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Demidova-Menzel, Nadeshda; Heidorn, Thomas
Working Paper Gold in the investment portfolio
Frankfurt School - Working Paper Series, No. 87
Provided in Cooperation with: Frankfurt School of Finance and Management
Suggested Citation: Demidova-Menzel, Nadeshda; Heidorn, Thomas (2007) : Gold in the investment portfolio, Frankfurt School - Working Paper Series, No. 87, Frankfurt School of Finance & Management, Frankfurt a. M., http://nbn-resolving.de/urn:nbn:de:101:1-2008082921
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Frankfurt School – Working Paper
No. 87
Gold in the Investment Portfolio
by Nadeshda Demidova-Menzel, Thomas Heidorn
Sonnemannstr. 9 – 11 60314 Frankfurt an Main, Germany Phone: +49 (0) 69 154 008 0 Fax: +49 (0) 69 154 008 728 Internet: www.frankfurt-school.de
Gold in the Investment Portfolio
Abstract
The paper examines the key drivers of gold investment. Since 2000 the gold price has risen drastically, making gold an interesting add-on to a portfolio. As gold futures have negative roll returns, gold pool accounts are characterized by high credit risk and physical possession of gold means high transaction costs, Xetra-Gold might be the most efficient way to enter the market. Xetra-Gold is a product created by the Deutsche Börse in 2007, which is handled like a security but can be exchanged into physical gold any time. In the portfolio context gold has had a positive impact on Euro and USD portfolios between 2000 and 2006 due to consider- able returns and low correlation to other assets. However, this has not been true for almost all other periods, the correlation was always low but the returns of gold were almost zero, over- riding the positive diversification effect.
Key words: investing in gold, gold in the portfolio, correlation of gold, returns of gold, Xetra- Gold
JEL classification: G11, G15, G24.
ISSN: 14369753
Contact:
Nadeshda Demidova-Menzel Prof. Dr. Thomas Heidorn [email protected] [email protected]
Frankfurt School of Finance & Management Working Paper No. 87 2
Gold in the Investment Portfolio
Content
1 Introduction...... 4
2 Price Driving Factors in the Gold Market ...... 5 2.1 Short-Run Price Determinants...... 8 2.1.1 Short-Run Gold Supply...... 8 2.1.2 Short-Run Gold Demand...... 9 2.2 Long-Run Price Determinants...... 15 3 Specific Attributes of Gold...... 21
4 Investments in Gold...... 22 4.1 Investment in Physical Gold...... 22 4.2 Buying Gold Pool Accounts...... 23 4.3 Investing in Gold Futures...... 23 4.4 Buying Gold Backed Securities and Xetra – Gold...... 25 4.5 Investing in Gold Mining Companies ...... 26 5 Gold as a Portfolio Constituent...... 29 5.1 Performance...... 29 5.2 Empirical Results...... 30 5.2.1 Euro zone / Germany...... 30 5.2.2 USA ...... 34 5.2.3 World...... 38 6 Conclusion ...... 42
Frankfurt School of Finance & Management Working Paper No. 87 3
Gold in the Investment Portfolio
1 Introduction
During the last years the gold price has risen significantly. As 15 European central banks de- cided to limit their gold sales in 2004 for the next 5 years, this might be a significant change for the behaviour of the gold price. At the same time, low returns of many asset classes force portfolio mangers to look for new investment policies. Gold started to be an interesting add- on to a portfolio. Early in 2007 a new investment vehicle was created. With Xetra – Gold set by the Deutsche Börse gold can now be handled as a normal security, leading to considerable advantages compared to investments in physical gold or gold futures.
The paper outlines the main drivers of the gold price, taking a look on short and long term effects. Correlation with interest rates and inflation are discussed from the USD angle but also from the Euro point of view. Understanding the basic pricing elements we can sum up the specific attributes of gold.
In the next chapter the possible investment forms in gold are analyzed. We start with physical gold, look at gold pool accounts and carefully examine gold futures. Xetra – Gold is then compared to these classic alternatives. The chapter concludes with the investment in gold mining companies instead.
Building on these elements, the contribution of gold in the portfolio context is examined. We look at distinct time periods, as gold has behaved very differently during the last decades. Also, there are substantial differences between the Euro zone and the USD environment.
At the end the major findings are summed up.
Frankfurt School of Finance & Management Working Paper No. 87 4
Gold in the Investment Portfolio
2 Price Driving Factors in the Gold Market
Similar to every other market, the price determining mechanism in the gold market is driven by supply and demand. To be exact, the real supply and demand should be considered in the analysis without taking into account the Central Banks gold sales and purchases as well as the supply component in the form of old gold scrap which are a kind of “recycling” of the above- ground stocks. Especially the overcompensation of the supply deficit through sales of the Central Banks was the reason why the gold price has been tending downwards for many years till 2000 despite of demand excess for a long period of time in the global gold market.
Figure 1: Gold Price in EUR in USD 800 800
700 700
600 600
500 500
400 400
300 300
200 200
0 0 5 7 88 89 92 93 95 96 97 99 01 03 9 9 99 991 9 9 994 9 9 9 998 9 00 0 0 004 00 006 00 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2002 2 2 2 2 2 Gold in EUR Gold in USD However, on September 27 th 2004, 15 European Central Banks agreed to limit their annual sales to 500 tonnes and their total gold sales to 2500 tonnes over the next 5 years. This limita- tion and the fact that the persistent low gold price had already forced a number of mining companies to close their gold mines because of insufficient profitability, caused a shortage of the gold supply (cf. Figures 1 and 2).
Figure 2: Gold Price since September 27 th 2004
600
550
500
450
400
350
300
5 04 04 05 05 06 06 p z 05 n 0 p z 06 n 06 p ez r u ez r u ez Se D M J Se D M J Se D Frankfurt School of Finance & Management Working Paper No. 87 5
Gold in the Investment Portfolio
As the gold price began to rise the mining companies were not able to balance the supply deficit immediately because of the time lag between the gold exploration and production. Be- sides that, the real supply from gold mining is limited by the available under-ground re- sources. They are estimated with approx. 100,000 tonnes while only half of these resources can be mined at reasonable costs. Increasing energy and transportation prices make gold min- ing extremely expensive. Additionally, more severe environmental regulations cause an in- crease in exploration and mining costs.
Political uncertainty in many gold mining countries (in Africa, Latin America, Asia) and un- clear owners’ rights in Russia 1 are further risk factors which cause shocks in the gold market in the form of sudden supply reduction and contribute to an increase of the gold price volatil- ity.
At the same time, on the demand side an increasing popularity of gold can be observed. There are two components of the gold demand: the “use demand” (jewellery, industry) and the “as- set demand” (investments). On the one side, gold is a “real” commodity used for consumption and production (“use demand”). On the other side, gold is considered to be a financial or re- serve asset (“asset demand”). About 15% of the annual gold production is held by investors in physical form 2 and provides a natural hedge against the currency weakness because of nega- tive correlation to the USD.3
The “use” demand for gold is a negative function of the price of gold (price elasticity) and a positive function of the income (income elasticity). Therefore, the demand for jewellery is affected by the price (volatility) and positively influenced by an increase of the available in- come. The best example is the continuous growth of wealth in Asian countries in which gold jewellery has traditionally been very popular: India and China. The demand of the jewellery sector counted for 71% in 2005. This number shows an increase by 12% in comparison to 2004. India counted for 22% of the global gold jewellery demand in 2005, an annual increase of 17%. India is thought to hold close to 15,000 tonnes or 10% of the world’s entire above- ground gold stocks. China’s demand also showed an upwards trend: the country’s gold trad- ing volume (together with net retail investment in form of coins and bars) increased by 36% in 2005. 4
The “asset” demand is based on a number of factors including real interest rate, dollar ex- change rate expectations, inflationary expectations, “fear” because of political turmoil, the returns on other assets and the lack of correlation with other assets. Gold investment is con- sidered to be a means for the reduction of portfolio volatility because the events that cause a collapse of stock prices also tend to raise the price of gold.
1 In Russia only minor ownership in mining companies is allowed. This regulation is a clear disadvantage of gold mining stocks. 2 According to the statistics of the World Gold Council, the World Official Gold Holdings of Central banks amount to 30,988.3 tonne as of December 2005; approximately 26% are held by the Federal Reserve Bank 3 Cf. Kavalis, N. (2006): pp. 3ff. 4 www.gold.org/value
Frankfurt School of Finance & Management Working Paper No. 87 6
Gold in the Investment Portfolio
Besides those factors one should not disregard the potential of surging gold prices through purchases of physical gold by the Central Banks of the countries with high foreign exchange reserves for the purpose of diversification: e.g. China, Japan, Russia, India, etc. (cf. Figure 3).
Figure 3: Foreign Exchange and Gold Reserve (Q3 2006)
1.000.000 79% 80%
74% 75% 900.000 70%
800.000 65% 61% 60% 59% 700.000 56%
50% 600.000 44% 500.000 40% 40%
400.000 30% 300.000 20% 200.000 13% 10% 10% 10% 100.000
4% 4% 4% 4% 3% 3% 3% 1% 2% 2% 0 0% 0% 1% 0% 0% 0%
ia ia g o il y ia e a in e ic z e es nd c nd c gal pan nd on ore ra rk ral om Italy abia fri pa u ec China a I K B tat ola ran r S re J Russ gap Mex Tu S P ngd F ort hailand ust zerla Canada P G in Malaysia T A Germany Ki Argentina uth A S d wit Hong nited e S it Saudi A So Netherlands U n U FX Reserves, in USD Millions (le.) % Gold of the Total Reserves (ri.)
These countries hold less than 5% of their total reserves in gold. As a comparison, the interna- tional average is about 10.5% at current market prices. In the EU this quote is over 40% and the USA holds around 70% of its reserves in gold.
