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What is gold?

Cory
April 3, 2017

Is gold a currency, commodity, inflation hedge, or a safe haven? That is what this post below from Pension Partners tries to answer. It was posted back in May but the historic data still tell an interesting story.

Click here for the original posting page.

“On a final note, what was the one asset you did not want to own when I started Duquesne in 1981? Hint … it has traded for 5000 years and for the first time has a positive carry in many parts of the globe as bankers are now experimenting with the absurd notion of negative interest rates. Some regard it as a metal. We regard it as a currency and it remains our largest currency allocation.” – Stan Druckenmiller

Stan Druckenmiller made headlines at the Sohn conference saying the bull market in stocks had “exhausted itself” and that Gold remains his “largest currency allocation.”

“Largest currency allocation.”

Interesting choice of words. But what is Gold in actuality? Is it a currency, commodity, or some combination thereof? Is it an inflation hedge or a safe haven?

Let’s examine each of these labels.

Gold as a Currency

Since the end of the Gold standard in 1972, we see an overall correlation of -0.37 between Gold and the Dollar Index, meaning that on average Gold and the Dollar move in opposite directions.

gold1

But on average doesn’t mean always. In looking at calendar year returns, Gold and the Dollar have moved in opposite directions 75% of the time. That means in 1 out of every 4 years they are actually moving either up and down together.

gold2

And while Gold and the U.S. Dollar tend to move in opposite directions, the moves are not anything close to proportional. Since 1972, the Dollar Index has fallen 16% (-0.4% annualized) while Gold has risen 2875% (8% annualized). There is clearly more to Gold than just a falling Dollar.

Gold as a Commodity

Is Gold more of a Commodity? Let’s take a look.

Since 1972, the monthly correlation between Gold and the Thomson Reuters Equal Weight Commodity Index (CCI Index) is .39.

gold3

While Gold and Commodities tend to move together, they don’t always move together and the cumulative appreciation since 1972 has not been close to proportionate. In 31% of years Gold has moved in the opposite direction to the equal weight commodity index, with an annualized return of 8.0% for Gold versus 3.1% for the CCI Index.

gold4

Note: for our research on Lumber and Gold, click here.

Gold as an Inflation Hedge

How about Gold as an inflation hedge?

Since 1972, Gold’s 2875% advance has far surpassed the cumulative rate of inflation in the US of 480% for the overall CPI and 473% for Core CPI.

Digging in a little deeper, though, reveals that Gold is anything but a constant or proportionate inflation hedge. From 1972 through 1980, Gold surged 1256% versus a 110% increase in the CPI. During the next 20 years (from 1981 through 2000), the CPI rose 101% while Gold fell 54%.

gold5

Gold as a Safe Haven

How about Gold as a safe haven?

We know that Gold is uncorrelated to the U.S. stock market, with a monthly correlation of 0.00 since 1972.

gold6

But uncorrelated does not mean negatively correlated. There are times when Gold is up when the market is down but there are also times when Gold is down when the market is down. The same is true when the equity market is up.

Looking at monthly data since 1972, we find that in months where the S&P 500 finishes lower, Gold is positive only 54% of the time, little better than a coin flip.

On a calendar year basis, this improves to 67% but the sample size is much to small, with only 9 down years for the S&P 500 since 1972.

gold7

The Enigma that is Gold

The truth is that Gold cannot be simply defined as a currency, commodity, inflation hedge or safe haven. At various times it has been some/all of these things and at other times none of these things.

Gold is not a pure play on any one factor but the sum product of multiple factors. If you believe the U.S. Dollar is going lower, short the U.S. dollar. Gold will likely rise but the inverse Dollar ETF (UDN) is certain to rise. If you believe commodities are going higher, go long a basket of commodities. Gold will likely rise with them but a broad-based commodity exposure (DBC) will have better odds. If you are concerned about inflation Gold may end up protecting you in the long run but as we have seen Gold can be a terrible inflation hedge in the shorter run (see 1981-2000). Long-term bonds and stocks have actually been a much more consistent hedge against inflation than Gold over the past 40+ years. Finally, if you are seeking a safe haven – Gold may provide such an exposure at times – but the odds of that are not nearly as high as the consistency of Treasury bills/bonds.

Perhaps the most important thing we can say about Gold is that it is truly an enigma. Its behavior is unique in terms of its lack of sensitivity to economic activity and non-correlation to stocks and bonds. That uniqueness, while frustrating to those who need to explain its every move, is what make it an interesting component in a diversified portfolio (see Gold, What is it Good For?). It also makes Gold an effective baseline to which you can compare more economically sensitive commodities such as Lumber (see our research on Lumber and Gold).

