What Does Gold Hedge Against?

&#8220-Not inflation&#8221-, the gold critics will shout, in one of their go-to arguments. This is what we hear from CNBC&#8217-s Mark Haines at every possible chance: since 1980, gold has not kept up with the CPI and so shouldn&#8217-t be used as an inflation hedge. One would point out to Mark that this is analogous to arguing for global cooling based on that one 2005 start date. If you pick basically any other start date but the one corresponding to gold&#8217-s 1980 peak, you see something different, even giving CPI a long head start over floating gold prices:

Cumulative Increase Through December 2009 &nbsp-
&nbsp- CPI Gold Gold/CPI Increase Ratio
From: &nbsp- &nbsp- &nbsp- &nbsp- &nbsp-
Jan-55 808.3% 3129.5% 3.87 &nbsp- &nbsp-
Jan-70 476.9% 3113.9% 6.53 &nbsp- &nbsp-
Jan-75 320.1% 514.8% 1.61 &nbsp- &nbsp-
Jan-80 185.0% 143.8% 0.78 &nbsp- &nbsp-
Jan-85 105.4% 254.2% 2.41 &nbsp- &nbsp-
Jan-90 71.8% 176.3% 2.45 &nbsp- &nbsp-
Jan-95 44.5% 197.8% 4.44 &nbsp- &nbsp-
Jan-00 28.5% 298.5% 10.46 &nbsp- &nbsp-
Jan-05 13.3% 155.6% 11.74 &nbsp- &nbsp-

But in shorter time-frames gold critics do have half a point. Since 2003, on a daily basis, gold returns have only been 12.5% correlated to changes in the inflation rate implied by 10-year TIPs. On a monthly basis, gold returns are 9% correlated to those of the TIPs spread.

We can look back further if we examine the the monthly performance of gold versus year-over-year changes in the CPI index. The CPI index for a given month is released in the subsequent month, so CPI monthly values are shifted forward in this study to correspond to the month of their release. The YoY change in CPI is further assumed to be the market&#8217-s expectation of future inflation. All gold prices here are daily averages based on the London PM fix through December 1974, and Comex/CME spot thereafter.

Ignoring the fact that gold generally rose in this period, it doesn&#8217-t do particularly well when inflation is elevated by this definition. A cut-off of 4% was used because it was the round number that most nearly bisected the 501 months in question, but the pattern holds-up when this parameter and other assumptions are varied:

Monthly Gold Price Changes By Inflation Rate, Apr 1968 &#8211- Dec
2009
&nbsp- Sum Number of Months Average &nbsp- &nbsp-
Months where
inflation:
&nbsp- &nbsp- &nbsp- &nbsp-
&gt- 4% 180.4% 225 &nbsp- 0.80% &nbsp- &nbsp-
&lt-= 4% 232.3% 276 &nbsp- 0.84% &nbsp- &nbsp-

So what does gold hedge against? Gold does well when real returns are low. You can&#8217-t consider inflation without looking at prevailing rates and growth. The rates used below are the average of daily 10yr constant maturity rates (GS10) within a given month. As Larry David would say, &#8220-pretty &#8230- pretty good&#8221-:

Monthly Gold Price Changes By Real Rate, Apr 1968 &#8211- Dec 2009
&nbsp- Sum Number of Months Average &nbsp- &nbsp-
Months where
real rate:
&nbsp- &nbsp- &nbsp- &nbsp-
&lt- 3% 414.0% 268 &nbsp- 1.54% &nbsp- &nbsp-
&gt-= 3% -1.3% 233 &nbsp- -0.01% &nbsp- &nbsp-

3% was used because it is again the round number that most nearly bisects the observations, but it can be varied without changing the essential result. There are also simple ways to define low real returns without a fixed parameter that show similar performance breakdowns with very different distributions of months. Now, these are retrospective studies, not trading systems, but obviously there is little chance that those returns were drawn from populations with the same mean.