To consider the gold price development in much more detail it is important to differentiate between short-run and long-run determinants of the gold price. The long-run price of gold is expected to rise according to the inflation and act as an inflation hedge essentially because the long-run price of gold is related to the marginal cost of gold extraction. Assuming a close re- lationship of production cost and inflation, the price of gold will rise with the increase of pro- duction costs and therefore with the inflation. However this effect is not as substantial as the theory proposes and not true for Europe. In the short-run the gold price is very volatile. It is determined by supply and demand, and fluctuates considerably around this so called inflation hedge price .5 These short-run movements of the gold price occur in response to factors that alter the supply and/or demand for gold.
5 Cf. Levin, E.J., Wright, R.E. (2006): pp. 23ff.; the inflation hedge price is the mean reversion price.
Frankfurt School of Finance & Management Working Paper No. 87 7
Gold in the Investment Portfolio
2.1 Short-Run Price Determinants
Such factors that influence the short-run supply of gold are the current and lagged gold price, the gold lease rate in the previous and current period (physical interest rate and proxy for real interest rate), convenience yield and default risk, and the previous period quantity of leased gold to be repaid at the previous gold lease rate. The short-run demand for gold is described as a function of the price of gold, the available income per capita, the USD/world exchange rate, the gold lease rate, gold’s beta, US inflation, credit risk and political uncertainty.
2.1.1 Short-Run Gold Supply
The higher current gold price motivates gold producers to supply the gold consumers either by extracting gold from their mines or by leasing gold from central bank gold reserves. As there usually is a substantial time lag before mines react to a price change and begin with the gold extraction, there exists a positive relation between the quantity of gold supplied from extraction and the gold price in an earlier period ( lagged gold price ).
The level of the gold lease rate determines the amount of gold leased. If the gold lease rate is lower than the marginal extraction costs, the gold producer will decide to satisfy the short-run gold demand by leasing gold from a central bank. At the same time the producer is aware of the repayment commitment in the following period. Hence, the quantity of gold supplied from extraction is negatively related to the amount of leased gold in the previous period which has to be repaid to the central bank in the current period, and therefore negatively related to the gold lease rate in the previous period.
The gold lease rate represents physical interest rate and is used as a proxy for real interest rate in the analysis. The term gold lease rate is linked to the terms convenience yield and default risk premium. Default risk premium is a measure of financial credit risk and depends on the credit quality of the borrower. Credit default risk is also associated with financial shocks and structural changes in the international economy. It is assumed that during periods of financial turmoil the demand for gold (and therefore the gold price) is higher. Hence, this premium varies and also includes an extra-charge in periods of political uncertainty. Convenience yield is the benefit associated with physically holding gold. Central banks lease out gold at a physi- cal interest rate (gold lease rate) which is in equilibrium equal to the convenience yield plus default risk. Adjusting their gold lending exactly to the point where the physical rate of inter- est is equal to the convenience yield plus default risk, central banks determine the amount of gold supplied. That is an explanation why central banks reduce the quantity of gold leased to the industry in periods of political or financial turmoil which causes a rise in default risk or a rise in convenience yield, and therefore an increase in the gold lease rate.
Frankfurt School of Finance & Management Working Paper No. 87 8
Gold in the Investment Portfolio
2.1.2 Short-Run Gold Demand
The short-run “use” demand for gold is a negative function of the price of gold and a positive function of the available income per capita. In Figure 4 the worldwide Gross Domestic Prod- uct (GDP) per capita 6 is used as a proxy for the income variable.
Figure 4: Gold Price and World GDP per Capita in USD
Gold in USD GDP p.Cap. in USD 600 34000
500
26000
400
300 18000
200
Corr.coef.=0.53 10000
100
0 2000
5 1 3 5 7 9 1 3 7 9 5 9 9 97 98 98 98 98 98 99 99 00 1971 1973 1 1977 1979 1 1 1 1 1 1 19 1995 1 19 2001 2003 2
Gold in USD (year close price) GDP per Capita in USD
Figure 5 plots the total world income (GDP) 7 which also follows an upwards trend.
Figure 5: Gold Price and World GDP in USD
Gold in USD GDP in USD 600 36000000
500 30000000
400 24000000
300 18000000
200 12000000 Corr.coef.=0.54
100 6000000
0 0
9 5 1 7 8 89 9 95 97 01 9 9 0 1971 1973 1975 1977 19 1981 1983 19 1987 1 19 1993 1 19 1999 2 2003 2005 Gold in USD (year close price) GDP in USD
6 Data source: OECD 7 Data source: OECD
Frankfurt School of Finance & Management Working Paper No. 87 9
Gold in the Investment Portfolio
Figures 4 and 5 show that an increase of the world income (and consequently of the income per capita) might also have an effect on the long-run price of gold by increasing demand for jewellery and for gold as an investment. This statement is supported by a correlation coeffi- cient of over 50%. However, it is difficult to interpret this relationship exactly because the income and the gold price both rose over time with the general price level, and it is necessary to separate these two effects. In Figure 6 the world GDP under assumption of constant prices and constant exchange rates is used. This leads to a very small correlation between the world income and the price of gold. Therefore it is not clear whether rising income leads to higher gold prices.
Figure 6: Gold Price and World GDP in USD (constant prices, constant exchange rates)
Gold in USD GDP in USD 600 36000000
500 30000000
400 24000000
300 18000000
200 12000000 Corr.coef.=0.18 100 6000000
0 0 1 5 7 73 77 79 81 8 87 91 93 97 99 05 9 19 19 1975 19 19 19 1983 19 19 1989 19 19 1995 19 1 2001 2003 20 Gold in USD (year close price) GDP in USD
The short-term “asset demand” is based on a number of factors including dollar exchange rate expectations, inflationary expectations, the gold lease rate, the returns on other assets and the lack of correlation with other assets.
Figures 7-11 show the individual relationships between the nominal price of gold (denomi- nated in USD) with each of the explanatory variables.
Figure 7 shows a clear negative relationship between the gold price and the US-dollar-Euro exchange rate . A rise in the price of USD makes gold more expensive for investors outside of the dollar area, and this will reduce the demand for gold and this in turn lowers the price of gold.
Frankfurt School of Finance & Management Working Paper No. 87 10
Gold in the Investment Portfolio
Figure 7: Gold Price and USD/EUR Exchange Rate
Gold in USD, Gold in EUR USD/EUR 800 1,4
700
600 1,2
500
400 1
300
200 0,8
Corr.Coef. (Gold in USD and USD/EUR FX) = -0.39 100 Corr.Coef. (Gold in EUR and USD/EUR FX) = 0.22
0 0,6
0 6 0 01 03 0 0 0 1999 20 2 2002 2 2004 2005 20 2007 Gold in EUR Gold in USD USD/EUR Exchange Rate
There are two important conclusions concerning Figure 7. If the US dollar weakens, the price of gold denominated in USD will rise. At the same time the price of gold denominated in Euro will fall, i.e. gold denominated in Euro will get cheaper which would boost the demand for gold, and therefore will cause an upwards trend of the gold price development.
In Figure 8 the US inflation rate was calculated on a 12 month-basis and then graphically shifted 12 months into the past. Especially in the years 1973/74, 1978/79 a positive relation between the shifted US inflation rate and gold price is obvious.
Figure 8: Gold Price and US Inflation Rate Gold in USD Inflation Rate
800 14%
700 12%
600 Corr. Coef. = 0.18 10%
500 8% 400 6% 300
4% 200
2% 100
0 0%
4 0 7 9 0 2 4 70 73 75 76 77 78 82 83 85 88 90 91 93 95 96 97 98 03 05 06 971 984 986 999 001 19 1 1972 19 197 19 19 19 19 1979 198 1981 19 19 1 19 1 198 19 198 19 19 1992 19 1994 19 19 19 19 1 200 2 200 20 200 20 20 2007 Gold in USD U.S. Inflation Rate (12 mths roll.CPI-Change, shifted 12 monthes to the past)
Frankfurt School of Finance & Management Working Paper No. 87 11
Gold in the Investment Portfolio
Figure 9 represents the relationship between the gold price and gold lease rate . It is calculated by subtracting the three-month gold forward rate from the three-month LIBOR dollar interest rate. 8
As already mentioned, the gold lease rate is used as an empirical proxy for the real interest because in the market equilibrium there is an arbitrage relationship that drives the physical interest rate (the gold lease rate) into equality with the real interest rate. Theoretically, in equilibrium, a mine is indifferent between extracting gold now and selling the mined gold now, or leasing gold now, selling the leased gold now, investing the proceeds of the sale in a bond, selling the bond in one year and using the proceeds including interest to pay for extract- ing the gold plus the physical interest rate. If the costs of extraction rises at the general rate of inflation, the gold lease rate is equal to the real interest rate.
Thus it is assumed that the asset demand for gold will fluctuate in response to changes in the real interest rate, and there is an assumption that the gold price moves inversely with interest rates (cf. Figure 9). The real interest rate represents the opportunity cost of holding gold in the form of forgone yield (real interest rate) instead of holding an alternative interest bearing as- set. In case of low gold lease rate the investors would prefer gold instead of low interest bear- ing assets and the rising “asset demand” would drive the gold price upwards.
Figure 9: Gold Price and Gold Lease Rate
5,0% 700
4,5%
4,0% 600
3,5%
3,0% 500
2,5%
2,0% 400
1,5%
1,0% 300 Corr.Coef. = -0.11 0,5%
0,0% 200
8 9 0 1 2 2 4 5 6 6 7 9 9 0 00 0 01 0 0 0 05 0 0 0 n n l 04 ul 98 ul an ul ul 0 an u ul ul Ja J Jan Jul 99 Jan J J J Ja J Jan 03 Jul 03 J J Jan J Jan J Jan
Average Monthly Gold Lease Rate Average Monthly Gold Price in USD
Hence, the real price of gold moves in the opposite direction from the lease rate, but there are time periods in which this relationship is not that obvious and the correlation coefficient lies in the positive area (cf. Figure 10).
