Tag Archives: gld

GLD Continues To Lose Its Shine

The price of GLD continues to fall. The recovery of the U.S. economy keeps raising the odds of a rate hike in December, which pressures down GLD. This week’s GDP and PCE reports will provide additional insight into the direction of the U.S. economy and could indirectly move the price of the fund. The weakness in the gold market has also kept down the shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ). As the U.S. economy keeps showing signs of slow progress, the market raises the odds of a December rate hike. And this trend keeps pushing down the price of GLD. This week’s GDP and PCE will provide additional information about the direction of the U.S. economy. Additional strong results could drive GLD further down. This week, the second estimate of the U.S. GDP for Q3 will be released. In the first estimate, the GDP growth rate was only 1.5%, which was much lower than that in Q2. In terms of market reaction, even though the financial markets do tend to react to the progress of the U.S. GDP, the price of GLD doesn’t seem, as presented in the following chart, to have a consistent impact from the changes in GDP. (click to enlarge) (Source: BEA, Google Finance) The chart presents the relation, or lack of it, between the percent change in the price of GLD on the day the GDP report comes out and the “surprise” in the headline figure of the GDP annual growth rate – a positive percentage point indicates a better-than-expected growth rate. The dots don’t show a clear upward or downward trend to suggest a correction. The GDP growth rate tends to coincide with the movement of the U.S. dollar. And the latter also has a mid-strong correlation with the price of GLD – as the U.S. dollar rises, GLD tends to fall. But directly, GLD doesn’t seem to react in a more consistent way to the surprises of GDP’s headline figure. How about the relation over the long run? Although the slow recovery of the U.S. economy may have contributed, at least indirectly, to the decline in the price of gold, when you look at the two data series over the past decade, it’s hard to see any correlation as well. (click to enlarge) (Source: FRED ) These charts suggest that the progress of U.S. dollar, changes in long-term yields, the concerns over rising inflation and even, to a lesser extent, changes in the supply of gold are likely to be the main direct factors moving GLD. Does this mean the GDP report doesn’t matter? I don’t think so, especially at this stage when the FOMC contemplates whether or not to raise rates. After all, the market estimates that the chances for a rate hike next month by the FOMC are 74%. At the beginning of the month, these odds were lower than 50%. As the chances continue to climb, GLD tends to fall. It’s true that the Fed’s dual mandate refers to employment and price stability, not growth. These two targets are related to the GDP growth rate. And if GDP doesn’t rise, the Fed will be less incline to raise rates. Currently, the market expects GDP growth to come in higher than the first estimate of 2%. Any higher figure could indicate the U.S. economy is doing better than was previously estimated – another positive sign that could keep GLD prices down. It’s also worth noticing the components of the GDP report, such as changes in inventories, investments and personal spending. This week, we also have the PCE report – another indicator for the progress of U.S. inflation. In the past report, the core PCE stood at 1.3% year on year (as of September). The Fed’s annual outlook was 1.4% . If the core PCE doesn’t start to pick up, the Fed expects next year’s core PCE will rise to 1.7%. This may not delay the Fed from raising rates in December, but rather, it may maintain a very gradual rate hike pace next year, which will actually keep interest rates low and GLD from crashing. The price of GLD is still likely to further slowly decline. This week’s reports will provide additional information about the progress of the U.S. economy. As the U.S. dollar and long-term interest rates continue to climb, the downward pressure on GLD will intensify. It doesn’t mean the fund couldn’t experience short-term rallies – especially if the risk in the financial markets rises or the U.S. economy doesn’t progress or U.S. dollar changes course again and depreciates, just to name a few factors. But these short-term rallies aren’t likely, for now, to change the fact of the descent of GLD. For more please see ” GLD Continues to lose its appeal ”

How Will The Fed Impact GLD This Time?

