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View Poll Results: What should Jaran do with the $40?
play nanolimit NL until up to $100 and cash out 4 28.57%
Sit at a 1/2 table until doubled up or broke 3 21.43%
Blow it all on a MTT 6 42.86%
Who cares? It's not my money 1 7.14%
Voters: 14. You may not vote on this poll

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Old 08-20-2007, 01:08 PM
DcifrThs DcifrThs is offline
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Join Date: Aug 2003
Location: Spewin them chips
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Default Re: maybe this can help...

Zygote,

Copernicus is tryiing to explain why gold has no inherent risk premium.

it is a very debateable issue. typically, risk premiums for commodities are more likely to exist when the commodity is backwardated (futures price is less than spot price) indicating that there is more pressure from producers hedging their exposure to future cash flows than there is either speculative demand for the commodity or consumers hedging their input prices.

in general, the composition of the market in terms of producers vs. hedgers (i.e. consumers hedging their input prices) + speculators will typically determine whether or not there is a transfer of a risk premium in that commodity market.

if there is far more future demand for a commodity than there is pressure from hedging producers, the commodity may have 0 or even negative risk premium.

this is one of the fears of the effect CCFs (collateralized commodity funds) and ETF will have on commodity markets as large institutional investors allocate some of their portfolio to commodities for diversification purposes.

further, commodities are the one "asset class" that has a historic risk adjusted return far below that of other asset classes when risk is brought to the same level as the other assets (say to the level of equities).

this makes sense given the debate above.

where we go from here is to try to guage the level of expected risk adjusted returns for commodities going forward. this is hard and it is no way definite that either side is true.

if you think gold will transfer a guaranteed (i.e. like equities or other asset classes) risk premium to investors holding it, you are incorrect in that thought.

however, speculative pressures and varying market conditions due to innumerable issues ahead in the economy and gold's "special" place in peoples' minds may lead to significant price appreciation above the current, relatively high levels.

this choice to hold gold though is mostly speculation (active management) vs. passive risk premium collection. it does make sense to hold some gold (and other commodities) as a diversifier in well constructed passive portfolios, however, not in the levels many doomsdayers seem to think (thus those are the speculators in this market).

hoep this helps clear things up a bit.

personally, i think there is some small returns (maybe a sharpe ratio of .05-.10 vs. .2-.3 for other asset classes) available to investors/speculators being transfered from producers to those actors.

Cite: JoF paper from 1985

if you have access it is a good paper and one of the standard ones. if you don't, the abstract should suffice. note though that the composition of the commmodity markets have changed and that is why i believe future risk adjusted returns will be lower than indicated in the article (though still existing and persistant).

Barron
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