Tag Archives: gold

Special Issue of IRFA on Gold


IRFA Special Issue on Gold

There has, in the last decade,  been a remarkable resurgence in interest in gold as an asset class. The rise and fall of the gold price, questions of gold bubbles, the comparisons of the Euro to a new gold standard, the growth of China as a gold consumer, and the increased growth of gold related products have prompted significant numbers of academic papers on this metal. In this regard it seems timely to put together a set of papers that reflect the state of the art on the financial economics of Gold

Papers are therefore invited for a special issue on International Review of Financial Analysis  on Gold. Papers should be submitted via the elsevier EES system  by 1 September 2014. The Special Issue will be edited by Professor Brian Lucey, Editor in Chief, Professor Jonathan Batten, Special Issues Editor and Professor Dirk Baur, Associate Editor.

Papers should address the financial economics or econometrics of gold, gold derivatives, the gold market, the relationship of gold to other assets, the role of gold mining stocks, the microstructure of the gold market, forecasting of gold, the monetary role of gold and the role of gold as an investment asset. We welcome both theoretical and empirical approaches.

All papers accepted will, prior to publication, be required to be accompanied by a video abstract or audioslide (see http://www.elsevier.com/about/content-innovation/audioslides-author-presentations-for-journal-articles / or  http://www.elsevier.com/about/content-innovation/author-videos )

Papers should be submitted via http://ees.elsevier.com/finana/, selecting Gold Special Issue as article type. Please note that the standard submission fee remains in place for this special issue. We reserve the right to accept papers but to place them in regular issues of IRFA as opposed to the Special Issue.

Please feel free to contact any of the special issue authors if you wish to discuss the suitability of a paper for the special issue.


Irish Pension funds need to look beyond the obvious.

This is a version of a column published in the Irish Examiner 28 September 2013

Pensions are a time bomb that everybody knows is ticking away but few seem willing to defuse. Most politicians have over the years been happy to hope that when it does explode they will be long gone from the scene, and anyway maybe none of their constituents will be hurt. The recent proposals for mandatory provision are a good idea well grounded in best practice but are they enough?

Irish private pension funds have had a good year. This comes on the back of several horrible years. The year was good not just in terms of returns, 27% over the last four years or 6% per annum. It was also good in terms of inflows. This is important as the raid by the government on private pension assets has and had the potential to instill a lack of confidence. Yet we saw an inflow of 11%. Irish pension funds now stand at just over €80b.

This sounds a lot, but it is not really that much. Irish households have  on deposit in excess of €90b.  In a low interest rate environment where we are and will be for some time to come 80b will not yield much more than 4% pa. This amounts to,  gross of tax, about €6400 per person. This is not enough to live on. Thus pension funds need to either up the rate of return they will get or they need to increase the amount of money under management, or both .  The recent review of the Irish pension system by the OECD suggests that the private pension industry in Ireland, despite what many feel, is not overly expensive in terms of fees, measured internationally. What is problematic is that it is small. Smaller financial companies can find themselves at a disadvantage. While big is not always better, the efficiency of the pensions industry is probably best enhanced by it growing.

To get more returns is problematic. The strong 5-6% growth era of Ireland is over. We have not had that real growth since the mid 1990s and those conditions are not coming back. We have seen how problematic this can be when we chase that growth from credit pumping and / or property ponzi schemes. Thus pension funds that wish to increase growth in the longterm will need to consider thir asset allocation strategy very carefully.

If we examine Irish funds against European funds we find some significant differences.  Irish funds tend to have the highest allocation to equities and amongst the lowest to property. This is strange. Although we have been burned by the property crash commercial property should form a solid part of a pension fund. The nature of this asset class is that it is longterm. To some extent this underweighting is a reflection of the cycle we are in but Irish pension investors should consider if 2% is appropriate for the long term. Second, within this heavy equity allocation Irish pension funds are grossly overweight in holdings of domestic equity. They hold 32% of all assets in the form of Irish company shares. The market capitalization of Irish shares is approx. 0.2% of world shares. This overweighting in essence is a gigantic bet on the health of the Irish stock exchange.

Screen shot 2013-09-27 at 11.26.03

The domestic focus continues on the bond side, where only 5% of bond assets are non domestic government bonds. While Irish government bonds have performed very well over the last couple of years, falling yields being indicative of rising prices, pension fund investment is a longterm investment.

