluggish growth. Holding gold is a good hedge against inflation (currency depreciation produces inflationary pressure). Consequently, the Chinese market may be exerting pricing power in relation to real returns in a way not seen before (see the Dempsey and Leng FT article linked below).

However, some analysts suggest that the rise in price is disproportionate to these short-term factors and point to potential long-term structural changes in the global financial order which may produce significant changes in the market for gold.

Long-term factors

Since 2018, there have been bouts of gold purchasing by central banks around the world. In contrast to the 1990s and 2000s, central banks have been net purchasers since 2010. The purchasing fell back during the coronavirus pandemic but has surged again, with over 1000 metric tonnes purchased in both 2022 and 2023 (see Figure 3: click here for a PowerPoint).

Analysts have pointed to similarities between the recent pattern and central bank purchases of gold during the late 1960s and early 1970s (see The Conversation article linked below). Then, central banks sought to diversify themselves from dollar-denominated assets due to concerns about higher inflation in the USA and its impact on the value of the US dollar. Under the Bretton Woods fixed exchange rate system, central banks could redeem dollars for gold from the US Federal Reserve at a fixed rate. The pressure on the USA to redeem the gold led to the collapse of the Bretton Woods fixed exchange rate system.

While the current period of central bank purchases does not appear to be related to expected inflation, some commentators suggest it could signal a regime change in the global financial system as significant as the collapse of Bretton Woods. The rise of Chinese political power and the resurgence of US isolationist tendencies portend an increasingly multipolar geopolitical scene. Such concerns may cause central bankers to diversify away from dollar denominated assets to avoid being caught out by geopolitical tensions. Gold may be perceived as an asset through which investors can hedge that risk better.

Indeed, the rise in demand among Chinese investors may indicate a reluctance to hold US assets due to their risk of seizure during heightened geopolitical tensions between China and the USA. Chinese holdings of US financial assets as a percentage of GDP are back to the level they were  when the country joined the World Trade Organisation (WTO) in 2001 (see the Rana Foroohar FT article linked below). Allied to this is an increasing tendency to repatriate gold bullion from centres such as London and New York.

Added to these worries about geopolitical risk are concerns about traditional safe-haven assets – government debt securities. US government budget deficits and debt levels continue to rise. Similar patterns are observed across many developed market economies (DMEs). Analysts are concerned such debts are reaching unsustainable levels (economist.com). The view is that at some point, perhaps soon, a tipping point will be reached where investors recognise this. They will demand higher rates of return on these government debt securities, pushing yields up and prices down (bond yields and prices have a negative relationship).

In expectation of this, investors may be wary of holding such government debt securities and move to hold gold as an alternative safe-haven asset to avoid potential capital losses. However, there has been no sign of this behaviour in bond prices and yields yet.

Finally, there are economists who argue that the increased demand for gold is caused by a different regime-change in the global economy. This is not one driven by geopolitics, but by changing inflationary expectations – from a low-inflation, low-interest-rate environment to a higher-inflation, higher-interest-rate environment.

Some of the anticipation relating to inflation is derived from the persistent fiscal stimulus, evidenced by the higher government debt levels described above, coupled with the long period of monetary stimulus (quantitative easing) in developed market economies during the 2010s.

Further, some economists highlight the substantial capital investment needed for the green transition and reindustrialisation. While the financing for this capital investment may absorb some of the excess money flowing around financial markets, the scale involved will create a great demand for resources, fuelling inflation and raising the cost of capital as borrowers compete for resources.

Finally, the demographic forces from an aging population will also cause inflationary pressures. Rising dependency ratios across many developed market economics will create shortages, particularly of labour. This persistent scarcity of labour will continually drive up wages and prices, fuelling inflation and the demand for gold.


The recent surge in the price of gold has led to great interest by investors, financial market analysts and economists. At first, there was a perception that the price increase was similar to recent history and driven by short-term decreases in the real rate of return from financial assets, which reduced the opportunity cost of holding gold.

However, as the upward trend in the price of gold has persisted and does not seem to be explained by changes in real interest rates, economists have considered other reasons that might signal longer-term significant changes in the global financial system. These relate to changing geopolitical risk derived from an increasingly multipolar environment, concerns about the sustainability of government debt levels and expectations of persistently higher inflation in the world economy.

