What are the key factors determining the success or failure of a transaction? I believe that many investors will immediately emerge in the mind of the "time to enter and exit". Admittedly, the choice of entry timing will directly determine the pressure on the next position stage; exit timing will determine the ultimate 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 types of gold trading in different market environments.
Robert Johnson, chairman of the Institute of Financial Services of the United States, and two finance professors from Creighton University found that gold-related trades, such as gold futures contracts, physical gold, gold mining stocks and gold ETF funds, did not follow the same trend, sometimes even ended. On the contrary. For example, from January 25, 2008 to January 24, 2018, the IAU index, which tracks spot gold prices, rose by 45.1%, while the GDX index, which tracks the share prices of gold mining companies, fell by 49.3% over the same period. There is a huge difference between the two trends.。
Thus, 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, not the quality of the stock itself. In contrast, when 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 gold trading varieties? This depends on the market environment and the original intention of the transaction.
If you buy gold to hedge the risk of stock market crash, then physical gold is a better choice. Johnson's team has developed an indicator of the correlation between the trends of different financial assets through data statistics. If the correlation coefficient reaches 1, it means that the trend of the two financial assets is identical; 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. Therefore, physical gold is the best hedging asset for stock market risk.
If we 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 of gold mining enterprises is 0.2-0.4. At a time when inflation is rising, physical gold will play a "value-preserving" role and can maintain its value for a long time. It is worth noting that gold bars are the best tool to resist inflation, not gold ornaments, because gold bars have a stronger liquidity.
However, if investors are optimistic about the trend of gold prices and hope to gain considerable returns from the rise in gold, then gold futures contracts and gold mining stocks can provide higher returns. By leveraging futures contracts, investors can magnify the effect of rising gold prices, but at the same time increase risk exposure. In addition, because gold stocks fluctuate more widely than gold prices, investors often regard ETF as a "leveraged" investment target. Johnson's study found that gold stocks fluctuated 1.5-1.8 times as much as physical gold.
Johnson pointed out that investors should not generalize gold futures contracts, physical gold, gold mining stocks, gold ETF and other trading types as "gold investment". In fact, even in the same market environment, the price trends of these gold-related trades may vary widely. In order to maximize the profit, we should choose the best gold trading target according to different situations.