Screen shot 2013-09-27 at 11.27.27

It is in the area of alternative investments that we see what is for me the starkest difference. The UK has shown a consistent drift to greater allocation of investments in alternative (to stock and bonds) assets over the past decade, with now 11% of all assets allocated. For Ireland this is 3%. The UK is leading a field in which we are lagging. 24% of all plans in europe are planning to increase their exposure to alternative investment classes such as gold and private equity.

Alternative investments are not an asset class – they are a series of asset classes ranging from emerging market debt to copper futures. The main elements tend to be commercial property, hedge funds, commodities, and classes of debt. Looked at over the last decade or so, certain kinds of alternative investment classes have performed spectacularly well.  Amongst the top performers have been global infrastructure funds, commodities especially gold, and global private equity funds. Gold in particular has shown a remarkable sustained growth since 2000, even allowing for an element of froth. So also infrastructure, a trillion dollar market. And these are not especially volatile.

vol ret

Irish pension funds will get increased levels of assets as the governments mandatory policies come on stream. This is good, in the long term. But it will only show the full benefit if the domestic equity focus is scrapped and a much more imaginative asset allocation policy is put in place. Irish pension funds having weathered the worst of the crisis should now look outwards.

Over what periods, if any, did Gold beat the SP500 Price Index?

My post on gold and the need to look at the recent falls in a longterm perspective have generated some heat and light on the twitterweb. One critique is : sure if you look at the original post it is an artefact of the timing.

So, here are a series of charts of gold v the S&P 500 rebased at 5y intervals.

1985 Rebase

1985 Rebase

1990 Rebase

1990 Rebase

1995 Rebase

1995 Rebase

2000 Rebase

2000 Rebase


2005 Rebase

2005 Rebase

As I pointed out this shows us that a) gold has had a remarkable run over the last while and b) stocks fluctuate a lot. A more serious issue is that this is unfair on the equity market : although declining as a percentage of stocks, dividend paying equities, in the long term, really perform.
Below is a slide from my first lecture set in the Applied Corporate finance course, given in the third year in TCD. Its from James Montier

dividends matter

dividends matter

and here is some information on dividend payers worldwide. Yes, its a mess….

declining dividends

declining dividends

The Shocking Performance of Gold

Any serious investor, analyst, or commentator on precious metals has, to my mind, stressed that these are a) useful in small doses and b) a long run asset whose performance needs to be evaluated over a long run…So lets do that. There is quite enough hype about PM without hysterical “we’re doomed/Its only a flesh wound” from the opposing camps

Disclosure : I do not own gold bullion or in other form. I do have a phd student part funded by the LBMA.

Which matters and when for gold – London or New York?

Short answer : both, but at different times. This research applies a timevarying information shares analysis to 25 years of COMEX gold futures and LBMA AM gold fixes, and for the first time demonstrates when london and when new york contribute most to the determination of the world gold price

A paper on this is forthcoming in Applied Economics Letters, while here is a video discussing it and the paper itself can be on SSRN

Asset allocation in Defined Benefit Pension Plans in Europe

Mercers each year publish a DB survey, which I get a copy of.

The 2012 results are quite interesting, not least from an Irish perspective. They survey over 1300 plans, covering 600b plus assets in europe as a whole.

First, Irish plans show the highest bias towards equities of all countries. However, this equity heavy position (which we share with the UK , not surprising given our similar national cultures : see here for some research on culture and pensions) is declining over time.

Second, breaking this down in more detail, we still display a very high degree of home bias in equities, with 15% of total assets in domestic equities.  Also, reflecting the financing structure of Irish corporations, the striking lack of investment in domestic corporate bonds is also very evident. Given that across Europe as a whole 7-10% of asset allocation to these instruments is not uncommon this seems to be a potentially untapped resource for irish corporate and a useful diversifier for irish pension funds

Third, its not all gloom (well, mostly) as there are some hardy souls who plan to INCREASE exposure to euroarea perioheries.

fourth, we are not badly off when we compare Irish pension fund assets per capita to other european countries. Bear in mind however that these assets need to yield a return for possibly 25  years on retirement and you see that this is relative. Without exception europe is grossly under pension provided.

Finally, despite the bull market, despite reams of research (here, here, here ), and despite there being an increase in asset allocation towards alternative investments, pension funds are leaving diversification opportunities on teh table in the form of not going into precious metal. While this may be included in the commodities section, the likelihood is that were it a significant amount then it would be broken out. Pension fund trustees might consider if it is truly safer to invest in forestry or global macro hedge funds than gold?