The Strange Behavior Of Gold Investors From Monday To Thursday

Authored by Dmitri Speck via Acting-Man.com,

Known and Unknown Anomalies

Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals sector as well.  Today I am going to introduce one of those to you.

As Donald Rumsfeld, former secretary of defense knew, there are things we know we know, things we know we don’t know, and things we don’t know we don’t know (unfortunately he neglected to consider that there are also things we think we know that just ain’t so, such as “Saddam has WMDs” – but let’s not digress). Anyway, Seasonax knows them all! [PT]

Gold investors dead asleep for days?

To this end we are going to examine the performance of gold and gold stocks broken down by days of the week.

The first chart shows the annualized performance of the gold price in USD terms since 2000 (black bar), as well as the annualized gain generated on individual days of the week (blue bars).

I have measured the returns based on closing prices, thus the performance achieved on Tuesday equals the average percentage change between the close of trading on Monday and the close on Tuesday.

Gold, performance by days of the week, 2000 to 2017.  Friday stands out markedly

 

As the chart illustrates, one day really stands out: Friday. With an annualized return of 7.50 percent it reflects almost the entire annualized gain of 8.84 percent generated by the gold price over the time period under review.

By contrast, almost nothing noteworthy happened in the gold market from Monday to Tuesday. On Tuesday prices even declined slightly on average.

The difference – which has been measured over a period of no less than 4,585 trading days – is obviously quite significant. This suggests that these patterns are not a coincidence.

Gold investors indeed appear to be mired in deep sleep from Monday to Thursday, or at the very least they are showing very little enthusiasm on these days.

 

The days of the week under the magnifying glass

What exactly was the cumulative trend in this pattern over time? The next illustration shows the indexed performance of gold since the turn of the millennium in gold color, as well as that of individual days of the week in other colors.

Gold, cumulative performance by days of the week, 2000 to 2017, indexed.

A steady uptrend was in evidence on Fridays – click to enlarge.

 

As the chart shows, prices essentially tended to move sideways over the first four days of the week. Only in 2009 did Wednesday (green line) manage to generate a somewhat stronger average return as well.

The gains in the gold price over the entire period of almost 17 years were primarily achieved on Fridays. The blue line depicting the cumulative returns achieved on Friday is in a very steady uptrend. On Friday prices frequently even managed to rise even when the gold price declined overall in the course of the year, such as e.g. in 2014.

In short, Friday is indeed quite an unusual day.

 

The action in gold stocks is even more extreme

Given that Friday appears to hold a special position in the gold market, the question arises whether and to what extent gold stocks are affected by it. After all, the trend in gold stock prices depends on the trend in the gold price.

The next chart therefore shows the annualized performance of the HUI Index of unhedged gold mining stocks since the turn of the millennium (black bar) vs. the annualized performance achieved on individual days of the week (blue bars) since the turn of the millennium.

HUI, performance by days of the week, 2000 to 2017 –  Friday shines brightly, Monday is weak

 

Once again Friday is the by far strongest day. Its special status is even more pronounced than in gold itself: gold stocks on average rose by 13.28 percent annualized on Fridays, while the HUI on average gained only 5.76 percent over the week as a whole.  Or putting it differently: Investors who were exclusively invested on this single day every week, were able to achieve more than twice the return delivered by a buy and hold investment!

Moreover, in gold stocks the patterns from Monday to Thursday show a lot more differentiation than those in gold itself. For instance, the average gain recorded on Wednesdays actually exceeded the cumulative gain in the HUI over the week as a whole as well. By contrast, the average performance on Mondays was truly abysmal. Someone who invested in the HUI exclusively on Mondays would have suffered an annualized loss of 9.40 percent!

 

The weekly performance of gold stocks under the magnifying glass

The question of the cumulative performance broken down by days of the week arises in connection with gold stocks as well of course. The next illustration therefore shows the indexed returns of the HUI Index in gray, and those of individual days of the week in other colors.

HUI, cumulative performance by days of the week, 2000 to 2017, indexed.  Knocking it out of the park: Friday beats them all.

 

As the chart shows, the blue line depicting the performance of the HUI on Fridays faithfully tracked the rally in gold prices in the first several years after the turn of the millennium. However, a welcome divergence emerged during the financial crisis of 2008, which had almost no discernible effect on the performance achieved on Fridays.

Thereafter, the blue line by and large continued its ascent (only briefly interrupted in annus horribilis 2013), even though the trend in the HUI as such was quite dismal in recent years. Currently the cumulative return achieved on Fridays stands far above that generated by the HUI.