It&#8217-s surprising that thoughtful types like Nouriel Roubini and Martin Feldstein have questioned gold&#8217-s inflation hedging, but didn&#8217-t mention this point &#8212- it seems glaring: people hold the relatively useless metal when real rates and opportunity cost are low. This simple point somehow never comes through in the noise surrounding gold: the glib Spam-sagacity vs. the Fall of The Republic, all the go-to arguments.

Clearly there are other factors that may throw the model off for long stretches of time. These may be false positives (e.g. non-dollar weakness) or false negatives (e.g. if gold is monetized to the point that it rises in deflation).

Putting aside the current weakness related to the Euro and elevating risk aversion, since I&#8217-m expecting real rates to be on the low end compared to the late 20th century, my bias is still long gold. If yields should rise, especially if they are driven by vigilance, gold might make less sense.

[Cross-posted with minor changes from Seeking Alpha]

John Stewart unloads on CNBCs Jim Cramer.

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The Daily Show With Jon StewartM – Th 11p / 10cCNBC Gives Financial Advice

Daily Show Full Episodes
Important Things With Demetri MartinPolitical Humor
Joke of the Day

The Daily Show With Jon StewartM – Th 11p / 10cJim Cramer Unedited Interview Pt. 1

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The Daily Show With Jon StewartM – Th 11p / 10cJim Cramer Unedited Interview Pt. 2

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The Daily Show With Jon StewartM – Th 11p / 10cJim Cramer Unedited Interview Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri MartinPolitical Humor
Jim Cramer

UPDATE: Jim Cramer on John Stewart

John Stewart unloads on CNBC… and Jim Cramer.

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The Daily Show With Jon StewartM – Th 11p / 10cCNBC Gives Financial Advice

Daily Show Full Episodes
Important Things With Demetri MartinPolitical Humor
Joke of the Day

Video via Felix Salmon

The Daily Show With Jon StewartM – Th 11p / 10cJim Cramer Unedited Interview Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri MartinPolitical Humor
Jim Cramer

The Daily Show With Jon StewartM – Th 11p / 10cJim Cramer Unedited Interview Pt. 2

Daily Show Full Episodes
Important Things w/ Demetri MartinPolitical Humor
Jim Cramer

The Daily Show With Jon StewartM – Th 11p / 10cJim Cramer Unedited Interview Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri MartinPolitical Humor
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UPDATE: Jim Cramer on John Stewart

How do InTrades prediction markets work, and are they really accurate?

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Thanks to the InTrade person who uploaded the first CNBC segment on YouTube, and fixed the initial technical problem.

I renew my asking for the second CNBC segment to be uploaded at YouTube, too. [If someone else than InTrade does it, please hit me with the YouTube URL. Thanks.]

My analysis:

  1. InTrade-TradeSports CEO John Delaney does a good job explaining the mechanism of the wisdom of crowds.
  2. They cut professor Justin Wolfers too short. It&#8217-s a nuclear disaster &#8212-once again. Justin Wolfers is an admirable and ultra friendly person, a great prediction market researcher, a good prediction market analyst, and a wonderful blogger, but his TV appearances are, so far, totally crappy. The guy needs to hire a publicist who will teach him to flatten his Australian accent and to talk straight and plain &#8212-to go to the point real quick.
  3. &#8220-It seems like someone at CNBC decided at some point that they would NEVER address the legality issue.&#8221- – Dixit Deep Throat.
  4. After the broadcast of the video shot in Ireland, the camera goes back to the TV set, and, at this point, the comments from the journalists and the guest (Steve Forbes) show that they still don&#8217-t understand fully the prediction markets. They don&#8217-t have the right facts, and their analysis is not crystal clear.
  5. Overall, a good explainer on the prediction markets &#8212-taken into account that CNBC is an entertainment media. For deeper explainers, see the Wall Street Journal, the Financial Times, or Midas Oracle.

YouTube video (the last part was censored by InTrade-TradeSports CEO John Delaney – PRECISION: the discussion between the journalists and the guest on the TV set was suppressed)

APPENDIX: CNBC video + CNBC video #2

UPDATE: The second CNBC video segment that TradeSports-InTrade CEO John Delaney does not want you to see on YouTube

INTRADE-TRADESPORTS CEO JOHN DELANEY CENSORS CNBC ON YOUTUBE.