Only time will tell whether these explanations prove correct. If inflationary pressures subside, particularly in the USA, and if real returns from financial assets rebound, a decrease in the demand for and price of gold will suggest that the previous rise was driven by short-term forces.

If prices don’t fall back, it will only fuel the debate that it is a sign of significant changes in the global financial order.




  • Gold
  • Trading Economics


  1. Explain the relationship between real returns and inflation for financial securities like debt and equity.
  2. Why is gold perceived to be an effective hedge against inflation?
  3. Contrast the factors which influenced the demand for gold in the period which preceded the end of Bretton Woods with those influencing demand now?
  4. What has happened to the price of gold since this blog was published? Is there any evidence for the profound changes in the global economic order suggested or was it the short-term forces driving demand after all?

Your Americano, Latte or Cappuccino may soon be more expensive. This is because coffee bean prices are rising. A combination of continuing growth in demand and poor coffee harvests in various parts of the world have led to a rise in both Arabica and Robusta prices, with the International Coffee Organization’s Composite Indicator price (in US dollars) having risen by over 30% since mid-January this year (see chart below: click here for a PowerPoint)

Supply has been affected by droughts in Brazil and Vietnam, two of the world’s biggest coffee producers, and by pests (the Coffee Berry Borer) in the Kilimanjaro region of Tanzania and in other East African countries. Global exports of coffee in July 2016 were 22% down on the same month in 2015.

The growing shortage and rising current (spot) prices is reflected in future prices. These are prices determined in the market now for trading at a specified future date (e.g. in three months’ time). Future prices depend on predictions of the balance of demand and supply in the future. According to the MarketWatch article below, “Analysts at Société Générale in a note predicted that prices could climb about 30% further by the end of next year”. The current (mid-September) spot price of robusta coffee beans is around $0.96 per lb. The December 2016 future price is around $1.48.

So what effect will this have on the prices in Starbucks, Costa or Caffè Nero? And what effect will it have on ground or instant coffee in supermarkets? To quote the MarketWatch article again:

A research report from the US Department of Agriculture found that, on average, a 10% increase in green-coffee-bean prices per pound would yield a 2% increase in both manufacturer prices and at the register in places like Starbucks Corp.

This is because the cost of coffee beans is just one element in the costs of coffee roasters and coffee shops. Also these companies use futures markets to smooth out the prices they pay. They hold stockpiles of coffee, which they build up when prices are low and draw on when prices are high. This helps to reduce fluctuations in retail prices.

So don’t worry too much about the price of your morning coffee – at least, not yet.


Why a surge in coffee-bean prices may not hit the Starbucks set—yet MarketWatch, Rachel Koning Beals (9/9/16)
Wired coffee prices may not slip far News Markets, David Cottle (9/9/16)
Late-harvest woes prompt Brazil coffee harvest downgrade Agrimoney (7/9/16)
Look Out, Latte Lovers: Brazil Drought Hurts Espresso Beans Bloomberg, Fabiana Batista and Marvin G. Perez (13/9/16)
Why Your Morning Coffee Is About to Become Even More Expensive Fortune (28/7/16)
Climate change brews a storm for East Africa coffee farmers Business Daily (East Africa), Paul Redfern (4/9/16)
Coffee Market Report ICO (August 2016)


Commodity Prices Index Mundi
Historical Data on the Global Coffee Trade ICO
ICO’s Coffee Trade Statistics Infographic for July 2016 ICO blog (31/8/16)


  1. What determines coffee futures prices?
  2. How are the price fluctuations of coffee in coffee shops related to the price elasticities of demand and supply? What determines these elasticities?
  3. Why does a strengthening (an appreciation) of the currency of a coffee exporter affect (a) the price of coffee to producers in the country; (b) international coffee prices in dollars?
  4. Are poor coffee harvests on balance good or bad for coffee producers? How does this depend on the market price elasticity of demand? Does the answer vary from producer to producer?
  5. How does speculation affect coffee prices (both spot and future)? Is such speculation of benefit to (a) the coffee consumer; (b) the coffee grower?

Coffee prices have been falling on international commodity markets. In August, the International Coffee Organization’s ‘composite indicator price’ fell to its lowest level since September 2009 (see). This reflects changes in demand and supply. According to the ICO’s monthly Coffee Market Report for August 2013 (see):

“Total exports in July 2013 reached 9.1 million bags, 6.6% less than July 2012, but total exports for the first ten months of the coffee year are still up 3.6% at 94.5 million bags. In terms of coffee consumption, an increase of 2.1% is estimated in calendar year 2012 to around 142 million bags, compared to 139.1 million bags in 2011.”