This once again underscores how extraordinary the performance of gold mining stocks on Fridays actually was.

Compare this to the terrible downtrend in gold mining shares on Mondays, which is found at the very bottom of the chart. The yellow line declines steadily. On Monday, prices even tended to decline in years that were otherwise strongly bullish for gold mining stocks.

Odey Sees "Terrifying" Outcome Between Arrival Of MiFID, End Of QE

There is a dark cloud of tangible desperation over Crispin Odey"s recent monthly letters, and not only because he went "all in" on central bank failure exactly one year ago... and failed. With his fund down 10.6% YTD, and down 31% LTM, he knows he may have 1 Hail Mary left, two tops.  Which explains why as of August 31, the Odey Asset Management founder - who back in May asked rhetorically "why do i remain stubbornly bearish" - has bet it all on red, or inflation, and as his Top 10 position breakdown shows, he had a net 135% short in gilts and JGBs. As for the rest of his book, with just 25% of his top 10 position net long (ex gold), Odey"s view on risk assets remains the same: a crash is coming, the only question is when.

It is here that things get more interesting, because while traditionally Odey has bashed central banks for perverting and manipulating asset prices, this time he appears to have found another variable to help him goalseek his cataclysmic conclusion that it is all about to crash, and in his latest letter, Odey now says Europe"s upcoming research rule overhaul will result in less trading, less price discovery and less efficient markets.

He is referring, of course, to MiFID II, which Odey writes in his latest letter, will cause the cost of capital to rise "as information is going to become harder to come by" leading to investors with different levels of information and resulting in those with less access to analysis trading less. As previously discussed, the revised "Markets in Financial Instruments Directive" starts on Jan. 3. and forces firms to separate the cost of research from trading-related expenses incurred with investment banks.

It"s not just the impact of MiFid however: just as information flow is being curbed among the sellside, the Federal Reserve will be accelerating its balance sheet shrinkage. “For asset prices, a change to QE would be far from a happy solution,” Odey wrote in the August Swan Fund letter. “What is terrifying is that MIFID II is arriving when, thanks to QE and the sight of endless cheap money, companies’ shares are at their most expensive. Hindsight is going to have a field day.”

Maybe. Or maybe in hindsight it will be Odey"s endless war with central banks that will be his undoing.  Or perhaps Odey"s luck - we use the term loosely when it comes to the (former?) billionaire - is finally changing: having posted a miserable series of monthly losses, "In August-17 the EUR class returned +1.9% against the MSCI Daily TR Net Europe (EUR) return of –0.8%."

His full letter is below:

Manager"s Report

Sidney Homer in ‘A History of Interest Rates – 2000 BC to the present’ had to deal with the period before interest rates existed. What was the natural rate of return given by nature? How many eggs from a chicken? Economists started life as alchemists. All governments dreamt of creating gold out of base metals. All kings wanted interest rates to be lower so that growth could be stronger.

Now for 10 years we have enjoyed what they could never achieve. We have enjoyed rates of interest which were below the natural rate thanks to QE. It has allowed economies to grow so that we are now at the point where that growth threatens to be met by an inelastic labour supply.

It has so far proved disappointing for productivity globally which hovers around zero percent. But that reflects that QE has not been helpful for allocating capital. Take tertiary education in the UK. Over 20 years the university student population has grown by 650%. When student fees were increased by 300% to £10,000 p.a. in 2012 the thinking was that this would turn students into consumers. That they would demand value for money and more appropriate courses. But it hasn’t. Why? Because students still see the loans as free money. They have understood QE very well. The misallocation of resources continues but now when the student finds there is no job at the end of his / her degree, the sense of injustice leads them leftwards politically.

QE is no longer the easiest option. But, for asset prices, a change to QE would be far from a happy solution. We are now approaching MIFID II’s implementation and it is apparent that the effect of pricing research is that information is going to become harder to come by. Markets work off free and abundant information and views and multiple pricing points. MIFID II looks designed to ensure that individuals trading in a market will have different levels of information and as always the one with less information will start to trade less.

Less trading, less price discovery, less efficient markets. The cost of capital should rise. What is terrifying is that MIFID II is arriving when thanks to QE and the sight of endless cheap money, companies’ shares are at their most expensive.

Hindsight is going to have a field day.

Finally, for those wondering, here is Odey"s P&L since inception.

How To Trade The Trump-Xi Summit

While today"s market was certainly more exciting than many had expected, first surging on the blockbuster ADP report, then plunging in the biggest intraday drop in 14 months after "some" Fed members warned stock prices are "quite high", there is a chance that it will get even more exciting tomorrow, should either Trump or Xi utter a word "out of place" during the first summit between the two world leaders at Mar-A-Lago.

