On the Use of Gold as a Fixed Income Security
Keith C. Brown
John S. Howe
Financial Analysts Journal 43, 1987, pp. 73-77
Coincident with the “legalization” of gold in early 1975 was the emergence of an active market for gold futures contracts. A trading strategy made possible by the existence of a futures market is the hedged cash position (HCP) wherein an investor simultaneously purchases the metal and sells a futures contract for a desired delivery date. Previous studies have argued that a gold-based HCP can be regarded as a fixed-income security. The purpose of this paper is to investigate empirically whether the gold HCP possesses fixed-income properties similar to Treasury securities. Using monthly metal and futures prices from 1975 to 1983, we show that gold HCP returns failed to keep pace with inflation and were not set in a one-to-one correspondence with the inflation rate. We conclude that there is a significant lack of similarity between Treasury bills and hedged cash positions in gold.
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