8 Gold was not leased every day in the early years, therefore gold prices and lease rates averaged over the month for the entire sample period.
Frankfurt School of Finance & Management Working Paper No. 87 12
Gold in the Investment Portfolio
Figure 10: Rolling Correlation between Gold Price and Gold Lease Rate
Corr. Gold in USD 60% 700
40%
600
20%
500 0%
-20% 400
-40%
300 -60%
-80% 200
1 2 3 4 4 5 5 6 0 0 0 0 0 0 0 n 00 n 01 l l n l n 07 a a u u a u a J Jul 00 J J Jan Jul 02 Jan 03 J Jan Jul 0 J J Jan Jul 06 J 1Y. Roll. Correlation Gold in USD and Gold Lease Rate Average Monthly Gold Price in USD
Moreover it is to be considered that if for example, the rising interest rates reflect a concern over inflation or over the US dollar exchange rate, gold prices and interest rates move in line (both rise). The relationship between interest rates and the gold price depends on a clear dis- tinction between real and nominal interest rates and the precise cause of the rise in interest rates. In case the nominal interest rate (FED-Rate) increases slower than the inflation rate (which causes a negative real interest rate), an increase in the gold price can be observed (cf. Figure 11).
Figure 11: Inflation, FED-Rate and Gold Price
Gold in USD Inflation/FED Rate 800 25%
700 20% 600 Corr. Coef. (Gold & Infl.Rate) = 0.18
500 15%
400
10% 300
200 5%
100
0 0%
3 9 1 7 71 72 73 77 78 79 80 81 82 8 8 95 96 97 98 99 00 0 04 05 06 0 9 9 9 1970 1 19 19 1974 1975 1976 1 19 19 19 19 19 19 1984 1985 1986 1987 1988 19 1990 1991 1992 1993 1994 1 19 19 19 19 20 20 2002 2003 20 20 20 20 Gold in USD U.S. Inflation Rate (12 mths roll.CPI-Change, shifted 12 monthes to the past) FED-Rate
Frankfurt School of Finance & Management Working Paper No. 87 13
Gold in the Investment Portfolio
The correlation to other assets, especially to the stock market, is represented by gold’s beta. Gold’s beta influences the investors’ demand for gold in accordance with gold’s ability to reduce portfolio volatility. The effectiveness of gold in reducing portfolio risk is inversely related to beta which measures the extent to which the price of gold moves in the opposite direction of the stock market. In other words, beta is equivalent to the correlation coefficient:
ρGold ,EquityMark et ⋅σ Gold βGold = σ EquityMark et
It is believed that gold has a low beta in relationship to the stock market. In Figure 12 beta was calculated by regressing the monthly gold return on the monthly return of the Standard & Poor’s 500 (Total Return) Index, based on information from the previous 36 months.
Figure 12: Gold Price and Correlations to the Stock Market
Gold in USD Beta 700 1,4
1,2
600 1
0,8
500 0,6
0,4 400 0,2
0 300
-0,2
-0,4 200
-0,6
100 -0,8
79 80 81 86 87 88 92 93 94 95 99 00 01 06 1977 1978 19 19 19 1982 1983 1984 1985 19 19 19 1989 1990 1991 19 19 19 19 1996 1997 1998 19 20 20 2002 2003 2004 2005 20 Gold in USD 3yrs Roll. Beta Gold in USD/ Standard & Poor's 500 33yrs Beta Average
Generally, the empirical evidence shows that on average there is no correlation (very low gold’s beta near to zero in Figure 12). 9 If, however, the beta for gold rises for a period of time, the portfolio demand for gold will fall during that period. A negative beta makes gold attrac- tive for investors to hold in a portfolio because a negative beta results in gold reducing the portfolio volatility. Therefore the demand for gold as an investment is negatively related to the beta. That was not the case in 2006 however, because the demand for gold was mainly driven by professional investors like hedge-funds.
Figure 12 indicates a positive relationship between gold’s beta and the price of gold between 1980 and 1986 as well as in 2006, and a negative relationship for most of the remaining peri-
9 Cf. Lawrence, C. (2003); O’Connell, R. (2005); Pulvermacher, K. (2005b)
Frankfurt School of Finance & Management Working Paper No. 87 14
Gold in the Investment Portfolio
ods. Whatever the reason, the ambiguity and empirical instability of this relationship suggests that investors would need perfect foresight in deciding for an exposure to gold only during periods when it has a negative beta to the stock market.
The correlation between the returns on holding gold and the returns on the stock market also became negative for periods when the stock markets under-performed very badly. This rela- tionship is very obvious in the years 2001/2002 in Figure 13.
Figure 13: Gold and Stock Market Performance, Gold Price Correlations to the Stock Market
Gold in USD Beta 1500 1,4
1,2
1 1200
0,8
0,6 900 0,4
0,2
600 0
-0,2
300 -0,4
-0,6
0 -0,8
78 79 81 82 84 87 90 93 95 96 98 99 01 02 04 1977 19 19 1980 19 19 1983 19 1985 1986 19 1988 1989 19 1991 1992 19 1994 19 19 1997 19 19 2000 20 20 2003 20 2005 2006 Gold in USD (1977=100) Standard & Poor's 500 (1977=100) 3yrs Roll. Beta Gold in USD/ Standard & Poor's 500 33yrs Beta Average Having discussing the short-term price determinants, the long-term influence variables are the subject of the following section.
2.2 Long-Run Price Determinants
While short-run fluctuations in the gold price are expected to be caused by political and finan- cial turmoil as well as by changes in inflation and exchange rates, real interest rates and the beta for gold, there are also a number of macro economical factors which play a crucial role for the development of the gold price in the long-run.
Fear of inflation plays an essential role in an increase in investors’ interest as physical gold has always been considered as a hedge against currency weakness. A rising interest of inves- tors, using gold as a hedge against the US dollar weakness, were driving gold prices up in 2006. Being a real asset , gold has maintained its value in terms of the real purchasing power in the long run.
The long-run price of gold is expected to move with the general price level (consumer price index) to act as a hedge against inflation, essentially because the long-run price of gold is re-
Frankfurt School of Finance & Management Working Paper No. 87 15
Gold in the Investment Portfolio
lated to the marginal costs of extraction which rise at the rate of inflation. This conclusion is not affected if gold producers supply their customers by leasing from central banks as well as by extracting gold from mines. Since this leased gold has to be repaid it only affects supply in the short term. Profit maximising behaviour by gold producers ensures that the cost of gold from leasing is equal to the cost of gold from extraction. The general price level in the USA and in the world (represented by the OECD countries excluding countries with a high infla- tion) are used as explanatory variables in order to test the hypothesis that the price of gold moves with the general price level so that gold can be considered as a long-run hedge against inflation. The results of the empirical analysis are presented graphically in Figure 14 for the US price index and in Figure 15 for the world price index.
Figure 14: Gold Price and U.S. CPI Gold in USD CPI 800 250
700
200 600
500 150
400
100 300
200
50 Corr. Coef. = 0.15 100
0 0
2 3 4 5 7 0 1 2 4 9 1 6 8 9 3 5 6 7 7 8 9 9 0 0 970 97 97 976 97 978 98 98 983 98 985 987 98 990 99 992 994 99 000 001 002 00 007 1 1971 19 1 19 1 1 1 1 1979 1 19 1 1 1 1 1986 1 1988 1 1 1 1 1993 1 1995 19 1997 19 1 2 2 2 20 2004 20 2 2 Gold in USD U.S. CPI Index
Figure 15: Gold Price and OECD CPI
Gold in USD CPI 700 120
600 100
500 80
400
60
300
40 200
Corr.Coef. = 0.11 20 100
0 0
0 2 4 6 8 0 2 4 8 0 2 4 6 7 8 9 0 2 4 7 7 7 8 9 9 9 9 9 97 977 97 979 98 981 98 983 98 985 986 987 99 99 00 001 00 003 00 005 006 19 1971 19 1973 19 1975 1 1 1 1 1 1 1 1 1 1 1 1 19 1989 19 1991 19 1993 19 1995 1 19 1 19 2 2 2 2 2 2 2 Gold in USD OECD - Total excluding high inflation countries, Consumer Price Index, 2000=100
Frankfurt School of Finance & Management Working Paper No. 87 16
Gold in the Investment Portfolio
Figure 16 puts both indexes together starting from a common base of 100 in 1970. While both variables follow an upwards trend, the trajectory of the world price index is much steeper than the US price index.
Figure 16: OECD and U.S. CPI 900
800
700
600
500
400
300
200
100
0 2 7 7 74 81 83 85 88 90 92 94 97 99 01 03 04 05 06 9 9 9 9 9 9 0 0 19 1971 19 1973 1 1975 1976 1977 1978 1979 1980 1 1982 1 1984 1 1986 1987 19 1989 19 1991 1 1993 1 1995 1996 19 1998 19 2000 20 2002 2 20 2 20 OECD (excl. high infl. counties) CPI US CPI The trends shown in these figures are consistent with the view of a likely long-run relation- ship between the price of gold and the general price level, and that gold can be a long-run hedge against inflation. However, there are significant deviations between movements in the price of gold and the general price level in the short-run. It is clear that gold is not a short-run hedge against inflation. Transforming the Consumer Price Index in inflation rates, a link be- tween the price of gold and inflation can be seen in Figure 8 for the US inflation and in Figure 17 for the world inflation. Including the US and world inflation rates in the analysis suggests that the price of gold is higher during periods of high inflation because the demand for gold as an inflation hedge rises during such periods. This is clear for the periods 1972-1974, 1978- 1980 and 1986-1987. However, this relationship does not appear to hold between 2002 and 2005.
