Remember this chart the next time a financial expert expresses his opinion that gold mining shares are sensitive to massive inflation, wars and political upheaval.
Consider the following facts.
The darkest hours of World War II, for Britain and the United States (where these shares were traded), occurred from the very start of this chart until 24 June 1942. This period corresponds with Hitler's obvious preparations to invade Poland to his actual invasion of the Soviet Union, 3.5 years later in June 1942.
In this 3.5 year period, the world's political structure and economy was torn apart, while the US CinC doubled. Here is actual global chaos and massive inflation - yet the BGMI declined in value by more than -60%! This is not my opinion but an indisputable fact recorded in the BGMI.
After June 1942, the issue of war turned favorable for the Allies, but CinC inflation roared ahead. Still, the BGMI would not return to its December 1938 high until 1961. That was over twenty years after 1938.
We don't see the BGMI doing anything significant after World War II until 1961. During the 1950s, some Americans were building bomb shelters to prepare for the coming Soviet "atomic" attacks, and air raid sirens were installed in every major US city. The BGMI did not respond to this fear; however the Dow Jones Industrials were having a very nice bull market all during the 1950s. Current market logic expressed in the financial media would have these trends of the 1950s reversed.
CinC fell slightly between the inter-war period of December 1945 to June 1950. After the start of the Korean War in June 1950, CinC slowly started to pick up again. Let's blame this slight inflation on the Korean War. Here is a second shooting war with more inflationary acceleration of CinC. Again, here was another shooting war that had no discernable effect on the BGMI in the above chart.
Everything changes with the Kennedy / Johnson presidencies. After the start of President Kennedy's term of office, two things happened that the BGMI was very sensitive to.
1. CinC continued to noticeably increased, however now the US gold reserves noticeably decreased.
2. The London Gold Pool was formed.
The BGMI started to increase in value as the paper US dollars increased in numbers, and gold US dollar left the United States.
The world saw the creation of the London Gold Pool as the US Government's rejection of the Bretton Woods Monetary Accords (BWA). Printing more paper US dollars than there were US gold dollars to back them would, by the laws of supply and demand cause the price of gold to rise upwards in price from the official BWA's price of $35 an ounce.
The London Gold Pool's purpose was to pool the resources of US friendly central banks. Any time more buyers came into the London Gold Market than there were sellers, the pool would punish anyone who dared to purchase gold at a price above the official $35 dollars an ounce. Such purchasers would soon find that they would be met with massive selling of central bank gold. The London Gold Pool intended that over $35 an ounce gold purchases would be a losing proposition.
From the first day of The Pool's operations, the world of money knew that the United States no longer intended to honor the Bretton Wood's Accords. For reasons good or bad, printing paper US dollars in excess of its gold reserves was now the monetary policy of the United States. The world of money being realistic about such things, understood that the US would never again return to a limited paper currency.
The paper US dollar became a wasting asset. To see the truth of this, one only has to go to a library that offers news papers of the 1950-60s and compare the advertised prices then and what we pay for similar items today.
No doubt this increase in the BGMI was primarily from US investor demand. This was a time when American citizens needed a license to hold gold or face imprisonment, stiff financial penalties, or both. From 1933 to 1974, the shares in gold mining companies proved to be an effective American proxy for gold itself.
Note on the table below. I chose not to use the highest prices for gold and the BGMI of 1980. As 1980 was a period of extreme volatility in both gold and the gold stocks, it is pointless to pick a typical price. From the first week in January 1980, (the basis date for the values I used in my below table) gold was to rise $220 dollars in the next two weeks, and then fall $180 in the week after that. As $800 gold was but a fleeting moment in 1980, I thought it appropriate to use a 20 year period from the first week in 1960 to the first week in 1980 in the table below.
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The BGMI record clearly shows that as long as the US could inflate CinC without having a corresponding decrease in the US Gold Reserves (1945-58), the BGMI was indifferent to CinC inflation. However, when the inflation in CinC finally resulted in calls from foreign central banks upon the US gold reserves (1958 to 1968), the BGMI entered a significant bull market.
It is most important to know that this 1968 BGMI bull market's top occurred less than a week before the Bank of England's announcement of its withdrawal from the London Gold Pool on 14 March 1968. The day the Bank of England withdrew from the London Gold Pool, was the day world changed. The following two charts are important in understanding the bullish price action of the gold shares in the 1960s.
