Scott Burns is investing in Gold

[Browser]

Maybe not the worst idea these days. Merry Cliffmas!

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

http://assetbuilder.com/scott_burns/bytes_btus_and_bullion

[Call_Me_Op]

Maybe not the worst idea these days. Merry Cliffmas!

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

http://assetbuilder.com/scott_burns/bytes_btus_and_bullion

I guess I will substitute a low return stable investment with an investment having a low expected-return and extremely high volatility - including the possibility of catastrophic loss. I am half yanking your chain - but the other half is quite serious.

[ascenzm]

Maybe not the worst idea these days. Merry Cliffmas!

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

http://assetbuilder.com/scott_burns/bytes_btus_and_bullion

Scott's a bit late to the party.

And if he's going to invest in gold IMO he should own physical gold, not electronic shares of an ETF.

Mike

[wjo]

OK, let's note that Scott says this investment is with his fun money portfolio that keeps him from messing with his couch potato like index fund portfolio. That said, I find his investments in bits, bytes, and bullion a little strange, but hey, whatever keeps him happy and avoids playing with the index funds....

[Levett]

Burns (and his co-author, Larry Kotlikoff) has been recommending gold (and precious metals funds) since the publication of The Coming Generational Storm in 2004.

See chapter 8, "Securing your Future."

Lev

[Joe S.]

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. [So I'll buy gold]
When the world starts to see sane governments run by prudent politicians I’ll sell the gold.

When real interest rates drop, people like Scott Burns buy gold and the price of gold rises. If real interest rates rise, people like Scott Burns sell gold, and the price of gold drops.

The problem as I see it, is that once we eventually get out of the recession, real interest rates may rise. If so, gold will drop. Gold dropped precipitously in 1981.

However, things are unpredictable. Maybe real interest rates will drop even lower.

[Y]

We have people with different levels of intelligence and knowledge but I have yet to find one that can predict the future consistently -- and especially the markets.

[FRANK2009]

I own no gold except that which may be in my index funds/ETF's. What's wrong with say a 5% stake just for diversification purposes?

[Johm221122]

I own no gold except that which may be in my index funds/ETF's. What's wrong with say a 5% stake just for diversification purposes?

How much diversification will 5% get you?That being said I have 5% in Reits and small cap value but I hoping stocks outperform
john

[nisiprius]

So, when you crank gold into ESPlanner, what does it have to say?

(Scott Burns used to recommend ESPlanner heavily, a tool for implementing the "consumption smoothing" approach to retirement planning, and is the co-author of Spend 'Til the End, a book about "consumption smoothing.")

[Joe S.]

I own no gold except that which may be in my index funds/ETF's. What's wrong with say a 5% stake just for diversification purposes?

5% is not going to kill you. How the purpose of diversification is to lower your risk or elevate your expected return. Mathematically, gold does not appear to achieve either goal. It is therefore not useful diversification.

[fishnskiguy]

Maybe not the worst idea these days. Merry Cliffmas!

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

http://assetbuilder.com/scott_burns/bytes_btus_and_bullion

Scott's a bit late to the party.

And if he's going to invest in gold IMO he should own physical gold, not electronic shares of an ETF.

Mike

He has been holding gold since 2004.

He does not "invest" in gold, he "holds" gold.

Chris

[baw703916]

When the world starts to see sane governments run by prudent politicians I’ll sell the gold.

But before other market participants have incorporated this information into the market price? Yeah, sure.

[bdpb]

Burns (and his co-author, Larry Kotlikoff) has been recommending gold (and precious metals funds) since the publication of The Coming Generational Storm in 2004.

See chapter 8, "Securing your Future."

He also predicted the US would be wracked with inflation.

He also says you should be overweight China stocks.

[bdpb]

Maybe not the worst idea these days. Merry Cliffmas!

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

http://assetbuilder.com/scott_burns/bytes_btus_and_bullion

The title doesn't appear to be consistent with the quote.

Just what is the difference between "holding" and "investing in" gold?
Does he ever sell his holdings? Does he buy new holdings?

Burns was right on target with his "Couch potato" portfolios, but seems to have gone off course late in life.

[Browser]

I've held gold since 2002, primarily because I was losing faith in the government back then. Every time I think it might be time to sell, guys like Scott Burns remind me that the reasons I had for buying it in the first place haven't changed, or rather changed for the worse. Guess I'll keep on holdin', I guess forever. That's how long it will be before things are any better it looks to me. Merry Cliff-mas everyone! Maybe someone will put a little bullion under your tree this year.

[stratton]

So, when you crank gold into ESPlanner, what does it have to say?

