Gold Market Foundations certification exam assessment practice question and answer (Q&A) dump including multiple choice questions (MCQ) and objective type questions, with detail explanation and reference available free, helpful to pass the Gold Market Foundations exam and earn Gold Market Foundations certificate.
Table of Contents
Question 1
The three most valuable items 2,000 years ago, gold, frankincense, and myrrh have held their value through time.
A. True
B. False
Answer
B. False
Explanation
Only gold has retained its value. The price of frankincense and myrrh today is less than $5. Holding value means that gold has moved with inflation. This also means the real return on gold is zero. The real return on frankincense and myrrh has been negative.
Question 2
Select all characteristics that explain gold’s popularity:
A. Has a limited shelf life meaning it needs to replaced regularly
B. It is abundant and easily mined
C. Production is centrally controlled
D. Allowed for a medium of exchange, solving a trading problem
E. Easy for early metal workers to craft into ornaments
Answer
D. Allowed for a medium of exchange, solving a trading problem
E. Easy for early metal workers to craft into ornaments
Explanation
Gold allowed a medium of exchange, bypassing the barter problem. Gold also gained popularity because it was a relatively soft metal and easy to shape into ornaments. It also did not tarnish.
Question 3
An example of gold holding value is the fact that a Roman Centurion’s salary in gold is roughly what a U.S. Army major makes today.
A. True
B. FALSE
Answer
A. True
Explanation
The Centurion was paid roughly 38 ounces of gold in the time of Emperor Augustus. This gold today is worth about the annual wage of a U.S. Army major.
Question 4
Gold is a relatively low volatility asset with annualized volatility around 2% per year.
A. True
B. FALSE
Answer
B. FALSE
Explanation
Gold is a higher volatility asset with annualized volatility similar to the stock market, which is roughly 15% per year.
Question 5
Gold has proven to be an effective long-term as well as short-term inflation hedge.
A. True
B. FALSE
Answer
B. FALSE
Explanation
Gold is indeed an effective long-term hedge. However, the answer is false because gold’s volatility makes it unreliable over a short period. As shown in the graphic, over the last 40 years, gold has sometimes failed to hedge inflation and sometimes it provided effective protection. Notice that the volatility of inflation is 2% whereas gold is 15%. The high gold volatility relative to inflation ensures that gold will be unreliable in the short term.
Question 6
The volatility of an asset such as gold is a complete measure of its risk.
A. True
B. FALSE
Answer
B. FALSE
Explanation
Volatility is not a complete measure of risk because what matters is how an individual asset contributes to the risk of a portfolio. That is, investors do not hold 100% of their assets in gold. So, we look at gold’s contribution to overall portfolio volatility. This is where correlation becomes a useful measure. With low or negative correlation, when other elements of the portfolio are doing poorly, the negative correlation asset could be doing well, providing some relief.
Question 7
While gold’s correlation with equity returns is low on average, during certain periods the correlation spikes to above 0.8, meaning that gold will sometimes be a poor hedge for equity.
A. TRUE
B. FALSE
Answer
B. FALSE
Explanation
The analysis presented in the video showed that the correlation was stable with a maximum historical correlation of 0.2.
Question 8
The discovery of the Hoxne hoard is evidence that gold can be an unreliable safe-haven hedge.
A. True
B. FALSE
Answer
A. True
Explanation
Actually, the family that buried the coins for a safe haven never got to access their gold. They either died fleeing Britain or had to leave the treasure behind. The lesson here is that in a non-financial crisis like a war, it is unclear how useful gold will be.
Question 9
In the last 11 equity market drawdowns, gold provided positive returns in only 3 drawdowns.
A. True
B. FALSE
Answer
B. FALSE
Explanation
The analysis showed that gold provides positive returns in 8 of 11 drawdowns. In the other three, the returns were negative. In two, the returns were very small, negative 1 or 2 percent. In the inflation surge drawdown, gold’s return was -7%. Overall, gold’s performance in equity drawdowns is consistent with its ability to provide a hedge for a portfolio.
Question 10
Gold offers hedging properties similar to put options, given that both have positive returns on average in good times and bad times.
A. True
B. FALSE
Answer
B. FALSE
Explanation
Put options are very effective in terms of drawdowns providing positive returns in every drawdown. However, in non-drawdown periods you pay the price with annualized returns of -10% or less. This is the price you are paying for insurance. Very few investors would accept a drag on their portfolio return by constantly buying puts. Gold, on the other hand, provides positive returns in good times and bad.