The Power of Gold: An Initial Look at Trading Strategies Using Gold-based ETFs and ETNs 2009-2014

We examine the effectiveness of trading strategies that use exchange-traded funds (ETFs) and exchange-traded notes (ETNs) that offer various types of exposure to gold returns. The strategies are based on the results of recent research that indicate gold is a safe haven when financial market risk increases. We make adjustments to a stock/bond/gold portfolio based upon signals provided by the VIX and examine the effectiveness and relative effectiveness of the gold-related vehicles to enhance return. We also examine the returns of the ETFs and ETNs on a stand-alone basis. Our findings show that improved portfolio performance could have been possible over the sample period 2009-2014 by increasing exposure to gold when the VIX rises above a certain threshold and reducing exposure to gold when the VIX declines. The best results are from using an ETF that provides a simple one-to-one, i.e., unlevered, positive exposure gold, and the results support the hypothesis that gold is a safe haven. The other choices of financial vehicles that offer a levered and/or inverse relationship to gold are found to be less effective or to offer no benefits in the strategies we employ here.

JEL Codes: G1, G02 and G11

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