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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.

Tactical Signals from a Gold/Silver Ratio?

Can investors holding a position in gold as inflation hedge/equity crash protection improve performance of this position by shifting to silver when the gold-to-silver ratio is high? To investigate, we track the ratio of SPDR Gold Shares (GLD) price to iShares Silver Trust (SLV) price and look to switch from GLD to SLV while the latter is relatively undervalued. Using end-of-month prices of GLD and SLV during April 2006 (limited by inception of SLV) through January 2021, we find that: Keep Reading

QQQ:IWM for Risk-on and GLD:TLT for Risk-off?

A subscriber asked about a strategy that switches between an equal-weighted portfolio of Invesco QQQ Trust (QQQ) and iShares Russell 2000 ETF (IWM) when the S&P 500 Index is above its 200-day simple moving average (SMA200) and an equal-weighted portfolio of SPDR Gold Shares (GLD) and iShares 20+ Year Treasury Bond ETF (TLT) when below. Also, more generally, is an equal-weighted portfolio of GLD and TLT (GLD:TLT) superior to TLT only for risk-off conditions? To investigate, we (1) backtest the switching strategy and (2) compare performances of GLD:TLT versus TLT when the S&P 500 Index is below its SMA200. We consider both gross and net performance, with the latter accounting for 0.1% portfolio switching frictions 0.001% daily portfolio rebalancing frictions (rebalancing one hundredth of portfolio value). As benchmarks, we consider buying and holding SPDR S&P 500 ETF Trust (SPY) and a strategy that holds SPY (TLT) when the S&P 500 Index is above (below) its SMA200. Using daily S&P 500 Index levels starting February 5, 2004 and daily dividend-adjusted levels of QQQ, IWM, GLD, TLT and SPY starting November 18, 2004 (limited by inception of GLD), all through November 25, 2020, we find that:

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Bitcoin Displacing Gold?

Is Bitcoin beginning to displace gold as a U.S. dollar hedge? To investigate, we look at rolling correlations of returns for the following pairs of exchange-traded funds (ETF):

  1. Grayscale Bitcoin Trust (GBTC) and SPDR Gold Shares (GLD). This relationship should perhaps trend negative if investors are shifting from gold to Bitcoin.
  2. GBTC and Invesco DB US Dollar Index Bullish Fund (UUP). This relationship should perhaps trend negative if investors are hedging currency weakness with Bitcoin.
  3. GLD and UUP. This relationship should perhaps trend less negative if investors are shifting away from gold as a currency hedge.

Using daily and monthly adjusted prices for these three ETFs during May 2015 (limited by GBTC) through mid-November 2020, we 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 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 September 2020, we find that: Keep Reading

Gold Globally

Is gold a hedge and safe haven for other asset classes globally? In their September 2020 paper entitled “Gold as a Financial Instrument”, Pedro Gomis‐Porqueras, Shuping Shi and David Tan explore effectiveness of gold as hedge and safe haven for a variety of international market risks. They define a hedge as an asset with return uncorrelated or negatively correlated with that of another asset overall. They define a strong (weak) safe haven as an asset with return negatively correlated (uncorrelated) with that of a crashing asset. Their methodology accounts for both the magnitude and speed of asset price change. They focus on reactions of gold price to crises associated with European government debt, crude oil (an inflation proxy) and equity markets. Using gold, European government debt, crude oil and stock market prices and U.S. dollar exchange rates with other currencies during June 1997 through June 2020, they find that: Keep Reading

SLV vs. GLD

How are behaviors of gold and silver exchange-traded funds (ETF) similar and different? To investigate we consider iShares Silver Trust (SLV) versus  SPDR Gold Shares (GLD). Using daily returns for SLV, GLD and the S&P 500 Index (SP500) during late April 2006 (limited by SLV) through early September 2020, we find that:

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GDX and GDXJ vs. GLD

How are behaviors of physically backed gold and gold miner exchange-traded funds (ETF) similar and different? To investigate we consider each of Market Vectors Gold Miners (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ) versus SPDR Gold Shares (GLD). Using daily returns for GDX since May 2006 and GDXJ since November 2009, and contemporaneous daily returns for GLD and the S&P 500 Index (SP500), all through early September 2020, we find that:

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The BGSV Portfolio

How might an investor construct a portfolio of very risky assets? To investigate, we consider:

  • First, diversifying with monthly rebalancing of:
    1. Bitcoin Investment Trust (GBTC), representing a very long-term option on Bitcoins.
    2. VanEck Vectors Junior Gold Miners ETF (GDXJ), representing a very long-term option on gold.
    3. ProShares Short VIX Short-Term Futures (SVXY), to capture part of the U.S. stock market volatility risk premium by shorting short-term S&P 500 Index implied volatility (VIX) futures. SVXY has a change in investment objective at the end of February 2018 (see “Using SVXY to Capture the Volatility Risk Premium”).
  • Second, capturing upside volatility and managing drawdown of this portfolio via gain-skimming to a cash position.

We assume equal initial allocations of $10,000 to each of the three risky assets. We execute a monthly skim as follows: (1) if the risky assets have month-end combined value less than combined initial allocations ($30,000), we rebalance to equal weights for next month; or, (2) if the risky assets have combined month-end value greater than combined initial allocations, we rebalance to initial allocations and move the excess permanently (skim) to cash. We conservatively assume monthly portfolio reformation frictions of 1% of month-end combined value of risky assets. We assume accrued skimmed cash earns the 3-month U.S. Treasury bill (T-bill) yield. Using monthly prices of GBTC, GDXJ and SVXY adjusted for splits and dividends and contemporaneous T-bill yield during May 2015 (limited by GBTC) through June 2019, we find that:

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Real Gold Price and Future Gold Return

Does the real (inflation-adjusted) price of gold indicate future gold return? If so, what is the current indication? In their August 2020 paper entitled “Gold, the Golden Constant, COVID-19, ‘Massive Passives’ and Déjà Vu”, Claude Erb, Campbell Harvey and Tadas Viskanta examine behavior and implications of real gold price (gold price in U.S. dollars per ounce divided by the U.S. consumer price index) based on the assumption that the main investor interest in gold is as an inflation hedge. Specifically, they look at interactions among gold price, U.S. inflation, real gold price, government bond (10-year U.S. Treasury note) yield, expected U.S. inflation (difference between 10-year Treasury note and 10-year inflation protected Treasury yields) and gold demand as measured by holdings of the top two gold exchange-traded funds (ETF). Using data for these variables as available during January 1975 (inception of gold futures trading) through July 2020, they find that:

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DJIA-Gold Ratio as a Stock Market Indicator

A reader requested a test of the following hypothesis from the article “Gold’s Bluff – Is a 30 Percent Drop Next?” [no longer available]: “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 and DJIA over the period January 1971 through March 2020, we find that: Keep Reading

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