Category: Fundamental Analysis

Adding Gold To An Equity Portfolio

 

Introduction:

Using correlation and regression analysis, we learned in a previous article that monthly returns of gold since 1979 have not been statistically correlated with U.S. inflation or equities as represented by the CPI-U and the S&P 500 index, respectively. And using long term price charts, we learned in another article that the long term trend in gold prices has been strongly related inversely to the secular trend in equities.

In this article, we will examine the effect of adding gold to a diversified equity portfolio using another statistical tool, mean-variance analysis.

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Relationship Between Gold, Inflation, and Equities II

 

Introduction:

In part-1 of this study, we considered the question of whether monthly returns of gold were correlated with those of inflation or equities in the United States of America. We analyzed three decades of monthly returns using two statistical techniques, correlation and regression analysis. Were you surprised by the results?

Here in part-2 we will investigate whether there has been a relationship between the long term price trends of gold, inflation, and equities. But before we do, let us first clearly distinguish between “correlation of returns” and “price trends“.

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Relationship Between Gold, Inflation, and Equities

 

Introduction:

No doubt you have often heard it stated as a matter of fact that gold is a hedge against inflation or, what may at first glance seem synonymous, that gold is correlated with inflation. Have you wondered to what degree this may be true, if it is true at all? Perhaps curiosity about gold has been piqued in light of recent record gold prices coupled with economic conditions in general.

In this first of two articles we will assemble and analyze data describing the statistical correlation between the monthly returns of gold, inflation, and equities. And in part-2 of this study we will compare the long term price trends of gold, inflation, and equities. Read more »

Absolute Equity Valuation, Part III: Gordon Growth Model

Myron J. Gordon

Myron J. Gordon 1920 - 2010

Introduction:

In part-2 of this series we applied the concept of the present value of all future cash flows in the form of the dividend discount model. A variation of this is called the Gordon Growth Model 1 which deals with the infinite summation problem more directly.  

The Gordon Growth Model (GGM):  

The summation in the present value model is an infinite geometric series. It can be mathematically transformed 2 into what is known as the Gordon Growth Model, or GGM for short. Although cash flow can be represented by several measures, let’s use dividends for illustration purposes.  

Gordon Growth Model, formula 1

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Absolute Equity Valuation, Part II: Dividend Discount Model

Introduction: 

In part-1 of this series, we discussed the concept that a stock’s intrinsic value is the present value of its cash flows. Here in part-2 we will introduce the general form of the present value model, and discuss the dividend discount model in more detail. 

The present value model discounts all future cash flows to determine a stock’s present value, V0, which is its intrinsic value at t=0. Discounting all future cash flows necessitates using the infinity sign (∞) in the summation. The foundational formula for the present value model is: Read more »

Absolute Equity Valuation, Part I: An Overview

Present Value of Cash FlowsIn his seminal 1938 work, “The Theory of Investment Value,” John Burr Williams expounded on his theory that a common stock’s intrinsic value equals the present value of all its future dividends. Since then, considerable advances have been made in the field of security analysis and valuation. But the basic principals have remained the same.

This article is the first in a series comprising a basic overview of absolute security valuation as it applies to the common equity of domestic public companies. Our topics will include popular cash flow definitions, their formulas, underlying assumptions, applications, and multistage model equations. A detailed discussion of determining discount rates and growth rates is beyond the scope of this particular series.

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Merging Fundamental and Technical Analysis

Merging fundamental and technical analysis is by no means a new concept. But it is an important one to which I have devoted some study. Though the underlying assumptions may seem contradictory, I believe these two disciplines are complimentary. Learning to use both methods together has added more depth and perspective to my understanding of the financial markets.

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