Gold and correlations

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LTCM
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Gold and correlations

Post by LTCM »

So. I've only been on the forum a short while, so excuse the fact this may (ha!) have been discussed before. I checked the search but I couldn't find the specific question I'm about to ask.

I've seen a lot of recommendations for buying and holding assets with minimal or ideally negative correlations yet still positive expectations. I currently hold 10% EDV. 30% World. 60% US Growth. A lot of people recommend gold for the minimal/negative correlations and the counter argument is the lack of expected growth/dividend. It's effectively dead weight/ballast.

So what about gold miners? They seem like they should have net positive expectations for dividends/growth assuming they're not doing a bad job of it.

I assume the correlations are still minimal/negative but with a small expectation of growth/dividends?

I assume someone has thought of this already! I've seen utilities mentioned for this purpose but not gold mining.

:sharebeer
55% VUG - 20% VEA - 20% EDV - 5% BNDX
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LTCM
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Re: Gold and correlations

Post by LTCM »

Code: Select all

+------------------------------------------+--------+-------+------+-------+------+-------------------+--------------------------+----------------------------+-------------------------------+
|                   Name                   | Ticker | VEDTX |  GDX | VIGAX |  VPU | Annualized Return | Daily Standard Deviation | Monthly Standard Deviation | Annualized Standard Deviation |
+------------------------------------------+--------+-------+------+-------+------+-------------------+--------------------------+----------------------------+-------------------------------+
| Vanguard Extended Duration Trs Idx Instl | VEDTX  |     - | 0.22 | -0.31 | 0.10 |             7.31% |                    1.44% |                      6.21% |                        21.51% |
+------------------------------------------+--------+-------+------+-------+------+-------------------+--------------------------+----------------------------+-------------------------------+
| VanEck Vectors Gold Miners ETF           | GDX    |  0.22 |    - |  0.23 | 0.23 |            -1.96% |                    2.75% |                     11.32% |                        39.22% |
+------------------------------------------+--------+-------+------+-------+------+-------------------+--------------------------+----------------------------+-------------------------------+
| Vanguard Growth Index Admiral            | VIGAX  | -0.31 | 0.23 |     - | 0.48 |            12.29% |                    1.34% |                      4.78% |                        16.57% |
+------------------------------------------+--------+-------+------+-------+------+-------------------+--------------------------+----------------------------+-------------------------------+
| Vanguard Utilities ETF                   | VPU    |  0.10 | 0.23 |  0.48 |    - |             7.27% |                    1.25% |                      4.05% |                        14.02% |
+------------------------------------------+--------+-------+------+-------+------+-------------------+--------------------------+----------------------------+-------------------------------+
55% VUG - 20% VEA - 20% EDV - 5% BNDX
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LTCM
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Re: Gold and correlations

Post by LTCM »

What appears to be a 25 year old article on the topic. Still waiting for that albatross to fly.

http://www.efficientfrontier.com/ef/197/preci197.htm
55% VUG - 20% VEA - 20% EDV - 5% BNDX
000
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Re: Gold and correlations

Post by 000 »

Sure, Gold miners have been like a leveraged play on gold.

In the past this was literally true as Gold miners were highly indebted. Now gold miners actually have very clean balance sheets and are less leveraged than almost any other part of the stock market.

Still I think an appreciating gold price is likely to affect miners more positively than gold itself (the reverse is also true) because of the claims that only become profitable to mine at higher prices. I just thought of this but perhaps gold miners are like a call option in this way.

I use RING and GDXJ.
luckyducky99
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Re: Gold and correlations

Post by luckyducky99 »

You want to use gold miners as a proxy for gold. If that's true, then gold miners should roughly track gold. I don't know if that's true or not but I'm happy to accept that as a premise.

There has been a lot of discussion on how to value gold. viewtopic.php?f=10&t=299656&start=100#p4939835

One theory is that the price of gold correlates with the inverse of interest rates. You have a substantial growth tilt. Growth stocks also correlate with the inverse of interest rates. Low interest rates are good for both.

Something worth thinking about.
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Beensabu
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Re: Gold and correlations

Post by Beensabu »

Gold miners stocks should not be used as a proxy for gold.

Do a search for VGPMX (the old Vanguard Precious Metals and Mining Fund), and you'll find the discussion you're looking for.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Valuethinker
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Re: Gold and correlations

Post by Valuethinker »

LTCM wrote: Tue Apr 13, 2021 2:47 pm What appears to be a 25 year old article on the topic. Still waiting for that albatross to fly.

http://www.efficientfrontier.com/ef/197/preci197.htm
http://www.efficientfrontier.com/ef/adhoc/gold.htm

from 2004/05. Still the right way to think about this asset, I believe.
Valuethinker
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Re: Gold and correlations

Post by Valuethinker »

000 wrote: Tue Apr 13, 2021 4:25 pm Sure, Gold miners have been like a leveraged play on gold.