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Who today is aware that the 1960s was a golden decade for the gold mining shares? Gold stock investors from 1960 to 1968 saw gains of over 1,200% in eight years while gold itself was kept at $35 an ounce for the entire period!
Another important point for gold shares in the 1960's, is that after the closing of the London Gold Pool, gold was allowed to be traded freely for prices over $35 dollars an ounce. The increase in gold prices triggered a BGMI crash of minus 60% over the next two years.
This seems confusing, but there is logic to it. I promise, by the end of this article all will be explained and understood.
The next chart is a side by side comparison of the US gold reserves with the BGMI from December 1938 to January 1970. The two vertical dashed lines mark the start of the run on US gold and the withdrawal of the Bank of England from the London Gold Pool. There can be no doubt why the 1958-68 BGMI bull market occurred. It was the gold share's reaction to the run on US gold and the existence of the London Gold Pool.
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Please note that the Vietnam War was concurrent with, but not a factor of this bull market in the BGMI. As in the case with World War II, the Korean War, and the Cold War that created constant US domestic fears of Soviet atomic attack upon the civilian population of the United States, the Vietnam War was an incidental non-factor to the BGMI price action from 1960 to 1973. (See the below chart)
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As you can see above, the 1960's BGMI bull market coincided with the London Gold Pool, * not * the Vietnam War. Without a doubt, for the first three decades in the history of the BGMI, (1939-68) a period that involved the US in World War II, The Korean War, the Cold War and The Vietnam War, the BGMI's primary trend was completely indifferent to American's involvement in armed conflict.
If foreign armed conflicts produced no reaction to the BGMI, what about American domestic upheavals? The 1960's racial problems occurred during the 1958 to March 1968 BGMI bull market, however Martin Luther King was assassinated on 04-April-1968, three weeks after the closing of the London Gold Pool. The BGMI was to crash by -60% in the next two years as the radical "Black Power" movement grew in influence.
The anti-war riots and political upheavals peaked in the United States, and elsewhere, after the closing of the Gold Pool and the market top in the BGMI. The BGMI collapsed 60% during the anti-war chaos of the next two years. In light of this data, on what basis can anyone claim that the gold mining shares are sensitive to war, social unrest, or persistent American public fears of sudden death from domestic or international terror?
The XAU is silent upon these years. One must wait some time before the digital XAU will be traded.
Considering the gold mining shares market of today, and seeing that the start of the current bull run of the BGMI closely matches that of the September 11, 2001 (9/11) World Trade Center Terror Attack, can we assume that the US's involvement in Iraq is somehow buttressing the BGMI extremely strong performance since 9/11? Many experts' considered opinion may say that this is so, but to assume this one must be unaware of the 67 years of BGMI history.
The Iraqi conflict is into its third year of combat operations. Of the four major wars the US has been involved in since 1939, the Iraqi conflict has seen the fewest human causalities to US troops abroad. To date, there have been negligible consequences on the home front when compared to the other three major wars. World War II and Vietnam were traumatic events to the American public. The Iraqi War, up to this point in time, has not been.
By the end of the current bull market in the BGMI, it will be very clear that the factor supporting its bullish primary trend will be monetary inflation and nothing else.
...
Here is a table for the bull and bear markets of 67 years for BGMI current to the 13 February 2006 issue of Barron's (*).
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So what are we to make of all this? The BGMI seems to be indifferent to war and social unrest at all times. There are frequent incidences when the BGMI has * decreased * significantly during long periods of massive monetary inflation. Remember, the BGMI went down 65% during its 1939-42 bear market when CinC inflation was at its most intense in the 20th century and while a world war waged on! The BGMI performed in very similar manner after the post London Gold Pool era from 1968 to 1971. In the Age of Greenspan we saw CinC increase by a whopping 538% while the BGMI crashed -82%!
...
The actual key in understand the BGMI is inflation, but not as you currently understand inflation's effects on the BGMI. We must look at inflation's effect upon all asset classes to understand the historical action of the BGMI. When we do, we see that monetary inflation flows from one asset class to another from one period of time to another. One asset class' inflationary gains are another's asset class deflationary losses.