But despite the fall in wholesale coffee prices, the price of a coffee in your local coffee shop, or of a jar of coffee in the supermarket, has not been falling. Is this what you would expect, given the structure of the industry? Is it simply a blatant case of the abuse of market power of individual companies, such as Starbucks, or even of oligopolistic collusion? Or are more subtle things going on?

The following articles look at recent trends in coffee prices at both the wholesale and retail level.


Coffee Prices Continue Decline Equities.com, Joel Anderson (17/9/13)
Arabica coffee falls Business Recorder (19/9/13)
Brazil Launches Measures to Boost Coffee Prices N. J. Douek, Jeffrey Lewis (7/9/13)
Coffee Prices Destroyed Bloomberg (4/9/13)
The surprising reality behind your daily coffee: The CUP costs twice as much as the beans that are flown in from South America Mail Online, Mario Ledwith (23/9/13)
Coffeenomics: Four Reasons Why You Can’t Get a Discount Latte Bloomberg Businessweek, Kyle Stock (19/9/13)
Here’s who benefits from falling coffee costs CNBC, Alex Rosenberg (9/9/13)
The great coffee rip-off is no myth Sydney Morning Herald, BusnessDay, Michael Pascoe (23/9/13)
Monthly Coffee Market Report International Coffee Organization (August 2013)


Coffee Prices ICO
ICO Indicator Prices – Annual and Monthly Averages: 1998 to 2013 ICO
Coffee, Other Mild Arabicas Monthly Price – US cents per Pound Index Mundi
Coffee, Robusta Monthly Price – US cents per Pound Index Mundi


  1. Why have wholesale coffee prices fallen so much since 2011? Are the reasons on the demand side, the supply side or both? Illustrate your answer with a supply and demand diagram.
  2. What determines the price elasticity of demand for coffee (a) on international coffee markets; (b) in supermarkets; (c) in coffee shops?
  3. Why has the gap between Arabica and Robusta coffee prices narrowed in recent months?
  4. Identify the reasons why coffee prices have not fallen in coffee shops.
  5. The cost of the coffee beans accounts for around 4% of the cost of a cup of coffee in a coffee shop. If coffee beans were to double in price and other costs and profits were to remain constant, by what percentage would a cup of coffee rise?
  6. How would you set about establishing whether oligopolistic collusion was taking place between coffee shops?
  7. What is meant by ‘hedging’ in coffee markets? How does hedging affect wholesale coffee prices?
  8. Explain the statement “If they have hedged correctly, Starbucks and such competitors as Green Mountain Coffee Roasters (GMCR) are likely paying far more for beans right now than current market rates.”
  9. What are “buffer stocks”. How can governments use buffer stocks (e.g. of coffee beans) to stabilise prices? What is the limitation on their power to do so? Can buffer stocks support higher prices over the long term?
  10. What are “coffee futures”? What determines their price? What effect will coffee future prices have on (a) the current price of coffee; (b) the actual price of coffee in the future?

Anyone investing in commodities over the past few weeks will have been in for a bumpy ride. During the first part of 2011, commodity prices have soared (see A perfect storm brewing?). This has fuelled inflation and has caused the Bank of England to revise upwards its forecast for inflation (see Busy doing nothing see also Prospects for Inflation).

But then in the first week of May, commodity prices plumetted. On the 5 May, oil prices fell by 7.9% – their largest daily amount since January 2009. Between 28 April and 6 May silver prices fell from $48.35 per ounce to just over $33.60 per ounce – a fall of over 30%. And it was the same with many other commodities – metals, minerals, agricultural raw materials and foodstuffs.

Many financial institutions, companies and individuals speculate in commodities, hoping to make money buy buying at a low price and selling at a high price. When successful, speculators can make large percentage gains in a short period of time. But they can also lose by getting their predictions wrong. In uncertain times, speculation can be destabilising, exaggerating price rises and falls as speculators ‘jump on the bandwagon’, seeing price changes as signifying a trend. In more stable times, speculation can even out price changes as speculators buy when prices are temporarily low and sell when they are temporarily high.

