The Role of Gold in Your Portfolio: Insights and Entertainment

A Look at Gold’s Dual Identity: Asset Class and Cultural Icon

Author

Nam Nguyen
December 22, 2024 • Estimated Reading Time: 7 minutes

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Hello, 

As we close out 2024, I’m truly grateful for your support and engagement throughout the year. Wishing you a joyous holiday season and a New Year filled with health, happiness, and success. 

This newsletter and the next will take on a lighter tone, focusing on more accessible and entertaining content.

Gold had an exceptional run in 2024, capturing attention across financial markets. In this issue, we explore gold's role in an investment portfolio and recommend a movie for the holiday season.

In this issue:

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Is Gold a Hedge or a Safe Haven Asset?

Historically, gold has exhibited a low correlation with other asset classes such as stocks and bonds, making it an effective hedge against market volatility and economic uncertainty.

The paper [1] delves deeper into examining the role of gold as a hedge or safe haven asset. It defines a weak, strong hedge, or safe haven asset as follows,

  • A weak hedge is an asset that has a negative conditional correlation with another asset or portfolio on average. A strong hedge is an asset that has both a negative conditional correlation and positive conditional coskewness with another asset or portfolio on average.

  • A weak safe haven is an asset that has a negative conditional correlation with another asset or portfolio in times of market stress or turmoil. A strong safe haven is an asset that has both a negative conditional correlation and positive conditional coskewness with another asset or portfolio in times of market stress or turmoil.

Findings

  • The study empirically analyzes the performance of gold across 24 countries over a 40-year period.

  • Results show that gold acts as a strong hedge in Brazil, India, Indonesia, Italy, Mexico, Russia, South Korea, Thailand, and Turkey, and as a safe haven in Brazil, France, India, Indonesia, Italy, Mexico, Russia, South Korea, and Turkey.

  • The study investigates whether gold can enhance overall portfolio performance as a hedge or safe-haven asset.

  • The conditional comoment-based dynamic (CCD) strategy adjusts portfolio allocation to gold based on its properties and adds gold to the stock portfolio during the holding period only if it serves as a hedge or safe haven.

Findings indicate that the CCD trading strategy outperforms the buy-and-hold strategy, generating higher returns, Sharpe ratio, and skewness when gold is utilized as a hedge or safe-haven asset.

Reference

[1] Lei Ming, Ping Yang, Qianqiu Liu, Is gold a hedge or a safe haven against stock markets? Evidence from conditional comoments, Journal of Empirical Finance, Volume 74, December 2023, 101439

Gold (2016) The Movie

The year was 1997 when the Bre-X mining scandal broke out in Canada. I was still a student back then, with little knowledge of the capital markets. But the news was so massive that it sparked my curiosity about the stock market and, more specifically, the mining industry. 

Nearly 20 years later, Hollywood produced a movie inspired by the Bre-X scandal. Starring Matthew McConaughey, Gold is an entertaining film that offers an insider's view of the mining industry, the world of investment banking, and the darker side of human ambition. It’s a fascinating watch that blends business intrigue with the pursuit of riches, making it both insightful and captivating.

Educational Video

Gold price analysis - How do real interest rates affect the price of gold? How does the US monetary base affect the price of gold? How does inflation affect the price of gold? How does CPI affect the price of gold? Lord Ashbourne, mining editor at Edison Investment Research answers all these questions with his in-depth analysis of gold and what affects its price.

Posts from 2024

  • Option Pricing Models and Strategies for Crude Oil Markets (8 min)

  • When Correlations Break or Hold: Strategies for Effective Hedging and Trading (7 min)

  • Hurst Exponent Applications: From Regime Analysis to Arbitrage (5 min)

  • Examining Contango and Backwardation in VIX Futures (5 min)

  • Making Use of Information Embedded in VIX Futures Term Structure (5 min)

  • Rethinking Pairs Trading: Can Traditional Methods Still Deliver Returns? (4 min)

Around the Quantosphere

  • Computer-run hedge funds like Qube and Squarepoint are diversifying by building out teams of human traders as assets swell (businessinsider)

  • A Gentle Introduction to k-fold Cross-Validation (MLmastery)

  • Two Private Credit ETFs Launch in a Single Day in New Gold Rush (Bloomberg)

  • Get rich quick or risky business? Options trading is accessible but not for everyone (BNNBloomberg)

Thank you for reading and let me know your thoughts in the comments below or by replying to this email! 

Disclaimer

This newsletter is not investment advice. It is provided solely for entertainment and educational purposes. Always consult a financial professional before making any investment decisions.

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