Realizing this truth, you must understand that gold mining companies are only one asset class, of many, that is fed from, or denied the flows from the wellhead of inflation. The flow of inflation-funding from one asset class to another is dictated by the fads and fashions of any current investment environment.
Here is the key to understanding the BGMI's 67 years of history. Since 1950, it has been a fact of life that the Federal Reserve has been creating inflation flows into the economy. That these inflationary flows have not always flowed into gold mining shares is also a fact of life.
So the current assumption of most people that inflation is at all times beneficial to the gold mining shares is wrong. There are 67 years of BGMI and monetary inflation history that shows this is not so. The above data proves that inflation drives the BGMI up 1,200% and then drives the BGMI down -60% or more as the Federal Reserve's endless flows of liquidity move the from one asset class and then on to another.
Ultimately, the "policy makers" have little control directing where their rivers of "liquidity" will go. That sometimes their inflation flows where they desire it to is just dumb luck. If this were not so, there would have been no need for the London Gold Pool in the 1960s, or the current Gold Cartel with its OTC derivatives market with a notional value of hundreds of trillions of dollars.
Arthur Burns of the 1970s created annual double digit CPI gains. In fact Burns did nothing different than what Alan Greenspan did in the 1990s when Greenspan created annual double digit increases in the financial markets. They both greatly increased the stock of paper US dollars in circulation. However, the Burns' inflation flowed into bread and butter items and so was blamed for the double digit inflation of the 1970s. Alan Greenspan's inflation flowed into financial asset items like high tech stocks and housing, so he is credited for creating great bull markets. The only differences between these two historic Inflationists, is just dumb luck. To believe any different is just plain dumb.
Both were only reckless Inflationists who danced with Madam Dumb Luck. Dumb luck for Burns caused people to hate him, dumb luck for Greenspan made people love him. I don't think dumb luck will treat our new Fed Head kindly.
When a previous hot sector starts to deflate, an increase in liquidity is likely to flow away from this now deflating asset. New liquidity wants to flow on to other assets that are more reasonably valued, and so more easily to benefit from inflation.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Ad Orientem wrote:
Fascinating article. Thanks for posting.
I only have Barron's GMI data back to 1975 on a weekly basis. If anyone has or gets their hands on the data back to inception, please let us know in here.
MG
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
I have weekly data back to 1939 but it's as an Excel file and not text; I'll see if it can be formatted to post into this forum (it'll be one loooooong post though). Looking at the data I have it seems that gold stocks acted more like ordinary equities (and not as a proxy for gold) until the mid 1960s or so...for instance, in 1954 and 1958 gold stocks did pretty well just like any other stocks...despite the fact that had gold been in a free market it would have almost certainly fallen in these years of non-inflationary prosperity with positive real rates; but by the mid-60s regular stocks and gold stocks had diverged enough in performance such that in 1966 EVERY other stock category (according to the Fama-French datasets) besides gold mining shares fell but gold mining shares rose.
Do you know what the seven stocks of the BGMI are? I can't find a list anywhere. It acts differently from XAU, HUI or GDX that they aren't suitable replacements.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
MachineGhost wrote:
Do you know what the seven stocks of the BGMI are? I can't find a list anywhere. It acts differently from XAU, HUI or GDX that they aren't suitable replacements.
Unfortunately I do not...plus wouldn't they have changed over the years anyway (for instance, I'm pretty sure Homestake Mining was one of the original stocks in that index but didn't it get bought out in the 1980s or 1990s)? Also, did Barron's mention that there were only seven stocks in the BGMI...if so then it's not much of an index.
How exactly does it act differently than the XAU? More volatile? Less? Just totally uncorrelated altogether? I tested it against INIVX (the oldest gold mining shares fund I could find....said fund switched from international stocks to being a gold mining stocks fund in 1968) from 1968 onwards and it showed a decently high correlation.
D1984 wrote:
How exactly does it act differently than the XAU? More volatile? Less? Just totally uncorrelated altogether? I tested it against INIVX (the oldest gold mining shares fund I could find....said fund switched from international stocks to being a gold mining stocks fund in 1968) from 1968 onwards and it showed a decently high correlation.