(Scott Burns used to recommend ESPlanner heavily, a tool for implementing the "consumption smoothing" approach to retirement planning, and is the co-author of Spend 'Til the End, a book about "consumption smoothing.")

ROTFL

Paul

[moneywise3]

"Stock picking is a great way to renew humility." LOL good one.
Merry Christmas to all.

[pascalwager]

With interest rates on safe investments expected to be near zero for years, investing in most fixed income securities is silly. No one should volunteer for a certain loss of purchasing power. Owning gold may not be better, but it is a good response to a world of compulsory low yields and competitive devaluation of currencies.

When the world starts to see sane governments run by prudent politicians I’ll sell the gold. Until then I’ll keep buying, because I trust gold more than I trust government paper or government policy. The easiest way to hold gold (note I said “hold”, not “invest in”) is to buy shares of a major gold exchange traded fund such as SPDR Gold Shares, ticker: GLD.

I just checked his DFA advisor portfolios, the one's he manages for clients, and they all have fixed income--as much as 67%. I think he's just frustrated with the low fixed income yields and his inability to provide a totally non-silly portfolio for his clients.

[EmergDoc]

I'm frustrated with low yields too. I'm not sure this is the solution.

[mephistophles]

I've held gold since 2002, primarily because I was losing faith in the government back then. Every time I think it might be time to sell, guys like Scott Burns remind me that the reasons I had for buying it in the first place haven't changed, or rather changed for the worse. Guess I'll keep on holdin', I guess forever. That's how long it will be before things are any better it looks to me. Merry Cliff-mas everyone! Maybe someone will put a little bullion under your tree this year.

I bought gold about that time for the same reasons you did. Seemed a reasonable way to diversify beyond paper assets. I have never considered selling and paying taxes on over a 400% increase in value. The simple reason is that I have less faith in government and our economic system now than I did then. I plan never to sell and to teach my heirs to never sell either, unless something really catastrophic happens to our paper currency. I really don't expect the bottom to fall out, but should something of that nature happen, those bits of gold in that bank vault might just provide some options for them to maintain some reasonable standard of living.

[HomerJ]

Mathematically, gold does not appear to achieve either goal. It is therefore not useful diversification.

I don't know if gold will be useful diversification in the future, but it definitely was useful diversification throughout the last decade... Not sure what math you're using, but when stocks crashed 4 years ago, gold was going up.

And the 20 years from 1980-2000, while stocks and bonds were going up, gold was going down... Not sure if it's a good long-term investment or not, but it certainly doesn't seem to correlate to other markets...

I was certainly glad I had 5% of my money in it over the last 6 years or so... I rebalanced quite a few times, selling gold that was rising, and buying stocks that were falling.

[HonoluluGator]

If he really wants to hold gold, shouldn't he be buying the real thing and not an ETF? When the Zombie apocalypse hits, the ETF gold is going to do him no good.

I'm pretty new to all of this, and I say that only partly tongue in cheek. My wife is alive today solely because her family had enough gold and jewelry to pay bribes to live through the Killing Fields of Cambodia. Gold is a great thing to have when the poop really hits the fan. Seems to me if you are buying ETF gold you are just speculating.

[z3r0c00l]

So during the last market crash, a 5% gold holding gave your total portfolio a 1% bump, nicely canceling out the 40% drop in your equity holdings?

[Joe S.]

Mathematically, gold does not appear to achieve either goal. It is therefore not useful diversification.

I don't know if gold will be useful diversification in the future, but it definitely was useful diversification throughout the last decade... Not sure what math you're using, but when stocks crashed 4 years ago, gold was going up.

And the 20 years from 1980-2000, while stocks and bonds were going up, gold was going down... Not sure if it's a good long-term investment or not, but it certainly doesn't seem to correlate to other markets.

Gold does not have a significant correlation to the other markets. However gold has so much volatility of its own, adding gold to a bond portfolio increases the volatility of the portfolio. Adding gold to a stock portfolio does decrease the volatility, but bonds do a better job of decreasing the volatility.

Gold proponents like to look at the period of 1971-2012, and in that period, gold did add value to portfolio, as gold had a positive return during the period. However when looks at longer periods of time, it is clear that the return of gold was abberantly high during this period. I have never seen a study that shows that adding gold to a portfolio works unless you pick a period where gold did abberantly well. By this I mean a well done study that has been published in the literature.

I would suggest that if you pick anything that has done abberantly well during the last 41 years, you can probably do a study showing that adding it to a portfolio works over the last 41 years. I predict that in the next 41 years some other commodity, say zinc, will do abberantly well and 41 years from now someone will be pushing zinc (or something similar) as the new portfolio diversifier.

