Gold

Can investors/speculators use gold as a hedge for equities or as a general safe haven? Does it hedge against inflation? These blog entries relate to gold as an asset class.

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Real Commodity Prices as Valuation Aids

Is there a simple way to tell whether a commodity is overvalued or undervalued? In his May 2014 presentation package entitled “Commodity ‘CAPE Ratios'”, Claude Erb looks at long-term real commodity prices as valuation “crutches” to estimate when commodities are overvalued and undervalued. He provides examples relating real commodity prices to future long-term (10-year) real commodity returns. He employs the U.S. consumer price index (CPI) for inflation adjustment. Using gold price since January 1975, the S&P GSCI Index since January 1970, corn price since April 1965, crude oil price since March 1983 and contemporaneous CPI data through April 2014, he finds that: Keep Reading

Gold Futures or Leveraged ETFs?

Should investors seeking leveraged positions in gold prefer futures or leveraged exchanged-traded funds (ETF)? In their August 2014 paper entitled “Price Dynamics of Gold Futures and Gold Leveraged ETFs”, Tim Leung and Brian Ward compare the price evolutions of spot gold, gold futures and leveraged gold ETFs. They use the XAU-USD gold-U.S. dollar exchange rate as the spot gold price. Among gold futures, they consider maturities from nearest month to one year. Among ETFs, they consider the unleveraged iShares GLD, the ProShares 2X UGL, the ProShares -2X GLL, the VelocityShares 3X UGLD and the VelocityShares -3X DGLD. They also construct static and dynamic portfolios of gold futures in efforts to replicate spot gold and leveraged gold price behaviors. Using recent gold futures and gold ETF prices through 7/14/2014, they find that:

Keep Reading

Gold as Hedge, Safe Haven and Downside Risk Protection

Is a position in gold consistently effective in protecting a portfolio of conventional assets? In the August 2014 preliminary version of their paper entitled “Does Gold Glitter in the Long-Run? Gold as a Hedge and Safe Haven Across Time and Investment Horizon”, Don Bredin, Thomas Conlon and Valerio Potì examine the hedging, safe-haven and downside risk reduction properties of gold relative to stocks and bonds in four major markets and across short and long investment horizons. In their examination, they employ wavelet analysis which enables localization of asset class interactions over time and across investment horizons. They apply this analysis to definitions of a hedge (safe haven) as an asset that is uncorrelated or negatively correlated with another asset or portfolio on average (in times of market stress or turmoil). They use a breakpoint of about a month to separate short-run from long-run behaviors. Using daily data for the spot price of gold, equity indexes and 10-year government bond indexes in local dollars for the U.S., UK, German and Japanese markets during January 1980 through December 2013 (except Japanese bond data commences January 1984), they find that: Keep Reading

Best Safe Haven ETF?

A subscriber asked which exchange-traded fund (ETF) asset class proxies make the best safe havens for the U.S. stock market as proxied by the S&P 500 Index. To investigate, we consider the the following 12 ETFs as potential safe havens:

Utilities Select Sector SPDR ETF (XLU)
SPDR Dow Jones REIT ETF (RWR)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
SPDR Gold Shares (GLD)
PowerShares DB Commodity Tracking ETF (DBC)
United States Oil (USO)
iShares Silver Trust (SLV)
PowerShares DB G10 Currency Harvest ETF (DBV)

We consider three ways of testing these ETFs as safe havens for the U.S. stock market based on daily, weekly and monthly return measurement intervals:

  1. Contemporaneous return correlation with the S&P 500 Index during all market conditions.
  2. Return/performance during S&P 500 Index bear markets as specified by the index being below its 200-day/40-week/10-month simple moving average (SMA) for the prior measurement interval.
  3. Return/performance during S&P 500 Index bear markets as specified by the index being in drawdown from a prior high-water mark by more than some percentage (baseline -10%) for the prior measurement interval.

