31/10/20: Gold Coins Market is Still Hedging Residual Covid Risk

Sales of the U.S. Mint gold coins have moderated off their pandemic highs, but remain elevated by historical standards, especially controlling for higher gold prices:

Since hitting a pandemic-period high of 216,500 oz in March 2020 (the highest sales volume since April 2013), the demand has moderated through June, topped 145,000 in July and 149,000 oz in August, and has been around 91,500 through the four weeks of October. This puts October sales above the last three years' average.

Average gold weight per coin sold remains relatively elevated and is co-trending with price per oz, most likely indicating lasting FOMO effect (herding by investors). The correlation is weaker than during prior episodes of major crises and recessions, suggesting that the pandemic-period demand is probably less influenced by the herding effects than in prior crises.

Annualized data through October also confirms precautionary, but not 'flight to safety' type of demand:

As the pandemic re-accelerates, it will be interesting to see how seasonality (uplift in end-of-year sales) plays out against the pandemic-related hedging positioning of investors.

13/6/20: Gold Coins Sales are Up, and the Markets are Screaming Something New

Some interesting movements in demand for gold coins in recent months, worth watching:

Price is up, and volume of sales is quite volatile. Still, sales are hitting highs.

• Following weaker y/y January and February, March 2020 sales rose almost x10 y/y in volume and average coin sold size rose from 0.5 oz in March 2019 to 0.674 oz in March 2020. 
• April 2020 sales were x3.25 times sales in April 2019 by volume, with average coin size rising to 1.0 oz. May saw a major fall-off in demand m/m but still posted sales x2.26 time those of May 2019, with average coin sold size down to 0.538 oz per coin. 
• Through June 13, June monthly sales are already x2.75 times higher than sales for the entire month of June 2019, with average coin size sold so far this June running at 0.985 oz per coin, against 0.625 oz per coin in June 2019. 

It seems investors still showing little signs of moderating safe haven demand for gold, despite robust performance in the financial markets until this week profit-taking blowout. 

Gold can be seen as both a hedge and safe haven against a range of key financial and political risks, but it can also be viewed as a long-run wealth storage tool, and, given its liquid nature, as a precautionary savings instrument for tail risks. If the current demand remains robust in the face of rising gold prices, we are likely witnessing a risk-return relationship/expectations shift amongst the savers and investors, away from considering trend-driven investment strategy of thee recent years and in favour of investing against a major concern for significant tail risks driving the markets in months and years ahead.

28/12/18: BTCD is neither a hedge nor a safe haven for stocks

A quick - and dirty - run through the argument that Bitcoin serves as a hedge or a safe haven for stocks. This argument has been popular in cryptocurrencies analytical circles of recent, and is extensively covered in the research literature, when it comes to 2014-2017 dynamics, but not so much for 2018 or even more recent period dynamics.

First, simple definitions:

1. A financial instrument X is a hedge for a financial instrument Y, if - on average, over time - significant declines in the value of Y are associated with lower declines (weak hedge) or increases (strong hedge) in the value of X.
2. A financial instrument X is a safe haven for a financial instrument Y, if at the times of significant short-term drop in the value of Y, instrument X posts increases (strong safe haven) or shallower decreases (weak safe haven) in its own value.

So here are two charts for Safe Haven argument:

The first chart shows that over the last 12 months, there were 3 episodes when - over time, on average, based on daily prices, stocks acted as a strong hedge for BTCUSD. There are zero periods when BTCUSD acted as a hedge for stocks. The second chart shows that within the last month, based on 30 minutes intervals data (higher frequency data, not exactly suitable for hedge testing), BTCUSD did manage to act as a hedge for stocks in two periods. However, taken across both periods, overall, BTCUSD only acted as a weak hedge.

The key to the above is,  however, the time frame and the data frequency. A hedge is a longer-term, averages-defined relationship. Not an actively traded strategy. And this means that the first chart is more reflective of true hedging relationship than the later one. Still, even if we severely stretch the definition of a hedge, we are still left with two instances when the BTCUSD acts as a hedge for DJIA against two instances when DJIA acts as a hedge for BTCUSD.