[HomerJ]

Gold proponents like to look at the period of 1971-2012, and in that period, gold did add value to portfolio, as gold had a positive return during the period. However when looks at longer periods of time, it is clear that the return of gold was abberantly high during this period.

The price of gold was controlled by the government from the 1930s through 1971, so we don't really have any other data except 1971-today. And gold did terrible for long periods of time during the last 41 years. We don't like it because it's done so great for the last 41 years.....

When stocks were doing terrible from 1971-1980, gold soared... And when stocks did well from 1980-2000, gold did poorly... and when stocks did poorly from 2000-2012, gold did well again.

It may not follow this pattern in the future, but you can't say gold DOES NOT provide useful diversification... It MAY NOT in the future, but it's been an excellent diversifier in the past. In the entire modern history of uncontrolled gold prices, it's been great for diversification. You can't just ignore that.

[pascalwager]

I'm frustrated with low yields too. I'm not sure this is the solution.

My point is he's not serious, or he wouldn't still be managing investor portfolios with 67% fixed income. He's just writing out of frustration.

[Joe S.]

When stocks were doing terrible from 1971-1980, gold soared... And when stocks did well from 1980-2000, gold did poorly... and when stocks did poorly from 2000-2012, gold did well again.

I am aware if you use a 4 data point analysis, gold does appear to have a negative correlation with stocks. I have said so on previous posts on this forum. However statisticians will point out that 4 data points is not enough data points to evaluate a correlation. However we do have 41 years or 41 data points we can analyze. We can also look on a monthly basis or even a daily basis and see if gold tend to move in the opposite direction as stocks. Such in depth research show minimal or no correlation between stocks and gold.
Since in depth analysis does not show gold having a negative correlation to stocks, I consider the decade analysis to not be statistically significant and not useful.
Here's another thread discussing the correlation between gold and stocks. Note that I bring up your very argument in the thread.
viewtopic.php?f=10&t=83067

[HomerJ]

When stocks were doing terrible from 1971-1980, gold soared... And when stocks did well from 1980-2000, gold did poorly... and when stocks did poorly from 2000-2012, gold did well again.

I am aware if you use a 4 data point analysis, gold does appear to have a negative correlation with stocks. I have said so on previous posts on this forum. However statisticians will point out that 4 data points is not enough data points to evaluate a correlation. However we do have 41 years or 41 data points we can analyze. We can also look on a monthly basis or even a daily basis and see if gold tend to move in the opposite direction as stocks. Such in depth research show minimal or no correlation between stocks and gold.
Since in depth analysis does not show gold having a negative correlation to stocks, I consider the decade analysis to not be statistically significant and not useful.
Here's another thread discussing the correlation between gold and stocks. Note that I bring up your very argument in the thread.
viewtopic.php?f=10&t=83067

Maybe you should reread your thread. Quite a few people have responses to your claims that gold is not a useful diversifier...

Like this one...

People often say that gold responds to inflation. It's a very general statement — perhaps somewhat incorrect at its core. The reality is that gold responds to the fear of inflation and/or the fear that markets will collapse. When people are fearful, they buy gold. When the fear finally passes — whether inflation appears or not — people often sell their gold for other stable currencies. That's just what happens, all over the world. That's why you won't find a direct correlation between gold and any one thing. It's a crisis hedge that's bought, sold, and traded by people in every country on the planet... Inflation just happens to be the worst thing that can happen to a currency — which is why it responds so strongly to the fear of it. It's not about how gold relates to any one stock exchange or inflation rate. Gold is a global asset, desired and shunned by billions of people across the gold.

Gold is a "Crisis Hedge" not an Inflation hedge

Right now, people are fearful of fiat currencies — even though there is not a lot of inflation to be found.

I have no problem with people saying Gold "may not" help a portfolio in the future... The last 41 years may have been an anomoly... But I do have a problem with people saying gold "will not" help a portfolio in the future, because if it's happened before, that's certainly proof it could happen again.

If a hurricane has never hit Iowa in the last 1000 years, you can probably get away with saying it will not happen. If a absolute freak hurricane made it inland enough to hit Iowa 2 years ago, even though it's very unlikely to happen again, you're going to get weird stares when you state, "Hurricanes don't hit Iowa" when it JUST happened.

[Joe S.]

Maybe you should reread your thread. Quite a few people have responses to your claims that gold is not a useful diversifier...

Like this one...

People often say that gold responds to inflation....

I have no problem with people saying Gold "may not" help a portfolio in the future... The last 41 years may have been an anomoly... But I do have a problem with people saying gold "will not" help a portfolio in the future, because if it's happened before, that's certainly proof it could happen again

There are many interesting arguments in the thread both pro and con, and I think you should read them all. However I am most interested in those arguments that are backed by data. The quote you give is not backed up by data.