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HE CENSORS THE END OF THE FIRST CNBC VIDEO SEGMENT TO FIT HIS MARKETING AGENDA.

HE ORDERS THAT THE SECOND CNBC VIDEO SEGMENT NOT TO BE UPLOADED ON YOUTUBE.

THE PROOF OF THE CENSORSHIP:

YouTube video (whose last part was censored by InTrade-TradeSports CEO John Delaney – PRECISION: the discussion between the journalists and the guest on the TV set was suppressed)

PLEASE, SOMEBODY, DO UPLOAD THE FULL VIDEO SEGMENT ON YOUTUBE, UNCENSORED, AND HIT ME WITH ITS URL. I&#8217-LL RE-EMBED IT FOR EVERYONE TO SEE. THERE IS NO CENSORSHIP ON MIDAS ORACLE. WE ARE NEITHER IN CHINA NOR IN IRELAND. WE ARE FREE WORLD&#8217-S CITIZENS. WE WANT TO SEE THE NAKED TRUTH, NOT DOCTORED TAPES.

The second CNBC video segment that TradeSports-InTrade CEO John Delaney does not want you to see on YouTube

APPENDIX: CNBC video + CNBC video #2

APPENDIX: THE ULTIMATE THING THAT TRADESPORTS-INTRADE CEO JOHN DELANEY WANTED TO CENSOR BUT COULDN&#8217-T THANKS TO MIDAS ORACLE.

It seems like someone at CNBC decided at some point that they would NEVER address the legality issue.

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Signed: Deep Throat.

APPENDIX: CNBC video + CNBC video #2

UPDATE: YouTube video (the last part was censored by InTrade-TradeSports CEO John Delaney – PRECISION: the discussion between the journalists and the guest on the TV set was suppressed)

UPDATE: The second CNBC video segment that TradeSports-InTrade CEO John Delaney does not want you to see on YouTube

The second CNBC video on InTrades prediction markets is up and running.

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CNBC video + CNBC video #2

In both segments, the appearance of Justin Wolfers is a nuclear disaster. They cut him ultra short. Maybe because of his strong Australian accent, I don&#8217-t know. But the end result is bad. It&#8217-s a pity. Justin Wolfers would have had many interesting things to say.

PS: InTrade people, please, put that on YouTube and tip me when it is done, so I can embed those videos.

UPDATE: YouTube video (the last part was censored by InTrade-TradeSports CEO John Delaney – PRECISION: the discussion between the journalists and the guest on the TV set was suppressed)

UPDATE: The second CNBC video segment that TradeSports-InTrade CEO John Delaney does not want you to see on YouTube

CNBC airs an upbeat explainer about InTrades prediction markets.

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Via our good friend Jason Ruspini.

CNBC video + CNBC video #2

– Please, put that on YouTube, and then give me the YouTube URL. I&#8217-ll embed the video in another post.

– Who is that guy that they will interview later on, Jason??? [UPDATE: Serge Ravitch]

My observations:

  1. Quite upbeat. Almost an advertisement for InTrade.
  2. No mention whatsoever that InTrade is illegal in America.
  3. On the website, they call InTrade a &#8220-political futures market&#8221-.
  4. The InTrade critic was Barry Ritholtz. They just showed his blog. He wrote that the trading on InTrade is &#8220-pitifully&#8221- small.
  5. The first prediction market analyst they want to hear is InTrade CEO John Delaney. The second is professor Justin Wolfers. And that&#8217-s all.
  6. Steve Forbes asked whether &#8220-this thing&#8221- (InTrade) predicted Joe Biden &#8220-weeks ago&#8221-. The answer is that InTrade predicted Joe Biden some days ago.
  7. Joe Kerner put an emphasis on liquidity, whereas the emphasis should have been on the market as the mechanism that delivers a collective verdict.

UPDATE: YouTube video (the last part was censored by InTrade-TradeSports CEO John Delaney – PRECISION: the discussion between the journalists and the guest on the TV set was suppressed)

UPDATE: The second CNBC video segment that TradeSports-InTrade CEO John Delaney does not want you to see on YouTube