What are the key factors that determine the success or failure of a transaction? I believe that many investors will immediately come to mind the "timing of entry and exit". It is true that the choice of the entry time will directly determine the pressure on the next holding stage; the exit time will determine the final profit and loss of the transaction. For gold investors, in addition to the timing of entry and exit, there is also a factor that can determine the life and death of trading, that is, the choice of "investment target". In short, investors need to choose different gold trading varieties in different market environments.
Robert Johnson, chairman of the American Institute of financial services, and two finance professors from Creighton University found that the trend of gold related trading products such as gold futures contracts, physical gold, gold stocks and gold ETF funds are not consistent, sometimes even completely opposite. For example, from January 25, 2008 to January 24, 2018, the IAU index, which tracks the price of spot gold, rose by 45.1%, while the GDx index, which tracks the stock prices of gold mining enterprises, fell by 49.3% in the same period.
Therefore, the choice of gold trading varieties is very important, which is quite different from stock trading. In an interview with Barron weekly, Johnson said that if investors build stock portfolios, the most important thing is to grasp the timing of each stock's entry, rather than the quality of the stocks themselves. In contrast, if investors trade gold, the choice of trading varieties is sometimes more important than the timing of entry and exit. So, how should investors choose the right kind of gold trading? It depends on the market environment and the original intention of the transaction.
If you buy gold to hedge against the risk of a stock market crash, then physical gold is a better choice. The Johnson research group has developed an indicator on the correlation of different financial asset trends through data statistics. If the correlation coefficient reaches 1, it means that the trend of the two financial assets is completely consistent; if the correlation coefficient is 0, it means that there is no relationship between the two trends. It is found that the correlation between ETF and S & P 500 is in the range of 0.3-0.7, while the correlation between physical gold and S & P 500 is only 0.03. As a result, physical gold is a good hedge against stock market risk.
If you buy gold to hedge inflation risk, then physical gold will be a better investment choice. The correlation between physical gold and inflation trend is almost zero, while the correlation between ETF and inflation trend is 0.2-0.4. When inflation goes up, physical gold will play a "value preservation" function, which can maintain its value for a long time. It is worth noting that bullion is the best inflation resistance tool, not gold ornament, because it has stronger liquidity.
However, if investors are optimistic about the trend of gold price and hope to get considerable profits from the rise of gold, then gold futures contracts and gold stocks can provide higher returns. By using the leverage of futures contracts, investors can amplify the effect of gold price rise, but also increase the risk exposure. In addition, because the fluctuation range of gold mining stocks is larger than that of gold price, investors often regard ETFs of gold mining enterprises as "leveraged" investment targets. Johnson's research found that the amplitude of gold stocks is 1.5-1.8 times that of real gold.
Johnson pointed out that investors should not generalize gold futures contracts, physical gold, gold stocks and gold ETFs as "gold investment". In fact, even in the same market environment, the price trend of these gold related trading varieties may vary greatly. In order to maximize the returns, we should choose the best gold trading target according to different situations.