Gold

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

How are behaviors of physically backed gold and gold miner exchange-traded funds (ETF) similar and different? To investigate we consider each of VanExk Vectors Gold Miners (GDX) and VanEck Vectors Junior Gold Miners (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 March 2022, we find that:

Keep Reading

Does the overnight return effect found pervasively among equity markets, as summarized in “Persistence of Overnight/Intraday Equity Market Return Patterns”, also hold for other asset classes? To investigate, we compare open-to-close (O-C) and close-to-open (C-O) average returns, standard deviations of returns and cumulative performances for the exchange-traded funds (ETF) used as asset class proxies in the Simple Asset Class ETF Momentum Strategy (SACEMS). Using daily dividend-adjusted opening and closing prices of these ETFs during mid-December 2007 (inception of the youngest ETF) through early March 2022, 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 February 2022, we find that: Keep Reading

A subscriber asked whether traders should enter a position in gold, as proxied by SPDR Gold Shares (GLD), whenever Commercial gold futures traders are net long and Non-commercial gold future traders (Speculators) are net short. To investigate, we:

• Obtain from the Commodity Futures Trading Commission weekly gold Commitments of Traders (CoT) legacy reports (futures only) as available. Terminology in the legacy reports matches that in the question posed.
• For each week, calculate the net (long minus short) contract positions separately for Commercial traders and Speculators.
• Identify the weeks when Commercial traders are net long and Speculators are net short. Because these two groups are largely trading counterparties, they are nearly always opposite in net positions (in other words, the specified setup is not much different from just requiring that Commercial traders be net long).
• Examine future GLD returns for these weeks.

Using weekly CoT gold futures position data since January 1986 and matching weekly GLD prices since inception in late November 2004, both through late February 2022, we find that: Keep Reading

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 monthly EFFR and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

How do returns of different asset classes recently interact with uncertainty in government economic policy as quantified by the Economic Policy Uncertainty (EPU) Index? This index at the beginning of each month incorporates from the prior month:

1. Coverage of policy-related economic uncertainty by prominent newspapers (50% weight).
2. Number of temporary federal tax code provisions set to expire in future years (one sixth weight).
3. Level of disagreement in one-year forecasts among participants in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for both (a) the consumer price index (one sixth weight) and (b) purchasing of goods and services by federal, state and local governments (one sixth weight).

Because the historical EPU Index series includes substantial revisions to prior months, we focus on monthly percentage changes in EPU Index and look at lead-lag relationships between change in EPU Index 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 levels of the EPU Index and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-commodities producer price index (PPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in PPI 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 PPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

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 December 2021, we 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 August 2021, we find that: Keep Reading