Figure 17: Gold Price and OECD Inflation Rate Gold in USD Inflation Rate
700 14%
600 12%
500 Corr. Coef. = 0.28 10%
400 8%
300 6%
200 4%
100 2%
0 0%
4 4 70 76 85 86 87 88 89 90 96 98 99 05 06 971 977 997 19 1 1972 1973 1974 1975 19 1 1978 1979 1980 1981 1982 1983 198 19 19 19 19 19 19 1991 1992 1993 1994 1995 19 1 19 19 2000 2001 2002 2003 200 20 20 Gold in USD OECD Inflation Rate Frankfurt School of Finance & Management Working Paper No. 87 17
Gold in the Investment Portfolio
In the Euro zone, however, there is absolutely no relationship between the price of gold de- nominated in EUR and the CPI or rather the inflation rate (cf. Figure 18 and 19). In Figure 18 a convergence of the gold price to the so called inflation hedge price (cf. section 2) can be observed in 2007. This picture is identical to Figure 14 and 15 which means that the current gold price is very close to the long-run inflation hedge price.
Figure 18: Gold Price in EUR and Euro zone CPI
Gold in EUR CPI 550 120
500 110
450 100
400
90
350
80 300
70 250 Corr. Coef. = 0.01
200 60
9 0 1 2 4 6 8 8 0 1 2 4 5 6 6 8 9 9 9 9 0 0 0 0 988 989 990 99 992 993 994 99 996 997 99 999 00 001 00 003 003 004 00 005 007 1 1988 1 19 1 1 1991 19 19 1 1993 1 19 1 1995 1995 1 1 1 1997 1 19 1 1999 2000 2 2 20 2002 2 2 2 20 2 2 2 20 20 2 Gold in EUR Eurozone CPI All Items (Source: OECD)
Figure 19: Gold Price in EUR and Euro zone Inflation
Gold in EUR Inflation Rate 550 6%
500 5% Corr. Coef. = 0.01
450 4%
400
3%
350
2% 300
1% 250
200 0%
3 4 6 89 90 91 92 93 94 95 96 96 97 98 98 99 00 00 02 02 03 04 05 988 991 001 1988 1 1989 19 1990 19 1 19 1992 19 19 199 1994 19 19 1995 19 19 19 1997 19 19 19 1999 20 20 2001 2 20 20 2003 20 200 20 2005 20 2006 200 2007 Gold in EUR Eurozone Inflation Rate (12 mths roll.CPI-Change, shifted 12 monthes to the past)
For countries other than the US, whether gold can be considered as a long-run inflation hedge depends on the country’s currency strength against the US dollar. It is important to note that exchange rates between the US dollar and currencies of different countries fluctuate over time
Frankfurt School of Finance & Management Working Paper No. 87 18
Gold in the Investment Portfolio
and inflation rates vary both between countries and over time. This, of course, is important since gold is denominated in US dollars. If the price of gold is quoted in US dollars and gold can be considered as an inflation hedge for the US, holding gold is profitable for investors domiciled in countries whose currencies depreciate against the US dollar more than the re- quired to compensate for the difference between the country’s and US inflation rate. It is surely no coincidence that the major gold consuming countries appear to be over-represented amongst those who have profited from holding gold because their currency depreciation against the US dollar exceeded what was required to compensate for the inflation rate differ- ences between the two countries. As the Euro appreciates against the US dollar, this favour- able investment effect currently does not exist in the Euro zone.
There is a growing consensus amongst economists that depreciation in the international value of the US dollar is likely. The main reason is the growing US current account deficit. Over the last three years, the cumulative trade deficit has exceeded 1.8 trillion US dollar, while the current account deficit has reached 2 trillion US dollar. In 2005, the US current account defi- cit reached 6.4% of GDP. There is reason to believe that this could result in a further major depreciation of the dollar. Under these circumstances it is preferable for the foreign investor to hold gold rather than US dollar-denominated assets, provided that gold acts as an inflation hedge in the US because gold represents a more credible means of preserving wealth com- pared with the alternative of holding US dollar denominated assets.
Another reason behind the US dollar depreciation potential is the large increase in China’s foreign currency reserves, which has increased by 34% in 2005 to a record high of 818.9 bil- lion US dollar. China’s dollar reserves have swollen in recent years as the Chinese Central Bank purchased most of the dollars generated by foreign trade and inward investment. The Yuan was revaluated in 2005 for the first time in a decade, allowing it to appreciate slowly against the dollar within a narrow trading band. Further currency revaluation steps are not excluded.
Thus economical facts show that real US dollar depreciation against other currencies is inevi- table. Therefore, provided that gold is a long-run hedge against inflation, US wealth holders should profit from holding gold during this period for two reasons. The first is that the dollar depreciation will lower the price of gold to investors outside of the USA, and this will raise their demand for gold and raise the US dollar price of gold. That is in addition to the long-run relationship between the US price level and the price of gold. The second reason is that a dol- lar depreciation will likely lead to raised US inflation rates, and gold would act as an inflation hedge during this period.
The current uncertainty over the US dollar results in an emphasis of the traditional view that gold provides an effective but not perfect “hedge” against inflation and other forms of uncer- tainty. However, the reality is also that although gold may be an inflation hedge in the long- run, there is significant evidence of a short-run price volatility.
A reverse option has to be mentioned because some researchers consider that gold is an infla- tion predictor rather than the price consumer index or the bond market. That means the cau-
Frankfurt School of Finance & Management Working Paper No. 87 19
Gold in the Investment Portfolio
sality is exchanged, i.e. not the inflation influences the gold price, but from the development of the gold price it is possible to predict the inflation. 10
As a conclusion the following Figures 20 and 21 are presented.
Figure 20: Gold Price in USD and 10 Years US Treasuries
Gold in USD in % 800 18
16 700
14 600
12 500
10
400
8 300 6
200 4
100 2
0 0
0 1 2 3 4 5 6 7 9 0 1 2 3 4 6 7 8 9 0 1 4 5 6 7 8 2 3 4 5 6 7 7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 01 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 19 1 1 1 1 1 1 19 1978 1 1 1 1 1 19 1985 1 1 1 1 1 1 1992 1993 1 1 1 1 1 1999 2000 2 2 2 2 2 2 2007
Gold in USD 10Y. US Treasuries
Figure 21: Gold Price in Euro and 10 Years Germany Government Bonds
Gold in EUR in % 550 10
500
8 450
400
6
350
300 4
250
200 2
0 2 3 4 5 6 7 8 9 0 1 2 3 6 7 7 7 7 7 7 7 7 7 7 8 8 8 8 85 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1971 1 1 1 1 1 1 1 1 1 1 1 1 1984 1 1 1
Gold in EUR 10Y. Germany Govt. Bond
10 Cf. Ranson, D. (2005)
Frankfurt School of Finance & Management Working Paper No. 87 20
Gold in the Investment Portfolio
In Figures 20 and 21 the bond markets present a deflationary picture, the gold market an infla- tionary one. For any investment decisions it is necessary to discuss which of these two predic- tors of the economical state is more influential.
3 Specific Attributes of Gold
Gold possesses three distinct attributes which make it unique in the “commodities universe”:
Gold is fungible. Gold is indestructible and storable. Gold is characterised by massive above-ground stocks which are enormous relative to the supply flow. 11 This last attribute means that a sudden increase in gold demand can be quickly and easily met through sales of existing holdings of gold jewellery, increas- ing the amount of gold recovered from scrap. It can also be met through the mecha- nism of the gold leasing market. Gold’s potential to be highly liquid and to have a high price elasticity is seen as its critical difference from other commodities.
Another crucial characteristic of the gold market is the fact that it is always in contango. 12 An explanation for the constant contango situation in the gold market which is presented graphi- cally in Figure 22, is derived from the Theory of Storage and Convenience Yield.
Figure 22: Gold in Contango, Source: Bloomberg
11 Currently the above-ground gold stocks amount to 150,000 tonnes; the supply contribution from the gold pro- duction amounted to around 2,500 tonnes in 2005; the total supply (with the sales of the Central Banks, scrap recycling, short-positions) amounted to approx. 3,700 tonnes in 2005. 12 Contango is the market situation in which spot prices are below the forward prices. Contango is the opposite of backwardation where spot prices are higher than forward prices.
Frankfurt School of Finance & Management Working Paper No. 87 21
Gold in the Investment Portfolio
The storability of gold and its enormous above-ground-stocks can explain why the gold mar- kets are always in contango, and why the future price of gold is always higher than its spot price:
Forward price = spot price + interest costs (=gold lease rate) + storage/insurance costs.
The existence of storage acts as a dampener on price volatility because it is able to balance supply and demand, but causes additional costs. The convenience yield presents the benefit from owning physical gold because it allows e.g. to avoid production disruptions or simply to give the investor a secure feeling. As already mentioned in Section 2.1.1 the convenience yield is included in the gold lease rate together with the credit risk premium.
4 Investments in Gold
There are a number of ways to invest in gold:
Investment in physical gold: jewellery, bars or bullion coins
Buying Gold Pool Account
Buying investment futures
Buying Gold Backed Securities (e.g. Xetra-Gold).
Investing in Gold Mining Companies
All these possibilities have their pros and cons.
4.1 Investment in Physical Gold
The ownership of gold jewellery has the substantial disadvantage that acquisition costs are extremely high because jewellery is often marked up by 300 per cent or more in the retail shops. All jewellery pieces are different and their values are subjective. The real value of jew- ellery is in the gemstones, the design and the craftsmanship. These greatly outrank the value of the gold.
The advantage of physically owning the metal in form of bullion coins or small bars is the liquid market for buying and selling them. That means it is comparatively easy to find buyers or sellers. Coins and small bars can be an appropriate gold investment method for sums from 100 to 10,000 US dollar, especially for people whose view is long term and for whom physi- cal possession is the main objective. The disadvantage is the significant difference between the buying and the selling price (7% or more). Moreover, there are considerable storage costs. The overall costs for dealing, delivery, storage and insurance can add up to a 10-15% range.