In the past this was literally true as Gold miners were highly indebted. Now gold miners actually have very clean balance sheets and are less leveraged than almost any other part of the stock market.

Still I think an appreciating gold price is likely to affect miners more positively than gold itself (the reverse is also true) because of the claims that only become profitable to mine at higher prices. I just thought of this but perhaps gold miners are like a call option in this way.

I use RING and GDXJ.
Their financial leverage may be low but their operational leverage is, if anything, higher.

Costs of production have risen due to older, deeper mines (and more expensive environmental constraints on new ones).

So higher fixed costs. Thus greater profitability gearing to revenue -- the definition of operational leverage.

And they used to forward sell a lot of gold at fixed prices. Investors were very adverse towards this "gold hedging" and I believe they do a lot less of it, now.

So if anything more geared to the gold price.
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Re: Gold and correlations

Post by Valuethinker »

luckyducky99 wrote: Tue Apr 13, 2021 8:57 pm You want to use gold miners as a proxy for gold. If that's true, then gold miners should roughly track gold. I don't know if that's true or not but I'm happy to accept that as a premise.

There has been a lot of discussion on how to value gold. viewtopic.php?f=10&t=299656&start=100#p4939835

One theory is that the price of gold correlates with the inverse of interest rates. You have a substantial growth tilt. Growth stocks also correlate with the inverse of interest rates. Low interest rates are good for both.

Something worth thinking about.
poster Market timer had a quite a nice picture of the gold price vs the 30 year TIPS real yield. Quite nice inverse correlation, it appeared.
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Re: Gold and correlations

Post by LTCM »

Beensabu wrote: Wed Apr 14, 2021 12:19 am Gold miners stocks should not be used as a proxy for gold.

Do a search for VGPMX (the old Vanguard Precious Metals and Mining Fund), and you'll find the discussion you're looking for.
Can you expand on the first point a little?

Regarding the 2nd, most of the recent posts appear to be discussions of VGPMX's move away from mining and precious metals. Do you have something specific in mind?
55% VUG - 20% VEA - 20% EDV - 5% BNDX
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LTCM
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Re: Gold and correlations

Post by LTCM »

luckyducky99 wrote: Tue Apr 13, 2021 8:57 pm One theory is that the price of gold correlates with the inverse of interest rates. You have a substantial growth tilt. Growth stocks also correlate with the inverse of interest rates. Low interest rates are good for both.
I have the same potential problem with EDV. I check the correlations on portfolio visualizer and the correlations are generally negative but with a massive spike recently as interest rate issues come to the fore.

So I'd need something like financials in there to deal with rising interest rates?

Growth + Mining + Financials = Total Stock Market - (???)
55% VUG - 20% VEA - 20% EDV - 5% BNDX
jarjarM
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Re: Gold and correlations

Post by jarjarM »

LTCM wrote: Wed Apr 14, 2021 12:43 pm
Beensabu wrote: Wed Apr 14, 2021 12:19 am Gold miners stocks should not be used as a proxy for gold.

Do a search for VGPMX (the old Vanguard Precious Metals and Mining Fund), and you'll find the discussion you're looking for.
Can you expand on the first point a little?

Regarding the 2nd, most of the recent posts appear to be discussions of VGPMX's move away from mining and precious metals. Do you have something specific in mind?
Not Beensabu, but check out the correlation between goldminer (GOEX) and GLD. It's prone to shock (significant lower correlation). I didn't check what happened during early 2018 but maybe worthwhile to dig a bit further if you really want to deal with gold miner. Also, goldminer annualized return is quite a bit worse than gold, so if you want to use goldminer as proxy, may need to consider rebalancing strategy as it's not a buy-and-hold asset class since expected real return is 0 or worse.

https://www.portfoliovisualizer.com/ass ... &months=12
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Re: Gold and correlations

Post by Beensabu »

LTCM wrote: Wed Apr 14, 2021 12:43 pm
Beensabu wrote: Wed Apr 14, 2021 12:19 am Gold miners stocks should not be used as a proxy for gold.

Do a search for VGPMX (the old Vanguard Precious Metals and Mining Fund), and you'll find the discussion you're looking for.
Can you expand on the first point a little?

Regarding the 2nd, most of the recent posts appear to be discussions of VGPMX's move away from mining and precious metals. Do you have something specific in mind?
jarjarM is correct. Gold miners stocks have so far crashed right along with other equities in a crisis. Gold tends not to do that.

It's probably better for me to point you to the wiki than anything else: https://www.bogleheads.org/wiki/Precious_metals_equity

Here's a 2014 thread by someone who invested in that fund at one point for the same reason that you are considering a gold miners fund:

viewtopic.php?t=152504

I hope this helps :)
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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