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Ceteris Paribus

Ceteris paribus is a Latin phrase meaning “other things being equal or held constant”, which is used to simplify the reasoning. It is commonly used in economics, since economic examples typically involve the interaction of many variables, such as supply and demand. For instance, an increase in value of the U.S. dollar will tend to decrease the price of gold. However, it is necessary to assume “all other things being constant,” since if real interest rates suddenly plunge to negative levels (or risk aversion significantly rises), the generalization about the dollar might not hold and the price of gold may actually rise (although the rise would be higher, absent the U.S. dollar appreciation).

Ceteris Paribus and Gold

Because gold prices depend on many factors, investors should be aware of the ceteris paribus assumption, which is widely used in gold investment analyses. For example, we can presume that the rise in economic uncertainty, e.g. about the future of the Chinese economy, will boost the gold price, other things being the same. However, other things are never static. In fact, many different and often opposing factors affect the gold price simultaneously. Therefore, the absence of a sudden increase in gold prices after some risky event does not necessarily mean that gold lost its safe-haven demand. Rather, it means that other factors – e.g. the appreciation of the U.S. dollar – are also in play and simply outweigh the supportive role of the rise in risk aversion.

We encourage you to learn more about gold – not only how to use the ceteris paribus assumption in gold investment analyses, but also how to successfully use the shiny metal as an investment and how to profitably trade it. A great way to start is to sign up for our gold newsletter today. It's free and if you don't like it, you can easily unsubscribe.

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