How should traders approach tomorrow"s key risk event? Courtesy of Bloomberg"s ex-FX trader Mark Cudmore, here are some thoughts.

With fundamental trading semi-paralyzed ahead of Thursday’s Trump-Xi meeting, it’s only prices that matter for the moment.

• The summit between the Chinese and U.S. leaders could have profound implications, but it’s nearly impossible to have any bias going in to the meeting. There’s genuine potential for both positive and negative surprises.


• As a result, markets are in a holding pattern as we wait to see whether risk-aversion is really ready to step it up a notch. Key levels across assets have not yet broken, with the 2.3% line in 10-year Treasury yields being the most critical.


• The context is a global economy that’s strengthening. Excess liquidity remains in the system meaning that yield and returns will continue to be chased overall. The flip side is that there are flickers of risk-aversion in markets that are not used to volatility.


• That environment leads to an adamantly divided market. On one side are those who cite growth and liquidity as a reason to always buy the dip. On the other, those who fear calamity, citing the idea that low volatility has induced excess leverage to chase returns and a misallocation of capital.


• I have sympathy with both views and while trading each individual asset requires conviction, sensible risk management of a portfolio requires a more balanced perspective. I believe markets are vulnerable to a larger correction this month, but the structural macro story leads me to be bullish longer-term, so I don’t expect a sustained bear market.


• Thursday’s high-profile meeting may not provide any concrete outcomes, but it’s likely to at least provide sufficient excuses for markets to act, even if it is on a pre-ordained path.

Unsatisfied by Cudmore"s take? Here are some more analyst opinions on what to expect tomorrow.

Citigroup Global Markets Asia (Ken Peng, investment strategist)

• “It’s more a bargaining game rather than one where punishments are doled out”


• Markets feel “comfortable” as there isn’t universal support in the Republican Party for a protectionist trade policy. Failure of the president’s health-care bill is also a factor


• Still, hard to predict how talks will pan out

Oanda Asia Pacific (Jeffrey Halley, senior market analyst)

• China will strive for market stability during the talks


• “The chances of the onshore- and offshore-traded yuan being allowed to trade materially weaker while Mr Xi is visiting the U.S. will be almost zero”

Guotai Junan Fund Management (Guo Rui, vice president)

• Don’t anticipate any news that will move markets


• “The meeting will be more likely about two leaders tentatively figuring out each others’ card hands. Trump tends to be hawkish on words, but the meeting itself signals there is common ground for cooperation”

ING (Jingyi Pan, markets strategist)

• “The market’s imagination appears to be running wild with the possibilities of the outcome from this meeting”


• That will likely make many stay on sidelines ahead of the meeting. “A pickup in volatility post event could nevertheless lure traders out”


• Trump’s past colorfulness when it comes to China’s perceived transgressions means talks could go a number of ways

ANZ (Khoon Goh, head of Asia research)

• Still a risk U.S. could take a strong line on China in the Treasury’s semi-annual currency report


• “Hopefully the Xi-Trump meeting will ease some of the tension”


• Lack of concern in markets shows traders don’t expect rhetoric over China being a currency manipulator to be followed through

Mizuho Bank (Ken Cheung, Asia currency strategist)

• Don’t expect any kind of deal out of the talks


• Don’t think China will be slapped with manipulator tag


• “We’re not looking for breaking news that would change the yuan’s outlook at the summit. The meeting will be smooth as Trump has softened his stance against China”

BofA: The Market Is No Longer Efficient

Almost exactly 8 years ago, in April of 2009 we wrote for the first time that as a result of the confluence of unprecedented central bank intervention meant to prop up risk prices which distort markets in the long run, and the rising dominance of HFT and algo trading strategies, which distort price formation in the ultra-short term, the market is no longer a (somewhat) efficient, discounting mechanism, but has in fact been "broken."

Now, in a note released overnight by BofA"s Savita Subramanian, the equity analyst comes to the same conclusion: the market is no longer efficient, primarily as a result of a wholesale scramble for short-term, data-driven trading gains, which have made a mockery of fundamental analysis and a focus on long-term investing profits.

Here are some of her observations:

Stocks for the long-term is an all but forgotten concept today. The rise of short-term investment strategies, which tend to rely on access to better, faster and larger stores of data and information, has attracted trillions of dollars of capital, compressing equity holding periods and likely exacerbating spikes in short-term volatility.

