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.
Gold Seasonality Drivers January 30, 2012
Does seasonal fear of stock market weakness or demand for jewelry drive gold prices? In his January 2012 paper entitled “The Seasonality of Gold – Jewelery Demand and Investor Behavior”, Dirk Baur examines calendar month seasonality of the price of gold. Using daily gold bullion spot prices (London fixing) and COMEX gold futures prices during 1981 through 2010 (30 years), along with contemporaneous stock market index and gold jewelry demand data, he finds that: More…
Multi-year Performance of Non-equity Leveraged ETFs November 10, 2011
An array of leveraged exchange-traded funds (ETF) track short-term (daily) changes in commodity and currency exchange indexes. Over longer holding periods, these ETFs tend to veer off track. The cumulative veer can be large. How do leveraged ETFs perform over a multi-year period? What factors contribute to their failure to track underlying indexes? To investigate, we consider a set of 12 ProShares 2X leveraged index ETFs (six matched long-short pairs), involving a commodity index, oil, gold, silver and the euro-dollar and yen-dollar exchange rates, with the start date of 12/9/08 determined by inception of the youngest of these funds (Ultra Yen). Using daily dividend-adjusted prices for these funds over the period 12/9/08 through 11/4/11 (almost three years), we find that: More…
Any Seasonality for Gold or Gold Miners? October 3, 2011
Do gold and gold mining stocks exhibit seasonality? Since exchange-traded funds for gold and gold miners are very young, the spot price of gold and mining indexes offer more reliable inference. However, spot gold prices are informative only as far back as 1968, because: “On March 17, 1968, the price of gold on the private market was allowed to fluctuate [, and] in 1975 the price of gold was left to find its free-market level.” Using monthly levels of the spot price of gold in dollars per ounce and the S&P 500 Index during February 1968 through September 2011, PHLX Gold/Silver Sector (XAU) during December 1983 through September 2011, AMEX Gold Bugs Index (HUI) during June 1996 through September 2011 and SPDR Gold Shares (GLD) during November 2004 through September 2011, we find that: More…
Comparison of Gold Alternatives September 22, 2011
Do the different ways of investing in gold produce similar outcomes? In their September 2011 paper entitled “A Comparative Analysis of the Investment Characteristics of Alternative Gold Assets”, Tim Pullen, Karen Benson and Robert Faff examine the diversification, hedging and safe haven properties of gold bullion, ten gold stocks, 11 gold mutual funds and two gold exchange traded funds (ETFs). A diversifier exhibits a positive (but less than one) average correlation with a reference asset/portfolio. A strong (weak) hedge exhibits negative (zero) average correlation with a reference asset/portfolio. A strong (weak) safe haven exhibits negative (zero) correlation with a reference asset/portfolio during market crises. They consider non-linearity by amplifying or pre-selecting intervals of extreme negative returns for the reference asset. Using daily levels of alternative gold assets and the S&P 500 Total Return Index as a reference asset during July 1987 through June 2010 (for bullion and gold mutual funds) and February 2005 through June 2010 (for all gold alternatives), they find that: More…
Use “Standard” SMAs to Identify Gold Market Regimes? August 25, 2011
Do simple moving averages (SMA) commonly used to identify stock market regimes work similarly for the spot gold market? To investigate, we consider two regime indicators: the 200-day SMA and a combination of the 50-day and 200-day SMAs. Using daily London afternoon spot gold prices (and, for comparison, daily closes of the S&P 500 Index) over the period January 1973 through mid-August 2011, we find that: More…
Gold Bubble? August 22, 2011
Has the strong appreciation of gold since 2001 produced a price bubble? In their March 2011 paper entitled “Is There a Speculative Bubble in the Price of Gold?”, Jedrzej Bialkowski, Martin Bohl, Patrick Stephan and Tomasz Wisniewski measure deviations of actual gold price from its fundamental value to identify gold bubbles. They use the convenience yield model and associated monthly commodity “dividends” (benefit of holding gold rather than gold futures) to derive gold’s fundamental value. They then apply a regime-switching test to estimate whether deviations of actual gold price from fundamental value enter bubble territory over their sample period. Using daily gold spot and nearby futures contract prices and the Treasury bill yield (risk-free rate) during November 1978 through March 2010 (377 months), they find that: More…
Required Yield Theory of Gold Valuation August 19, 2011
What is fair value for gold, which has no earnings and pays no dividend? In their 2005 paper entitled “The Price of Gold: A Global Required Yield Theory”, Christophe Faugere and Julian Van Erlach present a model of gold valuation based on a view of gold as a global store of real (inflation-adjusted) wealth. This model generates the price of gold as a function of the global investment yield required to produce a constant real after-tax return equal to long-term real growth in global GDP per capita. Capital flows to (from) gold depend on decreases (increases) in expected returns from other asset classes. Using quarterly data over the period May 1979 through May 2002, they find that: More…
Gold Price Drivers? August 18, 2011
What drives the price of gold: inflation, stock prices, public sentiment? To investigate, we relate spot gold price to the Consumer Price Index (non-seasonally adjusted), the S&P 500 Index and consumer sentiment. We start sampling in 1975 because: “On March 17, 1968, …the price of gold on the private market was allowed to fluctuate…[, and] in 1975…the price of gold was left to find its free-market level.” Using monthly data from January 1975 (January 1978 for consumer sentiment) through July 2011 (439 months), we find that: More…
Simple Gold-Gold Stock Fund Pair Trading June 24, 2011
A reader asked about the gold-gold miner stocks arbitrage-like argument in Jay Kaeppel’s 2/2/10 article “Don’t Give Up On Gold Stocks Just Yet”, for which his 9/21/04 article “Gold Stock and Gold Bullion” is a more robust antecedent. Does the relationship between gold and gold miner stocks support more frequent switching than indicated in these articles? For example, if SPDR Gold Shares (GLD) and Market Vectors Gold Miners GDX) diverge over some recent interval, do they then tend to converge? To check, we construct a simple long-only pair trading strategy and test it with available data. Using weekly dividend-adjusted closes for GLD and GDX since late May 2006 (inception for GDX) through mid-June 2011, we find that: More…
DJIA-Gold Ratio as a Stock Market Indicator June 17, 2011
A reader requested: “Please test the following hypothesis [presented by Simon Maierhofer, co-founder of ETFguide.com] in 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.” For this evaluation, we test 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 and DJIA over the period January 1971 through May 2011 (485 months), we find that: More…
