Gold

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 nine alternatives, five of which are bond-like mutual funds and two of which are gold-related:

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)
Spot Gold

Specifically, we compare monthly return statistics, cumulative performances and maximum (peak-to-trough) drawdowns of these nine alternatives for months during which SPY is below its SMA10. Using monthly T-bill yield and monthly dividend-adjusted closing prices for the above assets during January 1993 (as limited by SPY) through Mar 2018, we find that: Keep Reading

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

• Diversifying (based on pairwise correlations) by combining: (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; and, (3) ProShares Short VIX Short-Term Futures (SVXY), to capture the U.S. stock market volatility risk premium by shorting short-term S&P 500 Index implied volatility (VIX) futures.
• Capturing upside volatility and managing portfolio drawdown via monthly rebalancing and gain-skimming to a cash position.

We assume equal initial allocations of $10,000 to each of the three risky assets and $0 to cash. If the risky assets have a month-end combined value less than the combined initial allocations, we rebalance them to equal weights for next month. If the risky assets have a combined month-end value greater than the combined initial allocations, we rebalance to the initial allocations and move the excess permanently (skim) to cash. We assume monthly portfolio reformation frictions of 2% of month-end combined values of risky assets. We assume accrued, skimmed cash earns the 3-month U.S. Treasury bill (T-bill) yield. Using monthly adjusted values of GBTC, GDXJ and SVXY and contemporaneous T-bill yield during May 2015 (limited by GBTC) through mid-February 2018, 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 SPDR Gold Shares (GLD) and Market Vectors Gold Miners (GDX). Using weekly returns for these assets, and for SPDR S&P 500 (SPY), over the available sample period of May 2006 (limited by GDX) through October 2017, we find that:

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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 consider the following 12 ETFs as potential safe havens:

Utilities Select Sector SPDR ETF (XLU)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
Vanguard REIT ETF (VNQ)
SPDR Gold Shares (GLD)
PowerShares DB Commodity Tracking ETF (DBC)
United States Oil (USO)
iShares Silver Trust (SLV)
PowerShares DB G10 Currency Harvest ETF (DBV)

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.

Using daily and monthly dividend-adjusted closing prices for the 12 ETFs from their respective inceptions through June 2017, and contemporaneous daily and monthly levels of the S&P 500 Index from 10 months before the earliest ETF inception through June 2017, we find that: Keep Reading

What research is available bearing on silver, platinum and palladium as investments? In their April 2017 paper entitled “The Financial Economics of White Precious Metals – A Survey”, Samuel Vigne, Brian Lucey, Fergal O’Connor and Larisa Yarovaya summarize the body of academic research on the financial economics of silver, platinum and palladium. The survey covers relevant studies of market efficiency, predictability, behavioral influences, diversification benefits, volatility drivers, macroeconomic influences and relationships with other assets. Based on this research, they conclude that: Keep Reading

In their February 2017 paper entitled “Bayesian Model Averaging, Ordinary Least Squares and the Price of Gold”, Dirk Baur and Brian Lucey analyze a large set of factors that potentially influence the price of gold via two methods: Ordinary Least Squares (OLS, scatter plot) and Bayesian Model Averaging (BMA, accounting for model uncertainty). They include as potential influencers three other precious metals futures, crude oil spot and futures, two commodity indexes, U.S. and world stock indexes, currency exchange rates, 10-year U.S. Treasury note (T-note) yield, U.S. Federal Funds Rate (FFR), a volatility index (VIX) and U.S. and world consumer price indexes. To test robustness of influencers, they consider: (1) subsamples to test consistency over time; (2) daily and monthly measurements to test consistency across sampling frequencies (except consumer price indexes, available only monthly); and, (3) contemporaneous and one period-lagged (predictive) relationships. Using daily and monthly prices for the specified assets during January 1980 through September 2016, they find that: Keep Reading

Are precious metals effective safe havens, preserving capital when stocks and bonds crash? In their January 2017 paper entitled “Reassessing the Role of Precious Metals as Safe Havens – What Colour is Your Haven and Why?”, Sile Li and Brian Lucey assess whether four precious metals (gold, silver, platinum and palladium) are safe havens relative to stock market indexes and 10-year government bonds across 11 countries. The 11 countries are: U.S., UK, Germany, France, Italy, Switzerland, Canada, Japan, China, India and South Africa. They focus on stock and bond market crashes specified as daily returns in the bottom 5% of respective return distributions over the entire sample period. They define weak and strong safe haven behaviors based on moderate and high statistical confidence in crash protection, respectively. They consider different economic and political causes of stock and bond market crashes. Using daily returns for stock market indexes, 10-year government bond indexes and precious metals spot markets for the 11 countries, all in local currencies, during January 1994 through July 2016, they find that: Keep Reading

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 November 2016 (551 months), we find that: Keep Reading

Do changes in the dollar-euro exchange rate reliably interact with the U.S. stock market and gold? For example, do declines in the dollar relative to the euro indicate increases in the dollar value of hard assets? Are the interactions coincident or exploitably predictive? To investigate, we relate changes in the dollar-euro exchange rate to returns for U.S. stock indexes and spot gold. Using end-of-month and end-of-week values of the dollar-euro exchange rate, levels of the S&P 500 Index and Russell 2000 Index and spot prices for gold during January 1999 (limited by the exchange rate series) through October 2016, we find that: Keep Reading

“Central Bank Gold Reserves, Gold Lending and Gold Price” finds some conditional relationships between aggregate world central bank gold reserves and gold price. Can investors exploit these relationships? To check, we relate recent quarterly estimates of central bank gold reserves and quarterly spot gold price, noting that there is roughly a one quarter delay in availability of the former. Using these data from the end of the first quarter of 2000 through the end of the first quarter of 2016, we find that: Keep Reading