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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.

Illiquid Asset Returns over the Long Run

Are illiquid assets competitive as investments with liquid financial assets over the long run? In his March 2016 paper entitled “The Long-Term Returns to Durable Assets”, Christophe Spaenjers summarizes long-term returns for three types of illiquid assets since the start of the 20th century:

  1. Houses and farmland.
  2. Collectibles (art, stamps, wine and violins).
  3. Gold, silver and diamonds.

He focuses on capital gains but comments on ancillary costs and potential associated income where relevant. Using available monthly price indexes for these assets from a variety of sources during 1900 through 2014, he finds that: Keep Reading

Gold Futures vs. Gold Miner Stocks

How do gold futures and gold miner stocks interact? In their January 2016 paper entitled “Are Gold Bugs Coherent?”, Brian Lucey and Fergal O’Connor examine the relationship between gold miner stock behavior (NYSE ARCA Gold Bugs Index) and the price of gold (COMEX gold futures). Specifically, they apply wavelet transforms to analyze the degree of co-movement (coherency) and lead-lag tendencies between changes in the Gold Bugs Index and gold futures price measured at both short and long intervals. Using daily closes for the two series during January 1998 through most of November 2015 (see the chart below), they find that: Keep Reading

Gold a Consistent Dynamic Inflation Hedge?

Is gold a consistent hedge against inflation? In their October 2015 preliminary paper entitled “Is Gold a Hedge Against Inflation? A Wavelet Time-Frequency Perspective”, Thomas Conlon, Brian Lucey and Gazi Salah Uddin examine the inflation-hedging properties of gold over an extended period at different measurement frequencies (investment horizons) in four economies (U.S., UK, Switzerland and Japan). They consider both realized and unexpected inflation. They also test the inflation-hedging ability of gold futures and gold stocks. Using monthly consumer price indexes (not seasonally adjusted) for the four countries and monthly returns for spot gold (bullion) in the four associated currencies since January 1968, monthly survey-based U.S. inflation expectations since January 1978, and monthly returns on the Philadelphia Gold and Silver Index (XAU) as a proxy for gold stocks since January 1984, all through December 2014, they find that: Keep Reading

High-Frequency Technical Trading of Gold and Silver?

Does simple technical analysis based on moving averages work on high-frequency spot gold and silver trading? In their August 2015 paper entitled “Does Technical Analysis Beat the Market? – Evidence from High Frequency Trading in Gold and Silver”, Andrew Urquhart, Jonathan Batten, Brian Lucey, Frank McGroarty and Maurice Peat examine the profitability of 5-minute moving average technical analysis in the gold and silver spot markets. They consider simple moving average (SMA), exponential moving average (EMA) and weighted moving average (WMA) crossing rules. These rules buy (sell) when a fast moving average crosses above (below) a slow moving average. They start with four commonly used parameter settings, all using a fast moving average of one interval paired with a slow moving average of 50, 100, 150 or 200 intervals [(1-50), (1-100), (1-150) or (1-200)]. They then test all combinations of a fast moving average ranging from 1 to 49 intervals and a slow moving average ranging from 50 to 500 intervals, generating a total of 66,297 distinct rules. To compensate for data snooping bias, they specify in-sample and out-of-sample subperiods and test whether the most successful in-sample rules work out-of-sample. They also use bootstrapping as an additional robustness test. Using 5-minute spot gold and silver prices during January 2008 through mid-September 2014, they find that: Keep Reading

Inflation-based Projection of the Price of Gold

Where is the price of gold headed? In their August 2015 paper entitled “The Golden Constant”, Claude Erb and Campbell Harvey apply a “golden constant” hypothesis (inflation is the principal driver of the price of gold) to project the future price of gold. Specifically, they explore implications of mean reversion of the real price of gold. Using the monthly relationship between gold price in U.S. dollars and U.S. inflation during 1975 through the first half of 2015, they find that: Keep Reading

Research on Gold as an Investment

What is the scope of research on gold as an investment? In their July 2015 paper entitled “The Financial Economics of Gold – A Survey”, Fergal O’Connor, Brian Lucey, Jonathan Batten and Dirk Baur review the body of formal research on gold from the perspective of an investor. They start with the following background topics: how gold markets operate; physical gold demand and supply; and, gold mine economics. They then address gold as an investment as follows: portfolio diversification with gold; gold as a safe haven; gold in comparison to other precious metals; relationships between gold and currencies; mining stocks and exchange-traded funds (ETF) as gold substitutes; interaction of gold and oil; gold market efficiency; gold price bubbles, interactions of gold with inflation and interest rates; and, behavioral aspects of gold investing. They note consistencies and inconsistencies of research findings within topics. In reviewing this body of research, they note that: Keep Reading