People commonly confuse both hedging and safe haven as being defined by the negative symmetric correlation between assets X and Y, but in reality, both concepts are defined by the directional correlation: when X is falling, correlation myst be negative with Y, and when Y is falling, correlation must be negative with X. The downside episodes are what matters, not any volatility.

Now, to safe haven:

Again, it appears that stocks offer a safe haven against BTCUSD (6 occasions in the last 12 months) more often than BTCUSD offers a safe haven against stocks (2 occasions).  Worse, the cost of holding BTCUSD long as a safe haven for stocks is staggeringly high: some 60-65 percentage points over 12 months, not counting the cost of trading.

In simple terms, BTCUSD is worse than useless as either a hedge or a safe haven against the adverse movements in stocks.

19/3/18: Bitcoin as a Hedge?..

The story of Bitcoin has been told, repeatedly, as a story of an asset that offers a hedge to stocks, a hedge against the fiat currencies and a hedge against the excesses of QE. That story is pure, unadulterated bullshit.

As the chart above shows, Bitcoin is more of a lead-indicator to S&P 500, than a hedge. With volatility well in excess of other comparable instruments. 

3/3/17: Gold vs Bitcoin: Prices vs Values

Marketwatch reported earlier that Bitcoin is currently being priced at above the price of gold in USD terms: http://www.marketwatch.com/story/bitcoin-is-now-worth-more-than-an-ounce-of-gold-for-the-first-time-ever-2017-03-02?siteid=bnbh

The comparative is somewhat silly, because, as Marketwatch article notes, Bitcoin market cap is much much smaller than that for gold, which implies that any valuation of Bitcoin to-date incorporates a hefty liquidity risk premium compared to gold. In addition - unmentioned by the Marketwatch - Bitcoin lacks key financial properties of gold, including:

1. Established safe haven properties: gold acts as a safe haven instrument against large scale or systemic risks. Bitcoin is yet to establish such property with any conviction. There are some indications that Bitcoin may be seen in the markets as a hedge against some systemic risks, e.g. capital controls in China, but this property is yet to be fully confirmed in data. Beyond such confirmation, there is no evidence to-date that Bitcoin acts as a safe haven for other systemic risks (e.g. sovereign debt crisis risks in the Euro area, or political risks in the EU, etc).
2. Hedging properties: Bitcoin shows no hedging relationship to key asset classes, in contrast to gold.

The above points mean that in addition to liquidity risks, Bitcoin price is also factoring in premium for lacking the broader safe haven and hedging properties.

While the continued evolution of Bitcoin is a great thing to watch and take part in, immediate valuations of Bitcoin are subject to severely concentrated risks, including the currently extremely elevated risk of Bitcoin demand being severely skewed to China (http://trueeconomics.blogspot.com/2017/01/18117-bitcoin-demand-its-chinese-tale.html) and the supply and legal rights issues with Bitcoin. Hence, as it says on the tin: the comparative to gold is silly, even if entertaining.

9/11/16: Bitcoin vs Ether: MIIS Students Case Study

Following last night's election results, Bitcoin rose sharply in value, in line with gold, while other digital currencies largely failed to provide a safe haven against the extreme spike in markets volatility.

In a recent project, our students @MIIS have looked at the relative valuation of Bitcoin and Ether (cryptocurrency backing Ethereum blockchain platform) highlighting

1. Fundamental supply and demand drivers for both currencies; and
2. Assessing both currencies in terms of their hedging and safe haven properties

The conclusion of the case study was squarely in line with Bitcoin and Ether behaviour observed today: Bitcoin outperforms Ether as both a hedge and a safe haven, and has stronger risk-adjusted returns potential over the next 5 years.

See the case here: http://www.economist.com/whichmba/mba-case-studies/investment-case-study-competition-2016/middlebury-institute-international-studies and please, give your vote to the team of our students. 

15/1/16: Gold Bullion as Risk Diversifier: 2015 Overview

A note of mine covering 2015 Gold market and the continued role of gold bullion & coins as risk diversifiers in current environment is now available on GoldCore page here: http://www.goldcore.com/us/gold-blog/gold-bullion-retains-key-role-of-a-major-diversifier-dr-gurdgiev/.