Times are uncertain at present. Confidence fluctuates over the strength of the world recovery. On days of good economic news, demand for commodities rises as people believe that a growing world economy will drive up the demand for commodities and hence their prices. On days of bad economic news, the price of commodities can fall. The point is that when undertainty is great, commodity prices can fluctuates wildly.

Commodities plunge: Blip or turning point? BBC News, Laurence Knight (6/5/11)
Commodity hedge fund loses $400m in oil slide Financial Times, Sam Jones (8/5/11)
Commodities: ‘epic rout’ or the new normal? BBC News blogs: Stephanomics, Stephanie Flanders (6/5/11)
Commodities Still a Bubble – But Prices May Continue to Rise Seeking Alpha, ChartProphet (9/5/11)
When a sell-off is good news The Economist, Buttonwood (6/5/11)
Gilt-edged argument The Economist, Buttonwood (28/4/11)
Commodities: What volatility means for your portfolio Reuters blogs: Prism Money (9/5/11)
Gold, silver rise again on debt, inflation concerns Reuters, Frank Tang (10/5/11)
Commodities After The Crash, No Way But Up The Market Oracle, Andrew McKillop (9/5/11)
Outlook 2011:Three Dominant Factors Will Impact Precious Metals in 2011 GoldSeek (9/5/11)
Energy bills set to rise sharply next winter, Centrica warn Guardian, Graeme Wearden (9/5/11)
Dollar triggered commodities ‘flash crash’, not Bin Laden The Telegraph, Garry White, and Rowena Mason (9/5/11)
The outlook for commodity prices Live Mint@The Wall Steet Journal, Manas Chakravarty (11/5/11)
Three ways to play the next commodities bubble Market Watch, Keith Fitz-Gerald (11/5/11)

Commodity Prices Index Mundi
Commodities Financial Times
Commodities BBC Market Data


  1. Why did commodity prices fall so dramatically in early May, only to rise again rapidly afterwards?
  2. Why do commodity prices fluctuate more than house prices?
  3. What is the relevance of price elasticity of demand and supply in explaining the volatility of commodity prices?
  4. Under what circumstances is speculation likely to be (a) stabilising; (b) destabilising?
  5. To what extent are rising commodity prices (a) the cause of and (b) the effect of world inflation?
  6. If commodity prices go on rising every year, will inflation go on rising? Explain.

One of the contributing factors towards high inflation in the UK is high and rising oil prices – most of us have seen the effects of this with high prices at petrol stations. However, there are many other areas where high oil prices have had knock on effects and one particular effect is the costs to airlines. As a result, passengers will see a higher price. British Airways will be increasing its fuel surcharge on long-haul flights. The surcharge for economy seats is likely to increase by £10 per flight and for premium seats is to increase by £20 per flight. Nick Swift, BA’s chief financial officer said:

‘As customers will know form the price at petrol pumps, the cost of fuel has continued to rise significantly over the past three months. For us, fuel now represents over one-third of our costs and particularly affects our long-haul flights.’

The impact of high oil prices will undoubtedly affect airline profits, which are expected to halve this year. While International Airlines Group (IAG) has seen a rise in passenger numbers, costs have been rising faster and this may continue with further political unrest in the Middle East, as well as the recent natural disasters we have seen – in particular the concern about the nuclear power station. These concerns have led many airlines, including IAG to engage in hedging, where airlines try to protect themselves from rising fuel prices by agreeing the price they will pay for fuel several months ahead. There are undoubtedly risks of doing so, but with such high prices, this is a practice that airlines have engaged in. After all, fuel does represent over one third of IAG’s costs, so this price hike is hardly unexpected, but consumers will inevitably be affected.

British Airways increases fuel surcharge by £10 Telegraph, David Millward (5/4/11)
BA raises long-haul fuel surcharges BBC News (5/4/11)
BA passengers face fuel surcharge hike Sky News (5/4/11)
BA long-haul surcharge to go up The Press Association (5/4/11)
British Airways ups longhaul fuel surcharge Reuters (5/4/11)


  1. What are the causes of rising oil prices?
  2. What is the process of hedging? Are there any risks involved in it? Under what circumstances could hedging enable companies such as IAG to gain and lose?
  3. What impact is this surcharge likely to have on consumers? Who will it affect the most?
  4. What explanation is there for rising passenger numbers, yet falling profits for IAG?