Lumber-Gold Interaction as Stocks and Bonds Indicator

Does the interaction of paradigmatic indicators of optimism (lumber demand) and pessimism (gold demand) tell investors when to take risk and when to avoid risk? In their May 2015 paper entitled “Lumber: Worth Its Weight in Gold: Offense and Defense in Active Portfolio Management”, Charles Bilello and Michael Gayed examine the recent relative performance of lumber (a proxy for economic activity via construction) and gold (a safe haven) as an indicator of future stock market and bond market performance. Specifically, if lumber futures outperform (underperform) spot gold over the prior 13 weeks, they go on offense (defense) the next week. They test this strategy on combinations of seven indexes comprising a spectrum of risk (listed lowest to highest): BofA Merrill Lynch 5-7 Year Treasury Index (Treasuries); CBOE S&P 500 Buy-Write Index (BuyWrite); S&P 500 Low Volatility Index (Low Volatility); S&P 500 Index (SP500); Russell 2000 Index (R2000); Morgan Stanley Cyclicals Index (Cyclicals); and, S&P 500 High Beta Index (High Beta). Using weekly nearest futures contract prices for random length lumber, weekly spot gold prices and weekly total returns for the seven test indexes during November 1986 (November 1990 for Low Volatility and High Beta) through January 2015, they find that: Keep Reading

Real Commodity Prices as Valuation Aids

Is there a simple way to tell whether a commodity is overvalued or undervalued? In his May 2014 presentation package entitled “Commodity ‘CAPE Ratios'”, Claude Erb looks at long-term real commodity prices as valuation “crutches” to estimate when commodities are overvalued and undervalued. He provides examples relating real commodity prices to future long-term (10-year) real commodity returns. He employs the U.S. consumer price index (CPI) for inflation adjustment. Using gold price since January 1975, the S&P GSCI Index since January 1970, corn price since April 1965, crude oil price since March 1983 and contemporaneous CPI data through April 2014, he finds that: Keep Reading

Gold Futures or Leveraged ETFs?

Should investors seeking leveraged positions in gold prefer futures or leveraged exchanged-traded funds (ETF)? In their August 2014 paper entitled “Price Dynamics of Gold Futures and Gold Leveraged ETFs”, Tim Leung and Brian Ward compare the price evolutions of spot gold, gold futures and leveraged gold ETFs. They use the XAU-USD gold-U.S. dollar exchange rate as the spot gold price. Among gold futures, they consider maturities from nearest month to one year. Among ETFs, they consider the unleveraged iShares GLD, the ProShares 2X UGL, the ProShares -2X GLL, the VelocityShares 3X UGLD and the VelocityShares -3X DGLD. They also construct static and dynamic portfolios of gold futures in efforts to replicate spot gold and leveraged gold price behaviors. Using recent gold futures and gold ETF prices through 7/14/2014, they find that:

Keep Reading

Gold as Hedge, Safe Haven and Downside Risk Protection

Is a position in gold consistently effective in protecting a portfolio of conventional assets? In the August 2014 preliminary version of their paper entitled “Does Gold Glitter in the Long-Run? Gold as a Hedge and Safe Haven Across Time and Investment Horizon”, Don Bredin, Thomas Conlon and Valerio Potì examine the hedging, safe-haven and downside risk reduction properties of gold relative to stocks and bonds in four major markets and across short and long investment horizons. In their examination, they employ wavelet analysis which enables localization of asset class interactions over time and across investment horizons. They apply this analysis to definitions of a hedge (safe haven) as an asset that is uncorrelated or negatively correlated with another asset or portfolio on average (in times of market stress or turmoil). They use a breakpoint of about a month to separate short-run from long-run behaviors. Using daily data for the spot price of gold, equity indexes and 10-year government bond indexes in local dollars for the U.S., UK, German and Japanese markets during January 1980 through December 2013 (except Japanese bond data commences January 1984), they find that: Keep Reading

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