The relative efficiency of the gold and treasury bill futures markets

Abstract

his article examines the pricing efficiency of the gold futures market relative T to the Treasury bill futures market. Futures contracts for gold, a relative newcomer, have only been traded since 1975. T-bill futures contracts, also a relative newcomer, have been traded on organized exchanges since 1976.To the extent that prices for different delivery dates on the gold contract should reflect some interest rate which is related to the T-bill rate (as a measure of the opportunity cost of storing gold), gold futures prices should exhibit a well-defined relationship with T-bill futures prices in equilibrium. This article demonstrates that the futures markets for gold and T-bills are less than completely efficient relative to each other insofar as the interest rates implied by gold futures prices do tend to stray from their equilibrium level relative to the forward rates implied by the corresponding T-bill futures prices. If the market is inefficient from time to time and the implied gold rate is sometimes too high or too low relative to the implied T-bill rate, then one should be able to make abnormal profits by using trading rules based on the implied rates; evidence of such an ability is presented.Section I provides a brief review of the literature concerning efficiency in futures markets. Section I1 discusses the nature of futures markets and the mechanics of the "arbitrage" which produces potential profits from observed disequilibria in the gold and T-bill markets. A trading procedure is proposed which is novel because it utilizes a "tail" and a hedge ratio for the gold spreads so as to isolate profit arising solely from changes in relative implied rates. The results of simulated trading over *University of Illinois at Chicago and University of Hartford respectively. The authors are grateful to Fred Arditti for inspiring the research presented in this article, and for his comments on a previous draft, and to the Chicago Mercantile Exchange for providing the data employed in the empirical analysis. We wish to thank Michael Henry for computational assistance. We are, of course, solely responsible for any errors.

“Golden turtle tracks”: In search of unexploited profits in gold spreads

“…Given the relationship between the gold ICR and the Euro rate, it is useful to combine this result with previous work on gold ICRs by Monroe and Cohn (1986) who examine the relationship between gold ICRs and T-bill rates. Their evidence indicates that there is an identifiable "equilibrium" relationship between T-bill rates and gold ICRs with gold ICRs consistently trading at a premium relative to T-bills.…”

“…The haircut will affect the all-in cost of borrowing. (This point was missed in Monroe and Cohn (1986)) While the relationship between Eurodollars and B.A.6 varies over time, for the past two years B.A.s have averaged 20-50 basis points below Eurodollar rates on a yield equivalent basis.'Background on the hedging practices of the South African mining industry can be found in R. Gidlow (1983). South African mines have been permitted to hedge gold output since 1981, subject to Reserve Bank approval.…”

“…At this time the position is closed out and profit on the trade calculated. This approach to defining a trading strategy differs from other studies (e.g., Monroe and Cohn, 1986; Render, 1986) which use techniques such as moving averages and standard deviations to generate trading decisions. The trading strategy developed here is based solely on contemporaneous data.…”

On the efficiency of the global gold markets

“…A third strand of the literature has assessed the interdependencies, linkages, spillovers, information flow and efficiency amongst gold markets (e.g., Japan, UK, and US), and also between gold and other markets (e.g., stock, bond, and other precious metal markets) (Caminschi & Heaney, 2014;Chang et al, 2013;Ewing & Malik, 2013;Laulajainen, 1990;Lucey et al, 2013Lucey et al, , 2014Xu & Fung, 2005), whilst a fourth strand of the literature has sought to ascertain whether there exists a causality and/or co-integration relationship between gold prices/ markets and macroeconomic variables often by employing different versions of autoregressive conditional heteroscedasticity (ARCH) models (Blose, 2010a,b;Kutan & Aksoy, 2004;Mahdavi & Zhou, 1997;Pukthuanthong & Roll, 2011;Sjaastad, 2008;Sjaastad & Scacciavillani, 1996;Tully & Lucey, 2007;Zhang & Wei, 2010). Of direct relevance to our study, the final strand of the literature has focused on examining the predictability of gold price returns (Tschoegl, 1980;Monroe & Cohn, 1986;Basu & Clouse, 1993;Muradoglu, Akkaya, & Chafra, 1998;Christie-David, Chaudhry, & Koch, 2000;Smith, 2002;Mani & Vuyyuri, 2003;Mills, 2004;Parisi, Parisi, & Diaz, 2008;Wang, Wei, et al, 2011;Yu & Shih, 2011;Baur, 2013;Blose & Gondhalekar, 2013;Pierdzioch et al, 2014).…”

Arbitrage opportunities in metal futures markets

“…Easterwood and Senchack (1986 present evidence of a profitable bear spread strategy using a T-BilVT-Bond futures combination. By formulating an intracom-modity spread in gold futures together with a position in T-Bill futures, Monroe and Cohn (1986) exhibit profits ranging from $52.71 to $93.31 per trading contract. Maberly (1986) suggests an inverse relationship between the direction of the interday and intraday price change for the S&P 500 futures contract.…”