Barrick Gold bought out Homestake a few years ago, so I assume it would be in the BGMI. XAU is not a pure gold/silver mining index; it also contains copper and aluminum mining companies to a high degree. While using XAU seems to work in models, only buying BGMI seems to be profitable on trading the signals. I will check out INIVX.
EDIT: Yahoo only has INIVX back to 1993. Not useful.
Last edited by MachineGhost on Mon Apr 01, 2013 9:32 am, edited 1 time in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
D1984 wrote:
How exactly does it act differently than the XAU? More volatile? Less? Just totally uncorrelated altogether? I tested it against INIVX (the oldest gold mining shares fund I could find....said fund switched from international stocks to being a gold mining stocks fund in 1968) from 1968 onwards and it showed a decently high correlation.
Barrick Gold bought out Homestake a few years ago, so I assume it would be in the BGMI. XAU is not a pure gold/silver mining index; it also contains copper and aluminum mining companies to a high degree. While using XAU seems to work in models, only buying BGMI seems to be profitable on trading the signals. I will check out INIVX.
EDIT: Yahoo only has INIVX back to 1993. Not useful.
Morningstar has it back to its inception date in the 50s or 60s; just keep in mind that it wasn't until early 1968 (IIRC from the fund manager's reports it was a few months after Britian devalued in 1967 but a few months before the Gold Pool collapsed and the fixed $35 price couldn't be maintained) that this fund became a gold mining shares fund and not an international stock fund.
Now, with M*Star you do have to go into the "chart" display and calculate the numbers manually but I assume your timing model will only require weekly or monthly performance (i.e. it doesn't try to go in and out day by day but rather moves from one asset to another at the end of every week or the end of every month if such a move is indicated by the timing model) returns and not daily ones.
D1984 wrote:
Now, with M*Star you do have to go into the "chart" display and calculate the numbers manually but I assume your timing model will only require weekly or monthly performance (i.e. it doesn't try to go in and out day by day but rather moves from one asset to another at the end of every week or the end of every month if such a move is indicated by the timing model) returns and not daily ones.
I went into Morningstar and it will only show quarterly values going back to 1969. I could pull a Gumby and use that screen scraping thingy to extract the price values, but you are correct that I need weekly resolution at the very least.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
D1984 wrote:
Now, with M*Star you do have to go into the "chart" display and calculate the numbers manually but I assume your timing model will only require weekly or monthly performance (i.e. it doesn't try to go in and out day by day but rather moves from one asset to another at the end of every week or the end of every month if such a move is indicated by the timing model) returns and not daily ones.
I went into Morningstar and it will only show quarterly values going back to 1969. I could pull a Gumby and use that screen scraping thingy to extract the price values, but you are correct that I need weekly resolution at the very least.
Hmmm....Morningstar's graphs back to 1968 show the INIVX returns but they are very blocky and are maybe monthly at most. Doesn't seem nearly granular enough for what you are trying to do.
Now, if you use the "chart" feature in Morningstar and use the fund FKRCX, then you get fairly good granular data (daily) from around 1-1-1976 onward but like you said it would require manual "chart scraping" to get the daily returns (gains/losses).
Yahoo Finance does in fact have daily data for this fund going back to 1-1-1986; while this is better than the 1993 onwards data they have for INIVX I'm still not sure if it's enough; for starters, it doesn't capture gold's going parabolic in '79 and early '80 and then crashing hard in 1981.
I am really suspicious about BGMI. None of the gold stock models are profitable unless they specifically trade BGMI. Without any component information, its hard to get an idea of what could be occuring. Confidence: low.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
MachineGhost wrote:
I am really suspicious about BGMI. None of the gold stock models are profitable unless they specifically trade BGMI. Without any component information, its hard to get an idea of what could be occuring. Confidence: low.
In one of Mr. Lundeen's editorials ( http://www.gold-eagle.com/editorials_05 ... 22106.html ) that was linked to from the URL in your OP, he seems to indicate that the BGMI (and for that matter all of the other now discontinued Barron's Indexes...the BGMI is the only survivor and the only one Barron's still calculates and publishes) is arithmetic price weighted much like the DJIA is. For all I know--and I admit I could be quite wrong on this--the "modern" gold indexes like the HUI and XAU are either market cap weighted or equal weighted. Would this explain the any of the differences in performance when a timing system is tried and it ends up working on the BGMI but not on any of the modern gold mining indicies?