To extract long-term value from Gold, embrace the enigma. Leave the storytelling to those whose job it is to come up with a reason for its every move.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Discussion
19 Comments
    Apr 03, 2017 03:40 PM

    Only GOLD !

    CFS
    Apr 03, 2017 03:44 PM

    It is a pity these analysts are not mathematicians. I would love to see these curves broken down by Fourier Analysis and see the various sizes of the components.

    CFS
    Apr 03, 2017 03:57 PM

    Daily Press briefing on Wind development and lots of stuff:

    https://www.youtube.com/watch?v=O71AuqQFB7E

      Apr 03, 2017 03:44 PM

      The federal slob needs to be put on a diet.

    Apr 03, 2017 03:17 PM

    How much gold should one own in an optimal portfolio? Past performance is not an indicator of future results.

    http://proactiveadvisormagazine.com/gold-diversification-portfolio

    GH
    Apr 03, 2017 03:18 PM

    Nice article, useful info.

    Gold is….Gold.

    The debate about the nature of gold sometimes feels a bit like over-chewed bubblegum after years of following it. But it’s a topic we would be better off if all understood.

    For those who haven’t seen them, there are 3 articles that cover the topic well.

    First, the easiest read, by Doug Casey:

    http://www.caseyresearch.com/articles/doug-casey-gold

    CFS
    Apr 03, 2017 03:30 PM

    https://youtu.be/aBHtHZPVS7Q?t=32

    Epstein’s Metals.

    CFS
    Apr 03, 2017 03:41 PM
    CFS
    Apr 03, 2017 03:09 PM

    Airbus, Samsung, Others Lobby Trump Team On Investment
    By PAUL WISEMAN – Associated Press – 4 minutes ago
    WASHINGTON (AP) — At a time of public skepticism about globalization, a dozen CEOs from foreign-based companies with big U.S. operations meet Tuesday with Treasury Secretary Steven Mnuchin, Commerce Secretary Wilbur Ross and congressional leaders to talk up the benefits of foreign investment.

    Executives from Airbus Americas, Panasonic Corp. of North America, Samsung Electronics America and other firms will make the case for policies they say will keep foreign firms coming to America.

    “We’re all facing a much stronger populist environment,” said Nancy McLernon, president of the Organization for International Investment, which organized the meetings. “We want to ensure that foreign investment in the United States is not a blind spot.”

    Preliminary numbers from the Commerce Department show that foreign-based companies invested $396 billion into their U.S. operations last year, up 12 percent from 2015. Those companies employ 6.4 million workers in the United States.

    President Donald Trump is pursuing what he calls an “America First” economic agenda and has spoken of tearing up trade agreements and imposing taxes on companies that move out of the United States, produce goods in another country, then export back to the U.S.

    CFS
    Apr 03, 2017 03:11 PM

    Coal Miner Peabody Emerging From Bankruptcy
    Associated Press – 15 minutes ago
    ST. LOUIS (AP) — Coal miner Peabody Energy says it has emerged from bankruptcy protection after a year.

    The St. Louis company said Monday that it reduced costs and slashed its debt load by more than $5 billion in the past year.

    The company says its shares will resume trading Tuesday on the New York Stock Exchange.

    CFS
    Apr 03, 2017 03:21 PM

    BERLIN (AP) — The European Central Bank is set to release a new 50 euro note as part of a rollout of new banknotes that boast better security features.

    The new 50 that goes into circulation Tuesday features similar “feel, look, tilt” security measures that are part of the already issued 5, 10, and 20 euro banknotes.

    The new notes feel crisper and firmer than previous versions. They also have raised print and feature a portrait window, a portrait watermark and security thread; the emerald number displays an effect of light moving up and down when tilted.

    The 50 note is part of the new “Europa” series that showcases architectural styles from European history. It will be followed by new 100 and 200 banknotes. The ECB has decided not to circulate a new 500 euro note.

    CFS
    Apr 03, 2017 03:31 PM
      Apr 03, 2017 03:06 PM

      I think Bix has turned into an advertisement geek………once a month may be enough . I do not need him to interpret zerohedge daily……….jmho.

        Apr 03, 2017 03:07 PM

        nothing against you CFS…….

    Apr 03, 2017 03:40 PM

    Retail bankruptcies soar….in 2017 …..zerohedge

      Apr 03, 2017 03:41 PM

      retail space is going to be CHEAP……..

    Apr 03, 2017 03:06 PM

    What is the standard of value in a market?