Frankfurt School of Finance & Management Working Paper No. 87 22
Gold in the Investment Portfolio
Trading with big bars (400 troy ounces, about 12 kilogram) is reserved for professional mar- ket participants (companies and institutions). The bars are serial numbered, and usually do not leave the security of industrial strength vaults. They are competitively priced but inaccessible to the private investor because the access to competitive and simultaneous market pricing is restricted to those with financial sector data feeds. Moreover, the smallest trade size for most professionals exceeds US dollar 500,000.
4.2 Buying Gold Pool Accounts
Gold pool accounts allow the customer to buy a gold liability from the account pro- vider. Effectively the customer pays cash and the supplier treats him as a creditor for bullion which may or may not have been actually bought. Pool accounts are synonymous with unal- located gold. The advantages of gold accounts are their easy accessibility and relatively low dealing costs because there is usually no commission and the spreads are fairly tight at about 1%. The disadvantages of gold accounts lie in their non-quantifiable credit risks because unal- located gold grants very substantial unsecured credit to the account provider and places the bullion 'owner' at material credit risk. The owner is benefiting from a promise, and unlike the bank's promise to repay there is no assurance underlying the promise that the provider is competent to operate in much the same way as a bank.
4.3 Investing in Gold Futures
Gold futures are exchange-traded standardized contracts that oblige the buyer, to buy a defi- nite quantity of gold at a future delivery date to a price fixed beforehand. The future buyer assumes that the price of gold increases at due date. The contracts are usually settled in cash, without delivery of physical gold. Gold futures are traded on the Commodity Exchange (COMEX) of the NYMEX and the Londoner Bullion Market (LBMA).
The advantage of such gold investment is the possibility to bet on rising (long position) as well as falling (short position) gold prices depending on the investor’s market expectation, without the inconvenience of taking delivery of the underlying physical gold . The market is deep and liquid, and it is quite easy to track the true value of the futures contract by follow- ing the exchange price.
Trading gold futures eliminates the costs of settlement and significantly reduces the costs of storage. Buying gold futures implies small transaction costs (initial and maintenance margin). An initial margin with 2% of the future value has to be paid upfront, and any profit or loss will be adjusted on the down-payment and paid back to the investor net. In case of significant movements in the gold price which could lead to losses, the additional margin (variation mar- gin) is however required. Therefore, the disadvantage is the high risk because of the high short-term volatility of the gold prices.
Frankfurt School of Finance & Management Working Paper No. 87 23
Gold in the Investment Portfolio
Also, taking into consideration that gold is always in contango, investing in golf futures would produce negative rolling returns because a future contract for 12 months costs more than a nearby future contract for 1 month (cf. Section 3). In Figure 23 the development of gold future prices with a delivery date of 1 and 12 months is presented. It can be seen that the long-term future contract costs more than a short-term future contract.
Figure 23: Gold future contracts
1000
900
800
700
600
500
400
300
200
100
2 4 5 7 1 4 6 7 1 3 6 8 8 9 9 0 978 980 981 9 9 990 992 993 9 9 999 002 0 1 1979 1 1 198 1983 198 1 1986 1 1988 1989 1 199 1 1 199 1995 1 1 1998 1 2000 200 2 200 2004 2005 2 2007 Gold 1mth future Gold 12 mth future As gold is always in contango a long investment in gold provides no positive rolling yield, unlike other commodities in backwardation as it is presented in Figure 24.
Figure 24: Negative Roll Return of Long Investment in Gold
0%
-5%
-10%
-15%
-20%
-25%
-30%
0 0 0 78 81 83 85 87 88 91 93 95 97 98 03 05 07 001 19 1979 198 19 1982 19 1984 19 1986 19 19 1989 199 19 1992 19 1994 19 1996 19 19 1999 200 2 2002 20 2004 20 2006 20
Therefore, the reasonable way of investing in gold is selling future contracts in order to cap- ture the positive roll yield, provided it is possible to buy an equivalent contract back before
Frankfurt School of Finance & Management Working Paper No. 87 24
Gold in the Investment Portfolio
the available contract expires. But it is important to mention that this way of investing in gold is not accessible to private investors with small investment amounts. Especially the future selling in order to lock in the positive roll return from the gold investment in contango is next to impossible because it requires a seller to borrow gold for delivery. For retail investors be- cause of their credit risk there is no institution willing to lend gold for this purpose.
4.4 Buying Gold Backed Securities and Xetra – Gold
Gold backed securities are a relatively new innovation but currently represent more than 10 billion US dollar globally. They aim to combine the benefits of physical gold coins/bars with the liquidity and infrastructure of the traditional securities market.
Gold backed securities are close to owning bars. They are quoted on securities markets which are accessible with low dealing spreads for relatively small investments. The custody function is undertaken by a professional vault which is much safer than any form of private storage. The transaction costs are not higher than with other stock market investments.
This innovation is created to encourage private gold ownership with a high degree of security and low costs. By design, this form of securitised gold investment is expected to track the gold price almost perfectly. These securities are all regulated financial products and 100% backed by physical gold held mainly in allocated form.
One alternative is to invest in the gold-backed tracker funds, also known as Exchange Traded Funds (ETFs). Tracker funds follow the underlying gold price, and charge low fees because they do not require active fund management. 13
Gold certificates offer investors a method of holding gold without taking physical delivery. Issued by individual banks they confirm an individual’s ownership while the bank holds the metal on the client’s behalf. The client saves on storage and personal security issues, and gains liquidity.
An alternative is to invest in a new product of the Deutsche Börse : Xetra-Gold . This is a security backed by physical gold. Even though the product has no maturity, the investor can exchange it into physical gold at any time. Xetra-Gold is constructed as a zero bond perpetual. Each security can be exchanged into one gram of gold. The smallest dealable size is one gram of gold; on the other hand 1/1000 of a gram can be delivered. Issuer is the Deutsche Börse Commodities GmbH (DBCo). The gold is stored by the Clearstream Banking AG (CBF). Generally Xetra-Gold is created by delivering gold, which is then generally stored by the CBF. Deutsche Bank is market maker and also lead manager of the issues. The investor can ask his bank to exchange Xetra-Gold for physical gold at any time, which is delivered to the custodian of the investor. If the investor is not allowed to hold physical gold, the gold can also be sold and the proceeds are then paid to him.
13 Gold ETFs are an initiative of the World Gold Council, the industry body for gold miners, to boost demand for gold – which is heavily dependent on jewellery.
Frankfurt School of Finance & Management Working Paper No. 87 25
Gold in the Investment Portfolio
Xetra-Gold offers substantial advantages in comparison to other forms of gold investment. The storage cost is minimized and the transaction costs are similar to any other security. Also the counterparty risk is small as the gold is backing the issued security at a one to one ratio. Therefore it incurs lower costs compared to physical gold but does not carry the credit risk of gold pool accounts. Compared to a long position in the gold future Xetra-Gold eliminates the negative roll returns. As the gold market has always been in contango, the buying price is above the spot price, thus there is a systematic loss involved in a gold future investment. Xetra-Gold creates a very efficient way of investing in the gold spot market.
4.5 Investing in Gold Mining Companies
Investing directly in companies in the area of gold exploration and production (e.g. equity or debt ownership) is not the same as investing in physical gold. The financial state of the com- pany often depends only indirectly on the gold price development. Many more factors might have an influence on the company’s earnings than just the gold price, such as management decisions, interest rates, wage rates, unforeseen development of exploration costs etc. 14
It is also well known that many gold mining firms hedge their exposure to gold price fluctua- tions. In case the company takes on hedging activity against the gold price downturn, there is absolutely no way of tracking of the gold price development.
In Figure 25 the development of the share prices of gold mining companies (represented by the AMEX Gold BUGs Index) and actual gold prices is presented. AMEX Gold BUGs Index represents “Blue Chip” companies of the gold mining sector that do not hedge their gold pro- duction beyond 1 ½ years. Additionally the stock market index Standard & Poor’s 500 is added to the picture. Figure 25: Gold and Stocks Markets
350
300
250
200
150
100
50
0
5 4 5 6 96 97 98 00 02 03 99 9 9 9 999 0 001 0 0 00 00 00 1 1 1 1 1 2 2 2 2 2 2 2 2007
AMEX Gold BUGs Gold in USD Standard&Poor's 500
14 Cf. Gorton, G./Rouwenhoorst , K.G. (2004); Pulvermacher, K. (2005a)
Frankfurt School of Finance & Management Working Paper No. 87 26
Gold in the Investment Portfolio
Figure 25 shows that the gold mines stocks co-move with the gold markets, but the gold price development is not always completely reproduced by the stock prices. Recently, the value of gold mining shares was even more sensitive to the price of gold than the value of a gold bar, i.e. the gearing effect was much higher.
In Figure 26 the strength of the relationship between physical gold and gold mines stocks is presented, exhibiting the rolling correlation between daily changes in the share prices of gold mining companies (AMEX Gold BUGs Index) and actual gold prices. Between the gold price and the gold mining companies price development there is a relatively low correlation of only 67% from 1995 15 to February 2007.
Figure 26: Gold and Gold Mining Stocks Markets (AMEX), rolling Correlation
0,75
0,70
0,65
0,60
02 05 07 1998 1999 2000 2001 20 2003 2004 20 2006 20 3 Years Roll. Correlation Gold Price & Gold Mining Companies
However, compared to other commodities and commodity-related companies, gold shows a far stronger correlation to gold mining companies. 16 Another confirmation of that phenome- non is presented in Figure 27 with the rolling correlation of gold and gold mining companies based on their monthly price changes. In Figure 27 the correlation between the share prices of the gold sector companies and the broader US equity market is also shown.