Using daily, weekly and monthly dividend-adjusted closing prices for the 12 ETFs from their respective inceptions through July 2014, and contemporaneous daily, weekly and monthly levels of the S&P 500 Index from 10 months before the earliest ETF inception through July 2014, we find that: Keep Reading

DJIA-Gold Ratio as a Stock Market Indicator

A reader requested a test of the following hypothesis [presented by Simon Maierhofer, co-founder of ETFguide] from the article “Gold’s Bluff – Is a 30 Percent Drop Next?”: “Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market’s long-term direction. The Dow Jones measured in gold is a forward looking indicator.” To test this assertion, we examine relationships between the spot price of gold and the level of the Dow Jones Industrial Average (DJIA). Using monthly data for the spot price of gold in dollars per ounce (London 3:00 PM fix) and DJIA over the period January 1971 through March 2014 (519 months), we find that: Keep Reading

Best Bear Market Asset Class?

A subscriber asked which asset (short stocks, cash, bonds by subclass) is best to hold during equity bear markets, defined simply as intervals when SPDR S&P 500 (SPY) is below its 10-month simple moving average (SMA10). To investigate, we test the following eight alternatives, five of which are bond-like mutual funds and one of which is a gold stocks/gold mutual fund:

Short SPY
Cash, with return estimated as the yield on 13-week U.S. Treasury bills (T-bill)
Vanguard GNMA Securities (VFIIX)
T. Rowe Price International Bonds (RPIBX)
Vanguard Long-Term Treasury Bonds (VUSTX)
Fidelity Convertible Securities (FCVSX)
T. Rowe Price High-Yield Bonds (PRHYX)
Fidelity Select Gold Portfolio (FSAGX)

Specifically, we compare monthly return statistics, cumulative performances and maximum drawdowns of these eight alternatives for months during which SPY is below its SMA10. Using monthly T-bill yield and monthly dividend-adjusted closing prices for the funds above during January 1993 (as limited by SPY) through February 2014, we find that: Keep Reading

Gold vs. Gold Miners

How do gold and gold miner stocks interact? In his February 2014 presentation package entitled “A Golden Bet: Gold Miner Equities versus Gold”, Claude Erb examines the long-run relationship between gold and a gold miner stock indexes. He relies mostly on in-sample regressions over a 20-year sample period. Using monthly gold price and gold miner index level during September 1993 through October 2013, he finds that: Keep Reading

Speculation the Dominant Gold Price Driver?

Are gold price movements predictable? In his December 2013 paper entitled “Gold. The Bursting of a Bubble?”, Tim Verheyden assesses gold price predictability in two ways. First, he applies an autoregressive integrated moving average (ARIMA) model to assess the value of gold price technical analysis (whether past price behavior predicts future price behavior). Second, he examines interaction of gold price with inflation to assess whether the latter drives the former. Using monthly gold prices and U.S. Consumer Price Index data during January 2001 through September 2013, he finds that: Keep Reading

Explaining the Price of Gold

What factors truly explain movements in the price of gold? In his January 2014 paper entitled “Facts and Fantasies about Gold”, Joachim Klement checks the validity of common explanations for changes in gold price. Specifically, he investigates whether gold price responds to: change in inflation expectation; change in real interest rate; financial crises; changes in currency exchange rates; change in the marginal cost of gold production; central bank gold sales and purchases; and, change in the demand for gold-linked exchange-traded funds (ETF). Using monthly data for gold price and these potentially explanatory factors as available during 1970 through 2013, he finds that: Keep Reading

Comparing Precious Metals as Safe Havens

Are other precious metals more effective than gold as safe havens from turmoil in stock and bond markets? In their September 2013 paper entitled “Time Variation in Precious Metal Safe Haven Status — Evidence from the USA”, Brian Lucey and Sile Li compare and contrast the effectiveness of four precious metals (gold, silver, platinum and palladium) as safe havens from sharp declines in U.S. stocks (the S&P 500 Index) and U.S. bonds (a 10-year U.S. Treasury note index). They define an asset as a safe haven from another if returns of the former exhibit zero or negative correlation with returns of the latter when the latter experiences a sharp drawdown. A safe haven is different from a hedge, which has zero or negative return correlation with another asset or portfolio on average. They calculate returns for precious metals based on a continually rolling position in nearest month futures. They calculate return correlations quarter by quarter and focus on the worst 5% of drawdowns in stocks or bonds. Using daily futures contract prices for gold, silver, platinum and palladium and daily returns for the stock and bond indexes from the first quarter of 1989 through the second quarter of 2013, they find that: Keep Reading

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