Gold

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 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

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

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-August 2021, we find that: Keep Reading

A subscriber asked for corroboration of an assertion that a negative 30-year U.S. Treasury real yield indicates a good time to buy gold. To investigate, we employ the following monthly data:

• 30-year U.S. Treasury constant maturity yield (30-year) since February 1977 (the limiting series).
• Total U.S. consumer price index (CPI) since February 1976.
• Spot gold price since January 1977.

Each month, we subtract the 12-month past change in CPI (lagged one month for release delay) from the 30-year yield. When this real yield turns negative, we buy spot gold at the end of the same month and sell it the at the end of the month when the real yield turns positive. Using monthly data as specified through May 2021, we find that: Keep Reading

How sensitive are returns of stocks, bonds and gold to levels real interest rates (nominal rates minus inflation)? To investigate, we consider three nominal interest rates and two measures of inflation, as follows:

• 3-month U.S. Treasury Bill Yield (3-month).
• 1-year U.S. Treasury Constant Maturity Rate (1-year).
• 10-year Treasury Constant Maturity Rate (10-year).
• Personal Consumption Expenditures: Chain-type Price Index (PCEPI).
• Personal Consumption Expenditures Excluding Food and Energy: Chain-Type Price Index (Core PCEPI).

These choices offer six alternative real interest rates. We use end-of-month interest rates and inflation measures lagged by one month to account for release delay. We use the S&P 500 Index (SP500) capital gain only, the 10-year yield (with bond prices moving inversely) and spot gold price, all measured end-of-month, to represent returns for stocks, bonds and gold. We then relate monthly changes in real interest rates to asset class monthly returns in two ways: (1) calculate correlations of monthly real interest rates to asset class returns for each of the next 12 months to get a sense of how real rates lead asset returns; and, (2) calculate average asset class monthly returns by ranked tenths (deciles) of prior-month real interest rates to discover any non-linear relationships. Using monthly PCEPI and Core PCEPI since January 1961, interest rates since January 1962, SP500 level since December 1961 and spot gold price since December 1974 (when controls are removed), all through May 2021, 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 May 2021, we find that: Keep Reading

Are gold and bitcoin similar assets? In his December 2020 paper entitled “Bitcoin is Exactly Like Gold Except When it Isn’t”, Claude Erb compares and contrasts the following aspects of gold and bitcoin:

• Inflation hedge – how well an asset tracks some measure of inflation/purchasing power.
• Store of value – the ability of an asset to hold its value over long periods.
• Safe haven – how well an asset holds its value during equity market crashes.
• Valuation – intrinsic value of an asset.

Based on a survey of related research and arguments, he concludes that: Keep Reading