Gold

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

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

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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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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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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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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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

A subscriber asked which asset (short stocks, cash, bonds by subclass) is best to hold during equity bear markets. To investigate, we consider two ways to define a bear market: (1) months when SPDR S&P 500 (SPY) is below its 10-month simple moving average (SMA10) at the end of the prior month; and, (2) months when SPY is in drawdown by at least 20% from a high-water mark at the end of the prior month. We consider nine alternative assets:

1. Short SPY
2. Cash, estimated using the yield on 3-month U.S. Treasury bills (T-bill)
3. Vanguard GNMA Securities (VFIIX)
4. T. Rowe Price International Bonds (RPIBX)
5. Vanguard Long-Term Treasury Bonds (VUSTX)
6. Fidelity Convertible Securities (FCVSX)
7. T. Rowe Price High-Yield Bonds (PRHYX)
8. Fidelity Select Gold Portfolio (FSAGX)
9. Spot Gold

Specifically, we compare monthly return statistics, compound annual growth rates (CAGR) and maximum (peak-to-trough) drawdowns (MaxDD) of these nine alternatives during bear market months. Using monthly T-bill yield and monthly dividend-adjusted closing prices for the above assets during January 1993 (as limited by SPY) through Feb 2020, we find that: Keep Reading

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 14 ETFs as potential safe havens:

Utilities Select Sector SPDR (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 REIT ETF (VNQ)
SPDR Gold Shares (GLD)
PowerShares DB Commodity Tracking (DBC)
United States Oil (USO)
iShares Silver Trust (SLV)
PowerShares DB G10 Currency Harvest (DBV)
SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL)

We consider three ways of testing these ETFs as 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 14 ETFs since respective inceptions, and contemporaneous daily and monthly levels of the S&P 500 Index since 10 months before the earliest ETF inception, all through December 2019, we find that: Keep Reading

What drives the price of gold: inflation, interest rates, stock market behavior, public sentiment? To investigate, we relate monthly and annual spot gold return to changes in:

• Non-seasonally adjusted Consumer Price Index (CPI).
• Nominal and real short-term (ST) interest rates based on 3-month U.S. Treasury bill yield.
• S&P 500 Index return.
• University of Michigan (UM) Consumer Sentiment.

We start testing 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.” We lag CPI measurements by one month to ensure they are known to the market when calculating gold return. Using monthly data from December 1974 (March 1978 for consumer sentiment) through July 2019, we find that: Keep Reading