Summary The price of GLD declined in the past few days as the U.S. dollar rallied. The FOMC meeting will convene again this week. How will the upcoming FOMC meeting impact the price of GLD? The U.S. dollar has changed course and rallied in the past few days, which also dragged back down SPDR Gold Trust ETF (NYSEARCA: GLD ). In times when central banks aim to provide more liquidity: The ECB may expand and extend its QE program and cut rates in December, People Bank of China reduced again its rates, and Bank of Japan may ramp up its QE program this week (although the chances are low for this upcoming meeting); it becomes less likely for the FOMC to raise rates. And as long as the Fed delays its rate hike to a later date, precious metals are likely to benefit from it. This week, the FOMC will convene again for its penultimate meeting for the year. This meeting won’t include an economic update or press conference. The current market expectations , as derived from the bonds market, are for only 6% chance of a hike announcement in the coming meeting. The most likely scenario is for the Fed to publish a succinct statement with little changes to the wording in order to keep the possibility of raising rates in December. If so, GLD isn’t likely to have much of a reaction. But what does it mean about the December meeting? The two mandates of the Fed relate to labor and inflation. Since the last meeting, the reports related to these two mandates aren’t making the decision any easier. From the labor market perceptive , the NFP and JOLTS weren’t impressive. And even though unemployment rate is low, wages aren’t picking up any faster with a steady growth rate of 1.9%. When it comes to inflation, the last CPI report showed the core CPI reached 1.9% – very close to the Fed’s target inflation of 2%. It still seems that the Fed may decide to err on the side of caution and maintain its rates low this year and only raise rates around Q1 2016. If the next two NFP reports show another slow growth in jobs (fewer than 150,000 jobs per months) and little change to growth of wages, these reports will make it a bit easier for the Fed to delay it decision to next year. The changes in market expectations over the timing of the Fed’s rate hike is demonstrated in the rise and fall of short-term interest rates in recent months, as you can see in the following chart. (click to enlarge) Source: U.S Department of Treasury and Google finance The latest rally of GLD isn’t only related to the depreciation of the U.S. dollar. But that’s not all. Its rally is plausibly related to the decline in interest rates. In the past few months, the changes in the market expectations of short-term interest rates are strongly correlated with the daily shifts in the price of GLD – the linear correlation is around -0.41 over the last four months. The gold market has benefited from the recent weakness of the U.S. dollar and fall in interest rates. And if the Fed issues another dovish report or even keep its statement unchanged, this could provide another short-term boost for GLD. But as other central banks aim to turn more dovish by cutting rates or increasing QE programs, the upward pressure on the U.S. dollar will intensify, which is likely to bring down GLD. Therefore, even if GLD were to rally in the near term as the Fed delays its rate hike, the actions taken by other central banks could bring back down GLD in the coming months. For more please see: ” GLD Continues to lose its appeal “.

