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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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

Platinum as an Investment

Is platinum as good as gold? In the September 2013 version of their paper entitled “Analysis of the Investment Potential of Platinum Group Metals”, James Ross McCown and Ron Shaw evaluate the investment value of platinum group metals (platinum, palladium, rhodium, iridium, ruthenium and osmium). Using daily spot prices for platinum group metals, gold and crude oil, daily levels of a broad U.S. stock market index, monthly U.S. consumer and producer price indexes and monthly U.S. industrial production levels during July 1992 through December 2011, they find that: Keep Reading

Gold Price and U.S. Interest Rates

Do recent reactions of gold price to interest rate-related U.S. economic announcements (rising on rate-suppressing news) mean that gold acts like a bond? In their September 2013 paper entitled “What if Gold is a Bond?”, Claude Erb and Campbell Harvey re-examine the relationship between gold price and interest rates as proxied by U.S. government bond prices. Using monthly spot gold price, 10-year U.S. Treasury note (T-note) yield and U.S. Treasury Inflation-Protected Securities (TIPS) yield as available during January 1975 through August 2013, they find that: Keep Reading

Any Seasonality for Gold or Gold Miners?

Do gold and gold mining stocks exhibit seasonality? Using monthly closes for the spot price of gold in dollars per ounce and the S&P 500 Index since January 1979, PHLX Gold/Silver Sector (XAU) since December 1983, AMEX Gold Bugs Index (HUI) since June 1996 and SPDR Gold Shares (GLD) since November 2004, all through August 2013, we find that: Keep Reading

Future of the Price of Gold

Will increases in central bank and investor holdings of gold drive its price higher? Or, is the price of gold in bubble territory, portending weak future returns? In the May 2013 update of their paper entitled “The Golden Dilemma”, Claude Erb and Campbell Harvey investigate how investors should treat gold in asset allocation. They consider a range of arguments for owning gold, such as: (1) gold hedges inflation; (2) gold hedges currency decline; (3) gold is attractive when other assets are not; (4) gold is a safe haven in times of crisis; (5) gold is a de facto world currency; and, (6) central banks and investors in aggregate are still underweighting gold. Using gold price in U.S. dollars, the U.S. Consumer Price Index (CPI) and values of several currencies, mostly during January 1975 (the end of the government-fixed gold price era) through March 2012, they conclude that: Keep Reading

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