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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.

Is Gold Overpriced?

Is the price of gold too high? In their May 2024 paper entitled “Is There Still a Golden Dilemma?”, Claude Erb and Campbell Harvey revisit their golden dilemma, the tug of war between dueling ideas:

  1. A high price for gold today presages low future return.
  2. The higher the price of gold today, the rosier its future.

The focus on inflation and gold demand as potential key drivers of gold price behavior. Using monthly data for the U.S. consumer price index (CPI) and for gold demand indicators such as exchange-traded fund (ETF) and central bank gold holdings during January 1975 (when high-quality gold data becomes available) through March 2024, they find that: Keep Reading

Bitcoin Economics

What are the implications of mainstream economics for bitcoin? In his March 2024 paper entitled “Bitcoin: What Does Mainstream Economics Have to Say?”, Joshua Hendrickson tackles the following questions:

  1. Why does money exist and what role does it play in society? How does bitcoin fit our understanding of this role?
  2. What is bitcoin worth?
  3. Is bitcoin (or can bitcoin be) a sound form of money?
  4. Should governments adopt bitcoin?

His goal is to decipher how economics (not any particular economist) answer these questions. Applying mainstream economic theory, he concludes that: Keep Reading

Recent Interactions of Asset Classes with Effective Federal Funds Rate

How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using end-of-month EFFR and dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through March 2024, we find that: Keep Reading

Recent Interactions of Asset Classes with Inflation (CPI)

How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-items consumer price index (CPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in CPI and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly total CPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through June 2023, we find that: Keep Reading

Gold Plus Low-volatility Stocks?

Does an allocation to gold truly protect a portfolio from downside risk? In their April 2023 paper entitled “The Golden Rule of Investing”, Pim van Vliet and Harald Lohre examine downside risks for portfolios of stocks (value-weighted U.S. stock market) and bonds (10-year U.S. Treasury notes) with and without gold (bullion) based on real returns and a 1-year investment horizon. They also investigate substitution of low-volatility stocks for the broad stock market in search of further downside risk protection. Using monthly returns for the specified assets and U.S. inflation data during 1975 (when gold becomes truly tradable) through 2022, they find that:

Keep Reading

Any Seasonality for Gold or Gold Miners?

Do gold and gold mining stocks exhibit exploitable seasonality? Using monthly closes for spot gold (various sources) and the S&P 500 Index since December 1974, 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 December 2022, we find that: Keep Reading

Any Lead-lag Relationships Between Gold and 10-year U.S. Treasuries?

A subscriber asked whether there are any lead-lag relationships between gold, proxied by SPDR Gold Shares (GLD), and 10-year U.S. Treasury note (T-note) yields. As a proxy for the latter, we use iShares 7-10 Year Treasury Bond ETF (IEF). Using daily and monthly dividend-adjusted prices for GLD and IEF during mid-November 2004 (limited by GLD) through late July 2022, we find that: Keep Reading

When Gold Wins?

Why have inflation, economic uncertainty and geopolitical uncertainty not driven up the price of gold? In their brief May 2022 commentary entitled “Why Isn’t the Gold Price Higher?”, Paul Gambles and James Fraser review the times when gold is, and is not, a good investment. Based on historical gold prices, with focus on recent decades, they conclude 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 test 15 ETFs/funds as potential safe havens:

Utilities Select Sector SPDR Fund (XLU)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
Vanguard Real Estate Index Fund (VNQ)
SPDR Gold Shares (GLD)
Invesco DB Commodity Index Tracking Fund (DBC)
United States Oil Fund, LP (USO)
iShares Silver Trust (SLV)
Invesco DB G10 Currency Harvest Fund (DBV)
SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL)
Grayscale Bitcoin Trust (GBTC)

We consider three ways to find safe havens for the U.S. stock market based on daily or monthly returns:

  1. Contemporaneous return correlation with the S&P 500 Index during all market conditions at daily and monthly frequencies.
  2. Performance during S&P 500 Index bear markets as defined by the index being below its 10-month simple moving average (SMA10) at the end of the prior month.
  3. Performance during S&P 500 Index bear markets as defined by the index being -20%, -15% or -10% below its most recent peak at the end of the prior month.

Using daily and monthly dividend-adjusted closing prices for the above 15 funds since their respective inceptions, and contemporaneous daily and monthly levels of the S&P 500 Index since 10 months before the earliest inception, all through April 2022, we find that: Keep Reading

Gold Return vs. Change in M2

A subscriber requested confirmation of the following relationship between U.S. M2 Money Stock and gold offered in “Why Gold May Be Looking Cheap”: “[O]ne measure I’ve found useful is the ratio of the price of gold to the U.S. money supply, measured by M2, which includes cash as well as things like money market funds, savings deposits and the like. The logic is that over the long term the price of gold should move with the change in the supply of money… That equilibrium level is also relevant for future price action. When the ratio is low, defined as 25% below equilibrium, the medium 12-month return has been over 12%. Conversely, when the ratio is high, defined as 25% above equilibrium, the 12-month median return has been -6%. …This measure can be refined further. [G]old tends to trade at a higher ratio to M2 when inflation is elevated.” Because it retrospectively defines specific valuation thresholds using the full sample, this approach impounds lookahead bias/data snooping bias in threshold selection. We consider an alternative setup that relates monthly change in M2 to monthly gold return. We also consider the effect of inflation on this relationship. Using monthly seasonally adjusted M2 and end-of-month London PM gold price fix during January 1976 (to ensure a free U.S. gold market) through March 2022, we find that: Keep Reading

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