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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.

Explaining the Price of Gold

What factors truly explain movements in the price of gold? In his January 2014 paper entitled “Facts and Fantasies about Gold”, Joachim Klement checks the validity of common explanations for changes in gold price. Specifically, he investigates whether gold price responds to: change in inflation expectation; change in real interest rate; financial crises; changes in currency exchange rates; change in the marginal cost of gold production; central bank gold sales and purchases; and, change in the demand for gold-linked exchange-traded funds (ETF). Using monthly data for gold price and these potentially explanatory factors as available during 1970 through 2013, he finds that: Keep Reading

Comparing Precious Metals as Safe Havens

Are other precious metals more effective than gold as safe havens from turmoil in stock and bond markets? In their September 2013 paper entitled “Time Variation in Precious Metal Safe Haven Status — Evidence from the USA”, Brian Lucey and Sile Li compare and contrast the effectiveness of four precious metals (gold, silver, platinum and palladium) as safe havens from sharp declines in U.S. stocks (the S&P 500 Index) and U.S. bonds (a 10-year U.S. Treasury note index). They define an asset as a safe haven from another if returns of the former exhibit zero or negative correlation with returns of the latter when the latter experiences a sharp drawdown. A safe haven is different from a hedge, which has zero or negative return correlation with another asset or portfolio on average. They calculate returns for precious metals based on a continually rolling position in nearest month futures. They calculate return correlations quarter by quarter and focus on the worst 5% of drawdowns in stocks or bonds. Using daily futures contract prices for gold, silver, platinum and palladium and daily returns for the stock and bond indexes from the first quarter of 1989 through the second quarter of 2013, they find that: Keep Reading

Platinum as an Investment

Is platinum as good as gold? In the September 2013 version of their paper entitled “Analysis of the Investment Potential of Platinum Group Metals”, James Ross McCown and Ron Shaw evaluate the investment value of platinum group metals (platinum, palladium, rhodium, iridium, ruthenium and osmium). Using daily spot prices for platinum group metals, gold and crude oil, daily levels of a broad U.S. stock market index, monthly U.S. consumer and producer price indexes and monthly U.S. industrial production levels during July 1992 through December 2011, they find that: Keep Reading

Gold Price and U.S. Interest Rates

Do recent reactions of gold price to interest rate-related U.S. economic announcements (rising on rate-suppressing news) mean that gold acts like a bond? In their September 2013 paper entitled “What if Gold is a Bond?”, Claude Erb and Campbell Harvey re-examine the relationship between gold price and interest rates as proxied by U.S. government bond prices. Using monthly spot gold price, 10-year U.S. Treasury note (T-note) yield and U.S. Treasury Inflation-Protected Securities (TIPS) yield as available during January 1975 through August 2013, they find that: Keep Reading

Future of the Price of Gold

Will increases in central bank and investor holdings of gold drive its price higher? Or, is the price of gold in bubble territory, portending weak future returns? In the May 2013 update of their paper entitled “The Golden Dilemma”, Claude Erb and Campbell Harvey investigate how investors should treat gold in asset allocation. They consider a range of arguments for owning gold, such as: (1) gold hedges inflation; (2) gold hedges currency decline; (3) gold is attractive when other assets are not; (4) gold is a safe haven in times of crisis; (5) gold is a de facto world currency; and, (6) central banks and investors in aggregate are still underweighting gold. Using gold price in U.S. dollars, the U.S. Consumer Price Index (CPI) and values of several currencies, mostly during January 1975 (the end of the government-fixed gold price era) through March 2012, they conclude that: Keep Reading

Diversification Power Failure?

Do the relationships among returns for stocks and the most heavily traded commodities (gold and crude oil) consistently offer risk diversification? In their July 2013 paper entitled “Gold, Oil, and Stocks”, Jozef Baruník, Evzen Kocenda and Lukas Vacha analyze the return relationships among stocks ( the S&P 500 Index), gold and oil (light crude) over the past 26 years. Specifically, they test the degrees to which their prices: (1) co-move; (2) reliably lead one another; and, share any long-term relationships (such as ratios to which they revert). They seek robustness of findings by employing a variety of methods, data sampling frequencies and investment horizons. Using intraday and daily prices of the most active rolling futures contracts for the S&P 500 Index, gold and light crude oil during 1987 through 2012, they find that: Keep Reading

Gold Bubble? Yes

Does the rapid appreciation in gold price over the past decade represent a price bubble? In the October 2012 draft of their paper entitled “A Gold Bubble?”, Dirk Baur and Kristoffer Glover test for bubbles in gold price over the past four decades. Their test method is purely technical, focusing on price explosiveness and requiring no assessment of fundamental value. They consider also a complementary behavioral explanation of the technical analysis. Using daily and monthly gold prices in U.S. dollars during January 1970 through August 2012 (see the chart below), they find that: Keep Reading

Modeling and Forecasting the Price of Gold

Does modeling gold price relationships with other variables based on entire distributions differ from that based only on distribution means? In their May 2012 paper entitled “Is Gold Overpriced?”, Lingjie Ma and George Patterson apply a quantile regression model (considering effects across the distribution) to investigate long-run relationships between the price of gold and various economic and financial variables. Specifically, they relate gold price to lagged quarterly nominal U.S. GDP growth rate, lagged monthly U.S. unemployment rate, monthly U.S. inflation rate, U.S. dollar index, monthly Dow Jones Industrial Average (DJIA) return, 3-month U.S. Treasury bill (T-bill) yield and monthly West Texas Intermediate crude oil spot price. They compare quantile regression results to those from a conventional Ordinary Least Squares (OLS) model (which focuses on distribution averages). Using daily London P.M. gold prices in dollars per ounce and values for the selected predictive variables from April 1968 (when the price of gold began to move freely) through March 2012, they find that: Keep Reading

“Real” Assets and Inflation

Which asset class best hedges inflation? In the September 2012 draft of his book chapter entitled “‘Real’ Assets”, Andrew Ang examines the behaviors of the following assets commonly thought to hold their value during times of high inflation (“real” assets): inflation-linked bonds, commodities, real estate and U.S. Treasury bills (T-bill). He focuses on inflation as year-over-year change in the U.S. Consumer Price Index for all urban consumers and all items, but considers also inflation rates for medical care and higher education. He distinguishes inflation hedging (measured by correlation of returns and inflation) from long-run asset class performance. Using asset class proxy returns and U.S. inflation rates as available through 2011, he finds that: Keep Reading

Gold as Diversifier Versus Safe Haven

Has increasing use of gold as a portfolio diversifier changed the response of its price to crises? In their August 2012 paper entitled “The Destruction of a Safe Haven Asset?”, Dirk Baur and Kristoffer Glover examine the potential of investor behavior to extinguish the safe haven property of gold. Specifically, they consider how widespread inclusion of gold as a diversifier in investment portfolios affects gold price behavior in times of crisis. Based on theoretical conjecture and price data for gold during major financial market crises, they conclude that: Keep Reading

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