Managed futures funds (also known as CTAs), which tend to trade based on quantitative algorithms, have grown rapidly over the past several decades. According to BarclayHedge, their assets have grown to over 250bn, making up close to 10% of the total hedge fund universe.

Similarly, low volatility computer-driven strategies have also seen significant growth in recent years.

Quantitatively oriented clients have 3x the number of factors today than they did twenty years ago (Chart 5). Quant/factor investing popularity has increased sharply, at the expense of interest in fundamental investing (Chart 6). One of today’s greatest market inefficiencies may stem from the scarcity of capital devoted toward long-term, fundamental investing.

And yet, long-term market inefficiencies have increased: Given the abundance and improvement in data, analysis and tools, oddly enough, what should be an increasingly efficient market shows some signs of becoming less efficient. In tandem with asset growth in “fast money”, the opportunity set, as measured by the range of market prices, has shrunk on a short-term basis, but has risen on a long term basis.  

The number of analysts covering stocks has structurally
decreased – suggesting that the human element of fundamental analysis
(assessing body language of management, physical channel checks, etc)
have been supplanted by processes.

* * *

So are human traders destined for extinction as robots take over all jobs with only ETF trading soon remaining? Well, since BofA"s paying clients tend to be human, Savita had to put an optimistic spin on her findings. This is what she said:

Fundamentals win over long time horizons. The declining interest, assets and resources devoted to fundamental analysis suggests a significant opportunity in our view. Fundamental investing is not dead, far from it, but seems to require patience. Our analysis shows that fundamental signals see amplified performance as time periods are extended, but technical and positioning-based signals do reasonably well in the short term, but see marked alpha decay over the long term.

 

Over the long term, valuation is almost all that matters. Valuations have historically explained 60-90% of subsequent returns over a 10-year time horizon, with the price to normalized earnings ratio (our preferred valuation metric) explaining 80-90% of returns over the subsequent 10 years (Chart 13). Most other valuation measures have a reasonably strong level of efficacy over long time horizons (Table 1). We have yet to find any factor with such strong   predictive power over the short term.

 

Time really is money…At least for stocks. As investment time horizons lengthen, the probability of losing money in stocks generally decreases. While trading stocks over a one-day period can be
considered to be only marginally better than a coin-flip, the probability of losing money plummets to 0% over a 20-year time horizon. Moreover, time horizon arbitrage is unique to equities: other asset classes (for example, commodities, as shown below) do not exhibit such characteristics (Chart 14).

 

Over the past 80 years, only two decades have produced negative total returns: the 1930s (only -1% despite the Great Depression) and the 2000s (-9%, the worst decade for investors which started with high valuations and the “tech bubble” bursting and ended just after the financial crisis). Other decades also had numerous crises: 1940s (WWII); 1950s (Korean War); 1960s (social unrest, Vietnam war, JFK assassination); 1970s (hyperinflation, oil embargo); 1980s (mortgage rates near 20%, LatAm debt crisis, crash of 1987, S&L crisis); 1990s (Asia/Mexico/Russia crises, LTCM) yet produced solid returns for those who remained invested.

While we applaud the finding that "valuations matter" - as otherwise thousands of universities around the world would have to give their econ and finance professors the pink slip - there"s just one problem with the above: LPs and other asset allocators no longer have "patience."As another BofA analysis also released overnight showed, according to which a great rotation from active to passive management is taking place.  And while fundamental investing may "not be dead", those who practice it will soon have no cash left to manage, which is essentially the same thing.

JPM: "Turning Points In Market Trends Are Occurring At The Fastest Pace In History"

Ever get the feeling that the market has become frustratingly fast in responding to new information, with violent swings in either direction coming ever faster even if ultimately the "BTFD" mentality always seems to prevail? Well, it"s a fact. 

As JPM reports in a new analysis, citing quantitative and qualitative metrics, markets have become more macro driven and react faster to the new information. A qualitative example below shows the reaction time for recent major events (August ’15 selloff, Brexit, US Election, Italy Referendum) that has compressed from weeks to hours (Figure below).

In empirial terms, this means that quantitatively, we are noticing a higher density of market turning points. The next figure shows the average variability of asset trends (averaged across major asset classes) that show turning points occurring at the fastest pace in recent history (~30 years).

Given the engagement of central banks with markets and geopolitical developments, it should not be a surprise that markets are more macro driven. Furthermore, thanks to the ubiqutous presence of collocated HFTs, which respond to to headlines in microseconds, not to mention that information is created and consumed at a much faster pace than e.g. a decade ago (think of twitter, smartphones, etc.), the market is generally much "faster."