Also, is the timing system you are using something you came up with or is it something from the Internet/a newsletter?
D1984 wrote:
Would this explain the any of the differences in performance when a timing system is tried and it ends up working on the BGMI but not on any of the modern gold mining indicies?
Also, is the timing system you are using something you came up with or is it something from the Internet/a newsletter?
Beats me, but its possible. I was trying both what I came up with as well as those in the public domain. Nothing seems to be profitable unless it trades the BGMI. For instance, if I backtest only to 1985 when the XAU first came into existence, trading the BGMI will make about 44% CAR with an optimized moving average ratio crossover, but trading the XAU itself or the HUI or the GDX are unprofitable. Very peculiar.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
D1984 wrote:
Would this explain the any of the differences in performance when a timing system is tried and it ends up working on the BGMI but not on any of the modern gold mining indicies?
Also, is the timing system you are using something you came up with or is it something from the Internet/a newsletter?
Beats me, but its possible. I was trying both what I came up with as well as those in the public domain. Nothing seems to be profitable unless it trades the BGMI. For instance, if I backtest only to 1985 when the XAU first came into existence, trading the BGMI will make about 44% CAR with an optimized moving average ratio crossover, but trading the XAU itself or the HUI or the GDX are unprofitable. Very peculiar.
I'm sure you have probably already thought of this and accounted for it in your trading system, but if you are using the same timing model on each (by moving average crossover I assume you mean either 180 day or 200 day or 150 day or 10 month SMA--or EMA--when it crosses the current price) then could the fact that one is weekly (the BGMI) and the other is daily (XAU) have something to do with it or does the XAU fail as well even if you are willing to look at it every day and move in/out based on the crossover each day if necessary?
Also, I'm just curious...what are the CAGR results from 1-1-85 to present for the XAU and BGMI assuming you just bought each on the New year's Day of 1985 and held until now? Is BGMI just a higher returning index than XAU even without trading it?
Finally, how often is XAU rebalanced? How often is BGMI rebalanced (by which I mean rebalanced by the index provider barron's...not rebalanced by your trading system)? If one is rebalanced quarterly and the other monthly or annually that could mean that one index missues some momo trends (by getting rebalanced out of a rising asset) that the other doesn't (or conversely, that one of the indexes will rebalance out of a losing or downtrending asset sooner rather than just holding on to it).
Did you ever try to contact Mr. Lundeen about the BGMI and see if he knows about what stocks it contains and how often it is rebalanced? How about Nick Laird over at ShareLynx (the guy who put together the BGMI data going back to the 30s)? What did he say?
D1984 wrote:
the other is daily (XAU) have something to do with it or does the XAU fail as well even if you are willing to look at it every day and move in/out based on the crossover each day if necessary?
I tested daily, weekly, monthly and even quarterly resolutions. No difference. If anything, gold stocks seem to be a persistently terrible and risky investment.
Also, I'm just curious...what are the CAGR results from 1-1-85 to present for the XAU and BGMI assuming you just bought each on the New year's Day of 1985 and held until now? Is BGMI just a higher returning index than XAU even without trading it?
From 12/20/83:
XAU .78% CAGR
BGMI .74% CAGR
Finally, how often is XAU rebalanced? How often is BGMI rebalanced (by which I mean rebalanced by the index provider barron's...not rebalanced by your trading system)? If one is rebalanced quarterly and the other monthly or annually that could mean that one index missues some momo trends (by getting rebalanced out of a rising asset) that the other doesn't (or conversely, that one of the indexes will rebalance out of a losing or downtrending asset sooner rather than just holding on to it).
I get the impression that the BGMI is rebalanced as often as the DJIA. XAU is market cap weighted and not a total return index, rebalanced quarterly. It's possible that BGMI is a total return index, but then why would there be no significant difference in the above returns since 1983?
Did you ever try to contact Mr. Lundeen about the BGMI and see if he knows about what stocks it contains and how often it is rebalanced? How about Nick Laird over at ShareLynx (the guy who put together the BGMI data going back to the 30s)? What did he say?
It cant hurt to ask.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
No idea on weighting or rebalancing but the components are:
ABX
ASA
FCX
GG
KGC
NEM
SSRI
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
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