Stocks And Gold: A New Balanced Portfolio

High valuations and low rates make it necessary to build balanced portfolios. Gold can be a good diversifier for US stocks. Trend following approaches can add value. Leonardo Da Vinci is credited with stating that “simplicity is the ultimate sophistication.” Daniel Khaneman added credence to Da Vinci’s belief in his book, Thinking Fast and Slow . Khaneman pointed out that “complexity may work in the odd case, but more often than not it reduces validity.” In essence, Khaneman made the case that simpler is in fact better. The same is most likely true for investing. Despite the fact that our financial system is filled with complex financial products, and often chaotic feedback mechanisms, simple investment strategies tend to work better over the long run. For example, over the last decade, an investor would have been better served to buy a low cost S&P 500 index fund over investing in active managers. Over 80 percent of the active managers failed to outperform their respective benchmarks over that period. This is despite their large research teams, sophisticated investment strategies, and years of training. The simple process of buying an index fund and holding it over the ten year period would have been superior. Index funds are great, but buy and hold is hardly the optimal investment strategy. The macroeconomic environment, valuations, and the prevailing price trends should be considered. Simple, rules-based approaches can be used to adequately account for dynamic markets. The article, Value and Momentum: A Beautiful Combination , is a great example of using two simple, yet opposed systems, to formulate a sound overall investment methodology. The purpose of this paper is to explore a new twist on a balanced approach to investing through a simple system. Courtesy of Doug Short US stocks are severely overvalued by most measures that demonstrate historical accuracy. Chart 1 gives a pretty good summary of the overvalued state of stocks using several respected measures of market valuation. Thus, long-term investors should diversify their investment in the US equities market with other asset classes. The first thought that normally comes to mind is to diversify in different asset classes of equity. Many value investors would point to the undervalued emerging and international stocks suggesting that they may offer better future returns than the US stock market. The problem with this idea is that global stocks tend to be highly correlated with US markets during periods of stress. During the summer months of 2008, most stock market asset classes fell together. Correlations between different classes of equity moved towards one, signifying a lack of diversification and an increase in portfolio risk. Bonds are also typically referenced as a good diversifier when paired with equity investments. This is normally the case as bonds have a tendency to dampen the volatility of the overall portfolio over time. The problem with diversifying into bonds in a long-term portfolio is the fact that interest rates are historically low and we are thirty years into a bond bull market. At some point, in the next twenty years, one would expect interest rates to be higher than the current rates. That expectation could lead to poor returns for bonds, especially if all the monetary stimulus turns around to haunt us with inflation. Consequently, it made sense to us to scour other asset classes with historically low correlations to stocks but with the ability to protect a portfolio against inflation or rapidly rising interest rates. With the backdrop of accommodative central banks, record debt levels in developed nations, slow growth, and deflationary conditions, gold became the asset class of choice. Partly for the controversy, as investors hate and love the yellow metal. Our view of gold is primarily price related as we are quantitative investment managers. However, from a fundamental perspective, gold makes a lot of sense as a portfolio hedge. It is a currency in its basic form and hedges against the fall of other global currencies. Therefore, we decided to test out a new balanced investment approach where we diversified US stocks with gold. Since we do not believe that volatility is risk, we did not determine our weightings to stocks and gold through volatility targeting or risk budgeting approach. Living up to our heretic ways, we instead equally weighted the two asset classes and ran a comparison versus the S&P 500 from 1972 through 2014. The hypothetical results were as follows: (click to enlarge) Chart 2: Stocks vs. Stocks & Gold Clint Sorenson, CFA, CMT Data Courtesy of NYU Stern School of Business, Global Financial Data, Morningstar1 The two strategies did a good job growing the initial investment over the time period. Although, the drawdown was much less for the portfolio of 50 percent stocks and 50 percent gold. The S&P 500 fell more than 55 percent during the time period referenced above. The 50 percent stock and 50 percent gold portfolio fell a maximum of 31 percent. Growth was similar between the two strategies. $1 million invested in 1972 would have become over $72 million in the S&P 500 through 2014. The same amount put into the balanced portfolio would have turned into almost $59 million. Obviously, the S&P 500 would have been the overall winner in a competition of growth over this period of time. We decided to apply a simple trend following method to the balanced portfolio for further comparison. The rules are as follows: Measure each asset class (US Stocks and Gold) against their 8 month simple moving averages If the closing monthly price is above the moving average, the portion of the portfolio would be invested in the asset class (Buy Signal) If the closing monthly price is below the moving average then the portion of the portfolio would be invested in the 10 year US Treasury (Sell Signal) The following table embodies all possible portfolio allocations: Allocation Range Stocks (NYSEARCA: SPY ) 0-50% Gold (NYSEARCA: GLD ) 0-50% US Ten Year Treasury (NYSEARCA: IEF ) 0-100% Applying the simple buy and sell discipline to the balanced portfolio makes all the difference historically. Since 1972 $1 million invested in the trend following approach grows to over $286 million. This is significantly more than the S&P 500 or the static 50/50 (Stock/Gold) portfolio. Furthermore, the growth comes on the back of reduced drawdown. The maximum drawdown of the trend following portfolio is only slightly more than 18 percent. Applying the simple trend filter allows for enhanced return and reduced risk. Historically, it has made sense to rent bonds during periods where stocks and gold have entered negative trends. (click to enlarge) Chart 3: Trend approach to Gold and Stock portfolio Clint Sorenson, CFA, CMT Data Courtesy of NYU Stern School of Business, Global Financial Data, Morningstar2 It is our opinion that we are in the third equity market bubble in the past fifteen years. Historically high valuations, large amounts of public and private debt, unprecedented monetary support, and negative real interest rates have challenged the common approaches to portfolio construction. We hope we have demonstrated a way to simplify diversification using a portfolio of stocks and gold. A sound investment approach does not have to be complicated to generate attractive results. 1. For the 50/50 strategy of Stocks and Gold, we used index data through 2005 and then ETF data from 2006 through 2014. We used SPY to replicate the S&P 500 and GLD to replicate gold. 2. For the trend following strategy of Stocks and Gold, we used index data through 2005 and then ETF data from 2006 through 2014. We used SPY to replicate the S&P 500, GLD to replicate gold, and IEF to replicate the 10 year Treasury bond.