As JPM"s Marko Kolanovic also points out, "an emerging class of fully automated quant strategies is also likely speeding up the market reaction – these strategies process and trade on new information (e.g. feeds from tweets, press releases, etc.) in real time. Finally, we now live in a world in which everyone is a momentum chasers. As a result, the increased popularity of trend following strategies is also likely to contribute to shorter and faster trends, as strategies react quicker and lead to potential over/undershooting of fundamentally justified levels."

What are the implications of this fast-moving market? Some further thoughts from JPM:

Macro investors cannot ignore these developments, as they will need to react faster, compete with machines, and will be left with more risk in the form of market turning points. CTAs provide a good illustration of the direct of impact of quant strategies on asset flows. Figure 7 shows estimated equity flows, and Figure 8 estimated bond flows (the red line is actual exposure of a broad CTA index to the asset class, i.e. fund beta, and blue line is our model based out-of-sample forecast of the same position – note close correlation between the two). In 2015 and early 2016 these investors took substantial positions in equities, and the recent shift from a record long to short bond position contributed to a widening of bond yields.

Fundamental stock investors cannot ignore quant strategies either. Stocks are increasingly driven by (market neutral) factor exposures at the expense of fundamental drivers. Figure 9 illustrates this for one particular low volatility stock (JNJ, correlation to sector vs. correlation to low vol factor). Ten years ago, JNJ stock returns were entirely driven by sector fundamentals, but currently half of the stock’s returns are driven by factor returns (low vol factor). We also notice an outsized impact of stock returns around quant rebalances that typically occur at the end of the month (and first week of the month). Figure 10 shows that probability of a large move for stocks in a momentum portfolio are up to 3 times as large during turn of the month rebalances, as compared to other days in a month.

That said, fast moving markets are becoming a problem for everyone, not just macro investors. Stocks are reacting quickly to news, which leaves human investors less time to act. An example is earnings announcements where stocks immediately adjust to a price level and there is very little post-earnings drift. Figure 11 shows the size of earnings moves (normalized to ~3%) that are realized as gap moves (as opposed to post earnings drift) over time. Note that over the past decade, earnings drift has largely disappeared as stock prices adjust instantaneously. Similarly, market correlation started exhibiting strong seasonality – they are high outside of earnings season, and quickly break down at the time of announcement. This seasonality is further exacerbated by the increase of passive assets that drive correlation higher (outside of earnings season).

Furthermore, the ongoing mega-shift of funds from active to passive strategies continues to distort the "efficient market."

According to JPM, the level of passive indexation reached all-time highs with estimated ~35% of equities invested in capitalization weighted indices (up from ~15% 10 years ago). If indexed assets are relatively small, passive investing is a great cost-effective strategy. Passive investors are effectively piggy-backing on the most efficient, optimal, market portfolio. However, if the asset base becomes too large, passive investing may prevent market efficiency and lead to a misallocation of capital (large companies get larger, and small ones do not have capital, regardless of fundamentals). A large increase in passive assets can also cause distortion of valuations (e.g. favoring momentum vs. value, large vs. small, etc.). Investors are increasingly asking whether the current level of passive assets is already a problem for markets, and even the economy as a whole.

Figure 13 shows the recent trend in passive vs. active flows, and Figure 14 shows the increase in passive equity assets (as a % of total equity assets) as well as the number of companies listed in the US (on an inverse scale). There is a significant negative correlation between the number of new listings and size of passive assets. Although the correlation between the two is highly significant, this does not necessarily mean that passive assets caused this decline of new listings. The trend of capitalization weighted indexation may peak and start reverting over the next few years, especially if factor and stock dispersion cause broad capitalization weighted indices to underperform.

What is the preliminary conclusion? Well, for human investors competing with algos, robots and "Artificial Intelligence", will become even more difficult, not least of all because so much capital has shifted and continues to flow from active to passive strategies. As a result, ordinary, carbon-based investors will find they are increasingly at a disadvantage, even as the market drift from "fair value" continues to grow, making a major market "repricing" event increasingly more likely, while assuring that the losses for active market participants, mostly of the electonic variety will be dire.

Unfortunately, with few regulators able to grasp the major shift below the market"s surface, and especially now that deregulation is about to sweep Wall Street, there is little hope any of these concerns will be addressed until it is too late. In the meantime, prepare for markets that keep getting even faster, even more micro-volatility, even if the BTFD impulse continues to prevail until one day, the disconnect is just to great and the long overdue "mean reversion" event finally kicks in.