Research: Gold as an inflation hedge in a time-varying framework

Although physical gold ownership is widely regarded as a ‘safe haven’ and inflation hedge today, empirical research on the hedging properties of gold led to ambiguous results and provided evidence for instabilities in the relationship between gold prices and inflation; while long-run analysis supports the hypothesis of gold being an inflation hedge, there is not necessarily a linear relationship in the short run.


The authors use a monthly dataset including the price for gold denominated in U.S. Dollar, British Pound Sterling, Euro and Japanese Yen as well as the consumer price index and the producer price index of the USA, the UK, the Euro Area, and Japan. The gold price data has been provided by the World Gold Council and covers a sample period from December 1969 to December 2011.


The study finds that
– Gold is partially able to hedge future inflation in the long-run.
– This ability tends to be stronger for consumer prices in general as well as for the USA and the UK compared to Japan and the Euro Area.
– The adjustment of the general price level seems to depend on whether or not the economy is in “normal times” or times of turmoil.

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Commodity, Real Estate, Infrastructure

Research – Accessing real assets through equities
Facing inflation threats, many investors see diversification into “real” assets, especially commodities which are known to be drivers of inflation, as a potential answer. Direct exposure to real assets can include physical ownership and investment in funds or indices.

Performance driver of commodity stocks
One of the problems of indirect exposure to real assets obviously is that fact, that the prices of stocks do not depend on the prices of the underlying asset alone, but also on other factors like company-specific events or the valuation of the broader equity market.

Over the past 15 years, the commodity-based S&P North American Natural Resources Sector Index has generally moved in line with commodity prices, represented by the S&P GSCI Spot , but quite differently from the S&P500 core equity index.

Inflation hedging potential
Over the past 15 years, the index significantly outperformed both core equity indices and commodity indices with comparable volatility. Real-assets based equities are also positively correlated with inflation; however, the correlation is not very strong, especially when compared to commodity indices.

Yet, analysis of rolling 5-year periods over the last 15 years shows that the real asset-based equity index beat inflation over 90% of the times, a value significantly better than what commodity futures (~60%) and core equities (~40%) would have produced.

Portfolio diversification benefits
As real asset-based equities are strongly correlated with the broad equity market (see table above), one might assume that they do not offer significant diversification benefits to a typical equity/bond portfolio, but might even increase volatility. But due to the dispersion of equity and commodity returns, adding real asset- based equities helped portfolios achieving risk profiles similar to that of a portfolio with only direct commodity exposure, while enhancing returns.

Real asset-based equities
– offer fundamental exposure to underlying real assets
– outperformed core equities and commodity futures in the past
– are able to provide some inflation protection and diversification

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The fine wine market – Macro analysis and outlook
Following the draw down after the credit crisis events in late 2008, the prices of fine wines have once again seen a major correction over the last 12 months.

Two reasons for the latest correction:
– Unsurprisingly, demand was affected by the sovereign debt crisis in Europe and fears of economic
slowdowns, specifically in China.
– On top of that, the market had to deal with two over-priced and protracted en primeur campaigns which put the
prices for Bordeaux first growths under pressure.

As a result, the Liv-Ex 100 is now trading 30% below its peak, and well below its longer term price trend line.

Signs of recovery in bid-offer ratio
There is a lot of cash waiting to enter the market, and demand can’t get much lower and is now showing early signs of recovery. Unlike with other more conventional commodities, supply is not at all flexible.

The store of value argument
Most of the world is facing an era of financial repression, characterized by a long period of interest rates below inflation levels and money printing through quantitative easing, as this is the only option for governments to stimulate nominal GDP and pay down debt.

The preferred investment strategy in such an environment would be a strategy of capital preservation through investment in store of value assets, which are characterized by scarcity, longevity, physicality, internationality, uniformity, no income stream, no inherent debt and of no currency denomination . Wine, art and precious metals thus qualify as store of value assets.

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Real Estate

Investor appetite for real estate asset class increases
Institutional investors are slowly increasing their exposure to real estate, according to Preqin’s latest issue of “Real Estate Spotlight”. This result is based on interviews with over 100 active real estate investors.

Investor activity
Preqin’s report shows that 70% of investors with $10bn or more are likely to invest in the next 12 months, compared to 26% of investors with less than $1bn in assets under management.

Of those investors planning to commit in the next 12 months, 46% plan to invest in core funds, and 35% said they would invest in opportunistic funds; 24%, 22%, and 19% of investors will target value added, debt, and core-plus strategy funds respectively.

Fund performance
The increased appetite does not come as a surprise, as real estate investment strategies have performed exceptionally well recently: According to performance data of the funds listed in Opalesque’s A SQUARE database, real estate strategies are up an average 8.42% in 2012 through July and have outperformed most other asset classes.

Research: Relative value investing in a REIT portfolio – Performance and constraints

Results show that the “market” (the REIT Index) explains a significant portion of returns, namely 45.9% with an average beta coefficient of 0.922

Since not all REIT securities are equally liquid, capital is the biggest constraint to a relative value investment strategy. Data shows that the vast majority of REITs in the universe have less than $10 billion in market cap, and most REITs trade less than $100 million dollars a day.

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Investing in real estate tax liens – Benefits and risks

As investors are looking for opportunities with low correlation to stocks, municipal tax liens have emerged as an attractive alternative; and demand for this type of investment rose over the last couple of years as current market conditions may just be right to make it more lucrative.

The life cycle of a delinquent tax lien

Municipal tax liens are liens issued by U.S. county governments in order to ensure payment of property taxes for services the county offers. If a property owner is late paying those taxes, the municipality can sell tax lien certificates to investors via auctions (in person or internet-based), which enables it to finance current operations.

Benefits and risks

– The main benefit of investing in tax liens is the rate of return.
– The investment also is well collateralized as it is backed by the value of the property
– Last but not least, since the rate of return is set by state governments, returns are relatively stable with low correlation to stock market and interest rates.

There are some specific risks investors should be aware of:
– The biggest risk is purchasing a lien on worthless property
– Competition is another risk
– Failure to comply with state regulation may result in making the lien worthless.
– Last but not least, property values can be negatively affected by environmental or uninsured catastrophe risks.

Market conditions

The municipal tax lien market is estimated to be at least $8 billion across 30 states. Industry experts expect more states to open up, as municipalities require the sale of tax certificates for financing and cash flow purposes.

Although this asset class is becoming more popular among institutional investors and more investment funds are expected to launch, competition remains small, due to both capital scarcity and the sophisticated knowledge required to successfully enter the market.

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