15 The AMEX Gold BUGs Index exists since 16.12.1994. 16 The relationship between US commodity-related companies (represented by the Morgan Stanley Commodity Related Index) and the overall equity market is far stronger than the relationship between commodity-related companies and actual commodity prices. The correlation between commodity-related companies and the rest of the equity market is consistently higher than with the underlying commodities themselves. Consequently, having exposure to commodity-related companies is not the same as having commodity investments. Com- modity-related stocks are a weak substitute for their underlying commodity.
Frankfurt School of Finance & Management Working Paper No. 87 27
Gold in the Investment Portfolio
Figure 27: Rolling Correlations of the Gold Spot Price, Gold Mines Stocks and S&P 500
1,00
0,80
0,60
0,40
0,20
0,00
-0,20
-0,40 99 002 005 1998 19 2000 2001 2 2003 2004 2 2006 2007 Rolling 3-year correlation of monthly changes AMEX Gold BUGS & Gold Spot Rolling 3-year correlation of monthly changes AMEX Gold BUGS Index and Standard & Poor's 500 Rolling 3-year correlation of monthly changes Gold Spot and Standard & Poor's 500
It is clear that the relationship between gold mining companies and actual gold prices with approximately 75% is far stronger than the relationship between gold mining companies and the overall equity market with about 16%. Consequently, having exposure in gold mining companies is nearly the same as having gold investments.
A disadvantage has to be mentioned: Gold shares investment is potentially risky because most gold mining equities tend to be more volatile than the gold price. The appreciation potential of a gold mining company share depends on market expectations of the future price of gold, the costs of mining, the likelihood of additional gold discoveries and several other factors. For an expected return of 6.14% calculated with available data of the AMEX index between 1995 and 2006, the volatility of 37.90% should be taken into account. For gold the expected return, calculated on this base, was 4.41% and its volatility was 13.29%. While the gold mining equi- ties are subject to the same risk factors that influence the prices of most other equities there are additional risks that are specific to the mining business generally and to individual mining companies specifically.
Frankfurt School of Finance & Management Working Paper No. 87 28
Gold in the Investment Portfolio
5 Gold as a Portfolio Constituent
Gold has good diversification properties in a portfolio because the price of gold behaves in a completely different way than the prices of stocks or bonds, therefore it is worth examining a gold contribution to the overall portfolio return under the constraint of a given maximal risk.
5.1 Performance
First of all, possible returns from a gold investment should be considered. A distinction be- tween expected returns in US dollar and in Euro is necessary. In Tables 1 and 2 the calcula- tion results are presented. It is obvious that the return expectation in terms of Euro is different from US dollar-returns. Gains in US dollar often turn around to losses in Euro. If for example the price of gold denominated in US dollar gets higher, but the US dollar gets weaker against the Euro at the same time, the price of gold denominated in Euro does not change at the same rate as the gold price in US dollar. A graphical presentation of the development of the gold price over time is presented in the Appendix.
Table 1: Gold Returns in Euro
Compound Annual Return in EUR to the end of the year 1 year 3 years 5 years 10 years 15 years 1987 1988 -4,31% 1989 -15,70% 1990 -3,41% -7,98% 1991 -7,74% -9,10% 1992 4,04% -5,93% -5,64% 1993 27,32% 6,91% -0,10% 1994 -10,91% 5,68% -1,14% 1995 -3,12% 3,19% 1,07% 1996 -1,55% -5,28% 2,39% 1997 -11,79% -5,60% -0,93% -3,32% 1998 -6,32% -6,65% -6,83% -3,52% 1999 16,25% -1,33% -1,73% -1,44% 2000 1,18% 3,29% -0,88% 0,09% 2001 8,13% 8,34% 1,00% 1,69% 2002 5,75% 4,98% 4,73% 1,86% -0,71% 2003 0,81% 4,50% 6,06% -0,59% -0,43% 2004 -2,18% 1,07% 2,46% 0,34% -0,16% 2005 35,08% 9,66% 8,56% 3,73% 2,84% 2006 10,49% 13,44% 4,29% 4,94% 4,08%
Frankfurt School of Finance & Management Working Paper No. 87 29
Gold in the Investment Portfolio
Table 2: Gold Returns in US Dollar
Compound Annual Return in USD to the end of the year 1 year 3 years 5 years 10 years 15 years 1987 1988 -15,26% 1989 -9,84% 1990 3,49% -7,53% 1991 -7,75% -4,87% 1992 -5,28% -5,88% -7,13% 1993 16,80% 0,68% -0,97% 1994 -1,92% 2,76% -0,92% 1995 1,02% 4,99% 0,22% 1996 -5,01% -2,00% 0,81% 1997 -21,39% -8,97% -2,88% -5,03% 1998 -0,28% -9,36% -5,90% -3,47% 1999 -0,09% -7,82% -5,55% -3,26% 2000 -5,47% -1,98% -6,80% -3,35% 2001 2,46% -1,09% -5,37% -2,33% 2002 24,77% 6,52% 3,78% 0,40% -2,18% 2003 21,72% 15,13% 7,58% 0,62% 0,08% 2004 5,54% 16,27% 8,77% 1,36% 0,59% 2005 17,92% 14,10% 13,69% 2,94% 2,02% 2006 23,15% 15,29% 10,37% 5,64% 4,01%
5.2 Empirical Results 5.2.1 Euro zone / Germany
Figure 28 exhibits the 3 years rolling correlation between monthly changes in the actual gold prices denominated in Euro and the stock as well bonds markets.
Figure 28: Rolling Correlations Gold and Bond/Equity Market (Euro zone)
0,25
0,20
0,15
0,10
0,05
0,00
-0,05
-0,10
-0,15
-0,20
-0,25
5 2 94 00 01 04 992 999 006 1991 1 1993 19 199 1996 1997 1998 1 20 20 200 2003 20 2005 2
3 Years Roll. Correlation GOLD in EUR/REXP 3 Years Roll. Correlation GOLD in EUR/DAX
Frankfurt School of Finance & Management Working Paper No. 87 30
Gold in the Investment Portfolio
We see the low correlation especially with the REXP but also with the DAX. In Table 3 the performance measures of gold, stocks and bonds investments for various periods are summa- rized.
Table 3: Returns, Correlation and Volatility in the Gold, Bond and Equity Market (Euro zone)
1988-2006 Gold in EUR Gold in USD REX DAX EuroStoxx 50 Gold in EUR 1,00 0,67 -0,02 0,02 0,13 REX 1,00 0,08 -0,01 DAX 1,00 0,45 EuroStoxx 50 1,00
Compound Annual Return 1,43% 1,45% 5,88% 10,44% 14,09% Annual...... Performance (Average Return) 1,37% 1,39% 5,52% 9,59% 12,74% ...Volatility 14,83% 13,80% 3,35% 21,87% 30,11% 1990-1999 Gold in EUR Gold in USD REX DAX EuroStoxx 50 Gold in EUR 1,00 0,57 -0,02 0,00 0,14 REX 1,00 0,25 0,06 DAX 1,00 0,27 EuroStoxx 50 1,00
Compound Annual Return -1,44% -3,26% 7,62% 14,54% 31,36% Annual...... Performance (Average Return) -1,40% -3,20% 7,09% 13,11% 26,33% ...Volatility 14,86% 12,22% 3,11% 19,40% 36,20% 2000-2006 Gold in EUR Gold in USD REX DAX EuroStoxx 50 Gold in EUR 1,00 0,80 -0,01 0,04 0,07 REX 1,00 -0,16 -0,18 DAX 1,00 0,91 EuroStoxx 50 1,00
Compound Annual Return 7,91% 11,95% 5,24% -0,33% -0,35% Annual...... Performance (Average Return) 7,21% 10,95% 4,90% -0,74% -0,49% ...Volatility 14,93% 16,14% 3,00% 25,43% 23,31%
Frankfurt School of Finance & Management Working Paper No. 87 31
Gold in the Investment Portfolio
Figures 29-31 show the effect of adding gold to the investment portfolio over various periods of time. Figure 29 presents the overall period of time from 1988 till 2006.Here it can be seen that there is no reasonable risk-adjusted performance contribution of gold to the total portfo- lio.
Figure 29: Euro zone (1988-2006)
10%
50% Bonds/ 50% Equities
8% 100% Equities 100% Bonds
6%
Return 4%
100% Gold
2%
0% 0% 5% 10% 15% 20% 25% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
The period 1990-1999 (cf. Figure 30) is characterised by extraordinary returns in the equity market where a gold investment would be an unprofitable solution.
Figure 30: Euro zone (1990-1999)
14%
50% Bonds/ 50% Equities 12% 100% Equities 10% 100% Bonds
8%
6%
Return
4%
2% 100% Gold 0%
-2% 0% 5% 10% 15% 20% 25% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 32
Gold in the Investment Portfolio
Figure 31 emphasizes the risk reducing ability of gold by shifting the efficient line to the left in the area of the lower volatility in the years 2000-2006. During the last six years gold was an interesting element in the portfolio, differing sharply from most other periods. This de- pended on comparatively high returns in gold and low performance of equity.
Figure 31: Euro zone (2000-2006)
10%
100% Gold 8%
100% Bonds
6%
4% Return
2%
100% Equities 50% Bonds/ 50% Equities 0%
-2% 0% 5% 10% 15% 20% 25% 30% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 33
Gold in the Investment Portfolio
5.2.2 USA
In Table 4 the performance measures of gold, stocks and bonds investments for various peri- ods are summarized.
Table 4: Returns, Correlation and Volatility in the Gold, Bond and Equity Market (USA)
1974-2006 Gold in USD Lehman US Treasury Standard&Poor's 500 Gold in USD 1,00 0,00 -0,01 Lehman US Treasury 1,00 0,18 Standard&Poor's 500 1,00
Compound Annual Return 5,56% 8,34% 8,45% Annual...... Performance (Average Return) 7,33% 8,19% 9,31% ...Volatility 19,79% 5,48% 15,27% 1974-1979 Gold in USD Lehman US Treasury Standard&Poor's 500 Gold in USD 1,00 0,01 -0,11 Lehman US Treasury 1,00 0,32 Standard&Poor's 500 1,00
Compound Annual Return 25,80% 6,05% 1,87% Annual...... Performance (Average Return) 29,96% 6,08% 3,09% ...Volatility 27,32% 3,85% 16,98% 1980-1989 Gold in USD Lehman US Treasury Standard&Poor's 500 Gold in USD 1,00 0,01 0,17 Lehman US Treasury 1,00 0,25 Standard&Poor's 500 1,00
Compound Annual Return -4,75% 12,35% 11,96% Annual...... Performance (Average Return) 0,14% 11,81% 13,28% ...Volatility 22,95% 7,40% 16,38% 1990-1999 Gold in USD Lehman US Treasury Standard&Poor's 500 Gold in USD 1,00 -0,04 -0,13 Lehman US Treasury 1,00 0,35 Standard&Poor's 500 1,00
Compound Annual Return -3,59% 7,60% 16,14% Annual...... Performance (Average Return) -2,58% 7,29% 15,23% ...Volatility 12,24% 4,27% 13,42% 2000-2006 Gold in USD Lehman US Treasury Standard&Poor's 500 Gold in USD 1,00 0,09 -0,01 Lehman US Treasury 1,00 -0,34 Standard&Poor's 500 1,00
Compound Annual Return 12,25% 6,12% 0,24% Annual...... Performance (Average Return) 12,35% 6,11% 0,51% ...Volatility 14,07% 4,81% 14,28%
Frankfurt School of Finance & Management Working Paper No. 87 34
Gold in the Investment Portfolio
Furthermore, Figure 32 exhibits the 3 years rolling correlation between monthly changes in the actual gold prices denominated in US dollar and the stock as well bonds markets.
Figure 32: Rolling Correlations Gold and Bond/Equity Market (USA)
0,80
0,60
0,40
0,20
0,00
-0,20
-0,40
-0,60
7 9 0 1 2 3 5 6 7 8 9 1 2 3 4 5 7 8 9 0 1 3 4 5 6 7 7 7 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 1 1978 1 1 1 1 1 1984 1 1 1 1 1 1990 1 1 1 1 1 1996 1 1 1 2 2 2002 2 2 2 2 2
3 Years Roll. Correlation GOLD in USD/Lehman US Treasuries 3 Years Roll. Correlation GOLD in USD/Standard & Poor's 500
Figures 33-37 show the effect of adding gold to the investment portfolio. Because of broader available data the overall period could be subdivided into 4 sub-periods. Figure 33 shows that gold did not have a positive impact on a portfolio risk-adjusted performance during the time period of 1974 to 2006.
Figure 33: USA (1974-2006)
10%
50% Bonds/ 50% Equities
9% 100% Bonds 100% Equities
8% 100% Gold Return
7%
6% 0% 5% 10% 15% 20% 25% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 35
Gold in the Investment Portfolio
Figure 34 shows that in the time periods with high inflation gold improved the investment results of the total portfolio.
Figure 34: USA (1974-1979)
30%
25% 100% Gold
20%
Return 15%
100% Bonds 10% 100% Equities
5%
50% Bonds/ 50% Equities
0% 0% 5% 10% 15% 20% 25% 30% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
But Figures 35 and 36 for the years 1980-1989 and 1990-1999 in which equity investments provided extraordinary returns show an absolutely contrary picture.
Figure 35: USA (1980-1989)
15% 50% Bonds/ 50% Equities
100% Equities 100% Bonds
10%
Return
5%
100% Gold
0% 0% 5% 10% 15% 20% 25% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 36
Gold in the Investment Portfolio
Figure 36: USA (1990-1999)
16% 50% Bonds/ 50% Equities
100% Equities 12%
100% Bonds
8%
Return
4%
0% 100% Gold
-4% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Std.Dev. bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Figure 37 emphasizes the risk reducing ability of gold by shifting the efficient line to the left in the area of the lower volatility in the years 2000-2006. Therefore gold was an interesting asset during the last six years.
Figure 37: USA (2000-2006)
14%
12% 100% Gold 10%
100% Bonds 8%
Return 6%
4%
100% Equities 2% 50% Bonds/ 50% Equities
0% 0% 5% 10% 15% 20% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 37
Gold in the Investment Portfolio
5.2.3 World
In Table 5 the performance measures of gold, stocks and bonds investments for various peri- ods are summarized.
Table 5: Returns, Correlation and Volatility in the Gold, Bond and Equity Market (World) 1985-2006 Gold in USD Citigroup World Govt MSCI World LC Gold in USD 1,00 -0,06 -0,09 Citigroup World Govt 1,00 0,08 MSCI World LC 1,00
Compound Annual Return 3,38% 7,42% 7,89% Annual...... Performance (Average Return) 3,33% 7,18% 7,62% ...Volatility 13,34% 3,51% 14,09% 1985-1989 Gold in USD Citigroup World Govt MSCI World LC Gold in USD 1,00 -0,07 -0,16 Citigroup World Govt 1,00 0,10 MSCI World LC 1,00
Compound Annual Return 6,88% 9,87% 17,19% Annual...... Performance (Average Return) 5,47% 9,28% 16,44% ...Volatility 14,53% 4,53% 15,00% 1990-1999 Gold in USD Citigroup World Govt MSCI World LC Gold in USD 1,00 -0,06 -0,10 Citigroup World Govt 1,00 0,28 MSCI World LC 1,00
Compound Annual Return -3,59% 8,52% 9,78% Annual...... Performance (Average Return) -3,32% 8,01% 8,80% ...Volatility 12,11% 3,35% 13,81% 2000-2006 Gold in USD Citigroup World Govt MSCI World LC Gold in USD 1,00 0,02 0,01 Citigroup World Govt 1,00 -0,40 MSCI World LC 1,00
Compound Annual Return 12,25% 4,64% 0,42% Annual...... Performance (Average Return) 11,33% 4,52% -0,27% ...Volatility 13,88% 2,73% 13,62%
Frankfurt School of Finance & Management Working Paper No. 87 38
Gold in the Investment Portfolio
Furthermore, Figure 38 exhibits the 3 years rolling correlation between monthly changes in the actual gold prices denominated in US dollar and the stock as well bonds markets.
Figure 38: Rolling Correlations Gold and Bond/Equity Market (World)
0,50
0,40
0,30
0,20
0,10
0,00 -0,10
-0,20
-0,30
-0,40
-0,50
-0,60
8 9 0 1 2 3 4 5 7 9 1 3 4 5 6 8 8 9 9 9 9 9 9 96 9 9 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1998 1 2000 2 2002 2 2 2 2
3 Years Roll. Correlation GOLD in USD/Citigroup World Govt 3 Years Roll. Correlation GOLD in USD/MSCI World LC
Figures 39-42 show the effect of adding gold to the investment portfolio. Figure 39 presents the overall period of time from 1985 till 2006. Here it can be seen that there is no reasonable risk-adjusted performance contribution of gold to the total portfolio.
Figure 39: World (1985-2006)
10%
50% Bonds/ 50% Equities
100% Bonds 8%
100% Equities 6%
100% Gold
Return
4%
2%
0% 0% 5% 10% 15% 20% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 39
Gold in the Investment Portfolio
The same picture arose in the following years (cf. Figure 40 and 41).
Figure 40: World (1985-1989)
20%
50% Bonds/ 50% Equities
15%
100% Bonds 100% Equities
10% Return 100% Gold
5%
0% 0% 5% 10% 15% 20% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Figure 41: World (1990-1999)
12%
100% Bonds 50% Bonds/ 50% Equities
8%
100% Equities
4% Return
0%
100% Gold
-4% 0% 5% 10% 15% 20% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 40
Gold in the Investment Portfolio
But Figure 42 emphasizes that the risk-reducing ability of gold by shifting the efficient line to the left in the area of the lower volatility in the years 2000-2006 is also true in a worldwide investment framework.
Figure 42: World (2000-2006)
12%
10% 100% Gold
8% 100% Bonds
6%
Return 4%
100% Equities 2%
50% Bonds/ 50% Equities 0%
-2% 0% 5% 10% 15% 20% Std.Dev.
bonds, equities equity & bonds equally weighted, gold equities, gold bonds, gold
Frankfurt School of Finance & Management Working Paper No. 87 41
Gold in the Investment Portfolio
6 Conclusion
The development of the gold price changed after central banks had decided to limit their gold sales. Since that time supply and demand is less dependent on central bank gold selling policy and is characterised by a supply shortage, leading to a substantial rise in the gold price. With an annual Euro-performance of almost 8% between 2000 and 2006 gold became an interesting asset. The correlation to other assets was always low, but a total return below 1,5% between 1988 and 2006 meant no positive impact on the portfolio. Therefore investing in gold depends on the development of how central banks will deal with their gold reserves in the future. If they continue their policy of the last years, the positive effect on the gold price by higher de- mand, especially from India and China, might lead to a further positive movement.
Xetra-Gold was created by the Deutsche Börse in 2007 offering a new dimension for invest- ing in gold in the form of a security. Investing in physical gold leads to high transaction costs. Using gold pool accounts inflicts substantial credit risk. Gold futures have negative roll re- turns; therefore a long term position in gold is not well supported. Compared to that, Xetra- Gold offers a cost-effective solution to all disadvantages of the above-mentioned ways of in- vesting in gold. Xetra-Gold minimizes the transaction costs, has almost no credit risk and no problem with negative roll returns. Handling gold as a security can considerably improve the investment efficiency.
Frankfurt School of Finance & Management Working Paper No. 87 42
Gold in the Investment Portfolio
Appendix: Performance
Compound Annual Rate of Return Compound Annual Rate of Return 1 year investment (EUR) 1 year investment (USD)
40% 30%
35% 35,08% 25% 24,77% 23,15% 21,72% 30% 20% 27,32% 17,92% 16,80% 25% 15% 20% 10% 16,25% 15% 5% 3,49% 5,54% 10% 10,49% 2,46% 8,13% 0% -0,28% -0,09% 5,75% 1,02% 5% -1,92% 4,04%
-5% -5,28% -5,47% 1,18% 0,81% 0% -7,75% -5,01% -3,41% -10% -9,84% -4,31% -1,55% -5% -2,18% -3,12% -6,32% -7,74% -15% -15,26% -10% -10,91% -11,79%
-15% -20% -15,70% -21,39% -20% -25% 9 87 88 89 0 91 92 93 95 96 97 8 9 00 01 02 03 04 05 89 91 93 95 96 97 9 02 03 04 06 z 87 z z 90 z z z 94 z z z z z 00 z 01 z z z z 05 z z 07 z z z z z z z z z z z e e e e e e De De Dez Dez 9 De De Dez Dez 94 De De De Dez 9 Dez 9 De Dez Dez De De De Dez 06 Dez 07 D De z 88 D De De De z 92 De D De D De De z 98 De D De De De De De D De
Compound Annual Rate of Return Compound Annual Rate of Return 3 year investment (EUR) 3 year investment (USD)
15% 20%
13,44%
15,13% 15,29% 15% 16,27% 14,10% 10% 9,66%
8,34% 10% 6,91% 5,68% 6,52% 5% 4,98% 4,50% 5% 3,29% 4,99% 2,76% 3,19% 0,68% 0% 0% 1,07% -1,09% -1,98% -1,33% -2,00% -5% -4,87% -5,88%
-5% -7,53% -7,82% -5,60% -8,97% -5,93% -9,36% -5,28% -6,65% -10% -7,98%
-9,10% -10% -15%
9 0 1 2 3 4 6 7 8 9 0 1 2 3 4 5 6 7 9 0 1 2 4 6 8 0 2 4 6 8 9 9 9 9 9 9 0 0 0 0 0 0 8 9 9 9 9 9 9 0 0 0 05 0 07 z z 93 z 95 z 97 z 99 z 01 z 03 z z ez ez ez 9 z ez e e e e e e e e e D Dez Dez Dez 9 Dez 9 D Dez 9 5 Dez D De Dez Dez Dez 0 Dez Dez Dez Dez 0 D Dez Dez D Dez Dez D Dez D Dez D Dez D Dez D Dez D Dez D Dez D
Compound Annual Rate of Return Compound Annual Rate of Return 5 year investment (EUR) 5 year investment (USD) 10% 15% 13,69% 8,56%
10,37% 6,06% 10% 5% 4,73% 4,29% 7,58% 8,77%
5% 2,39% 2,46% 1,00% 3,78%
0% -0,10% 1,07%
-0,93% -0,88% -1,14% -1,73% 0% 0,81% -0,97% -0,92% 0,22%
-2,88% -5% -5,64% -5% -5,55% -5,37% -6,83% -5,90% -6,80% -7,13%
-10% -10%
3 4 7 9 0 2 3 4 5 6 91 95 97 99 00 02 04 05 06 07 91 92 9 9 9 0 01 0 0 0 0 0 ez 9 ez ez 96 ez 98 ez e z ez 03 e z ez ez ez ez ez ez ez z D ez D ez 92 D D ez 94 D D D ez D D ez D D ez 01 D D D D D ez D Dez Dez Dez 93 Dez Dez 95 Dez 96 D Dez 98 D D Dez D Dez Dez D De Dez 07
Frankfurt School of Finance & Management Working Paper No. 87 43
Gold in the Investment Portfolio
Compound Annual Rate of Return Compound Annual Rate of Return 10 year investment (EUR) 10 year investment (USD) 10% 10%
5,64% 5%
5% 4,94% 2,94%
3,73% 0,62% 0,40% 1,36% 0%
1,86% 1,69%
-2,33%
0,09% -3,26% 0% -3,47% -3,35% 0,34% -0,59%
-5% -5,03% -1,44%
-3,32% -3,52%
-5% -10%
6 0 1 2 3 7 98 00 03 04 05 07 9 0 0 0 0 06 0 z z z z z z ez 96 ez 99 z ez ez e e e e e e D Dez 97 Dez D De Dez 01 Dez 02 D Dez D Dez 06 Dez Dez Dez 97 Dez 98 Dez 99 D D D D Dez 04 Dez 05 D D
Compound Annual Rate of Return Compound Annual Rate of Return 15 year investment (EUR) 15 year investment (USD) 5% 5%
4,08% 4,01%
2,84%
2,02%
0,59% 0% 0% 0,08% -0,43% -0,71% -0,16%
-2,18%
-5% -5%
07 7 02 z 03 05 z 06 03 ez ez ez ez 01 ez 02 ez ez 04 ez 06 ez 0 Dez 01 D De Dez 04 D De D D D D D D ez 05 D D
Frankfurt School of Finance & Management Working Paper No. 87 44
Gold in the Investment Portfolio
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Capie, F., Mills, T.C., Wood, G. (2004), Gold as Hedge against the US Dollar , London, World Gold Council Dempster, N. (2006), The Role of Gold in India , World Gold Council, Gold Report, Septem- ber 2006 Gorton, G./Rouwenhoorst , K.G. (2004), Facts and fantasies about commodity futures , Yale ICF Working Paper No.04-20, February 2005 Kavalis, N. (2006), Commodity Prices and the Influence of the US Dollar, London, World Gold Council Lawrence, C. (2003), Why is Gold Different from Other Assets? An Empirical Investigation , London, World Gold Council Levin, E.J., Wright, R.E. (2006), Short-run and Long-run Determinants of the Price of Gold, World Gold Council, Research Study No 32, June 2006 O’Connell, R. (2005), What Sets the Precious Metals Apart from Other Commodities? , Lon- don, World Gold Council Pulvermacher, K. (2005a), What are commodities? , London, World Gold Council Pulvermacher, K. (2005b), Investing in Commodities: A Risky Business? , London, World Gold Council Pulvermacher, K. (2005c), Commodity Returns and the Economic Cycle , London, World Gold Council Ranson, D. (2005), Why Gold, not Oil, is the Superior Predictor of Inflation? , London, World Gold Council Vandeloise, S., Wael, M.V. de (1990), “Gold and Portfolio Diversification”, Tijdschrift voor Economie en Management , Vol. XXXV, nr.1, 1990, pp. 29-38
ONLINE-SOURCES www.gold.org www.lbma.org.uk www.oecd.org
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38. Böttcher, Henner / Seeger, Norbert Bilanzierung von Finanzderivaten nach HGB, EstG, IAS und US-GAAP 2003 37. Moormann, Jürgen Terminologie und Glossar der Bankinformatik 2002 36. Heidorn, Thomas Bewertung von Kreditprodukten und Credit Default Swaps 2001 35. Heidorn, Thomas / Weier, Sven Einführung in die fundamentale Aktienanalyse 2001 34. Seeger, Norbert International Accounting Standards (IAS) 2001 33. Stehling, Frank / Moormann, Jürgen Strategic Positioning of E-Commerce Business Models in the Portfolio of Corporate Banking 2001 32. Strohhecker, Jürgen / Sokolovsky, Zbynek Fit für den Euro, Simulationsbasierte Euro-Maßnahmenplanung für Dresdner-Bank-Geschäftsstellen 2001 31. Roßbach, Peter Behavioral Finance - Eine Alternative zur vorherrschenden Kapitalmarkttheorie? 2001 30. Heidorn, Thomas / Jaster, Oliver / Willeitner, Ulrich Event Risk Covenants 2001 29. Biswas, Rita / Löchel, Horst Recent Trends in U.S. and German Banking: Convergence or Divergence? 2001 28. Löchel, Horst / Eberle, Günter Georg Die Auswirkungen des Übergangs zum Kapitaldeckungsverfahren in der Rentenversicherung auf die Kapitalmärkte 2001 27. Heidorn, Thomas / Klein, Hans-Dieter / Siebrecht, Frank Economic Value Added zur Prognose der Performance europäischer Aktien 2000 26. Cremers, Heinz Konvergenz der binomialen Optionspreismodelle gegen das Modell von Black/Scholes/Merton 2000 25. Löchel, Horst Die ökonomischen Dimensionen der ‚New Economy‘ 2000 24. Moormann, Jürgen / Frank, Axel Grenzen des Outsourcing: Eine Exploration am Beispiel von Direktbanken 2000 23. Heidorn, Thomas / Schmidt, Peter / Seiler, Stefan Neue Möglichkeiten durch die Namensaktie 2000 22. Böger, Andreas / Heidorn, Thomas / Graf Waldstein, Philipp Hybrides Kernkapital für Kreditinstitute 2000 21. Heidorn, Thomas Entscheidungsorientierte Mindestmargenkalkulation 2000 20. Wolf, Birgit Die Eigenmittelkonzeption des § 10 KWG 2000 19. Thiele, Dirk / Cremers, Heinz / Robé, Sophie Beta als Risikomaß - Eine Untersuchung am europäischen Aktienmarkt 2000 18. Cremers, Heinz Optionspreisbestimmung 1999 17. Cremers, Heinz Value at Risk-Konzepte für Marktrisiken 1999 16. Chevalier, Pierre / Heidorn, Thomas / Rütze, Merle Gründung einer deutschen Strombörse für Elektrizitätsderivate 1999 15. Deister, Daniel / Ehrlicher, Sven / Heidorn, Thomas CatBonds 1999 14. Jochum, Eduard Hoshin Kanri / Management by Policy (MbP) 1999 13. Heidorn, Thomas Kreditderivate 1999 12. Heidorn, Thomas Kreditrisiko (CreditMetrics) 1999
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Gold in the Investment Portfolio
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