I don't feel the data shows that gold tends to go up when stocks go down. If you look at the yearly data supplied by Crawling Road, a pro gold site, it shows there are plenty of years where gold and stocks move together. For instance in 1978, 1979 and 1980 both went up. Then in 1981, both went down. Then in 1982 both went up.
http://crawlingroad.com/blog/2008/12/22 ... l-returns/

I do not know what the future will hold, so gold may go up the next time the stock market crashes. However data does not back up people's claims that it has a negative correlation with stocks.

[HomerJ]

However data does not back up people's claims that it has a negative correlation with stocks.

I will agree with that. but neither does the data show that gold has a positive correlation with stocks. They move in different directions for different reasons. And since gold HAS been useful for diversification recently, it's difficult to accept you saying matter of factly that gold is NOT useful for diversification, when we just went through a period where it was.

[rj49]

I'm frustrated with low yields too. I'm not sure this is the solution.

My point is he's not serious, or he wouldn't still be managing investor portfolios with 67% fixed income. He's just writing out of frustration.

Scott Burns used to be one of the best financial journalists, writing about simple index portfolios and offered good, practical financial advice to his newspaper readers. He also advocated a lot of LBYM options, including living out of a trailer as a snowbird (which he tried himself for a while), or moving to a lower-cost country. He also was the originator of the Couch Potato portfolio, half total market, half total bond, which is about as Bogleish as you can get. Then he started fiddling with his simple portfolio, adding whatever was the hot sector or asset class of the moment, so now there are about 10 variations of his Couch Potato portfolio. Then he decided to go for the money and now sells DFA funds, which is understandable, since you can't write a lot of articles or make a lot of money telling people to just split their money between TSM and TBM. And then of course he hawked ESPPlanner with Larry Kotlikoff, with the appealing but unworkable assumption that a computer program could design the rest of your financial life and account for all the unknown variables and surprises that life and the economy and the law throw your way. Still, he used to be one of the rare financial journalists who espoused a simple low-cost indexing Boglehead philosophy, along with Jason Zweig and a few others.

[Joe S.]

However data does not back up people's claims that it has a negative correlation with stocks.

I will agree with that. but neither does the data show that gold has a positive correlation with stocks. They move in different directions for different reasons. And since gold HAS been useful for diversification recently, it's difficult to accept you saying matter of factly that gold is NOT useful for diversification, when we just went through a period where it was.

I allege gold has been useful for diversification recently because it has had an aberrantly high return recently. As far as volatility is concerned, Lbill alleges that a 75% bond 25% stock portfolio appears to have a lower volatility than a 25% gold 50% bond 25% stock portfolio:
viewtopic.php?f=10&t=80572&p=1153004#p1153004
I don't think that adding gold reduced the volatility of a portfolio of stocks and bonds during the period 1971-2010, as bonds did a better job of reducing volatility than gold.

Addendum: if you read the thread. Lbill's results differ somewhat depending on whether you use nominal or real values. The thread is a complex one.

[hazlitt777]

I'm frustrated with low yields too. I'm not sure this is the solution.

My point is he's not serious, or he wouldn't still be managing investor portfolios with 67% fixed income. He's just writing out of frustration.

Scott Burns used to be one of the best financial journalists, writing about simple index portfolios and offered good, practical financial advice to his newspaper readers. He also advocated a lot of LBYM options, including living out of a trailer as a snowbird (which he tried himself for a while), or moving to a lower-cost country. He also was the originator of the Couch Potato portfolio, half total market, half total bond, which is about as Bogleish as you can get. Then he started fiddling with his simple portfolio, adding whatever was the hot sector or asset class of the moment, so now there are about 10 variations of his Couch Potato portfolio. Then he decided to go for the money and now sells DFA funds, which is understandable, since you can't write a lot of articles or make a lot of money telling people to just split their money between TSM and TBM. And then of course he hawked ESPPlanner with Larry Kotlikoff, with the appealing but unworkable assumption that a computer program could design the rest of your financial life and account for all the unknown variables and surprises that life and the economy and the law throw your way. Still, he used to be one of the rare financial journalists who espoused a simple low-cost indexing Boglehead philosophy, along with Jason Zweig and a few others.

I haven't followed Scott Burns very closely but I don't like his suggestion that we have to time when to buy gold and when to sell. (Or am I misreading him?) I just think it should be a part of everybodies portfolio. If 5% is all you can stand fine, but that would be a minimum in my opinion. If you want 25% as in the permanent portfolio, that won't hurt either.

I do believe that gold will continue to draw new investors as this low interest rate environment goes on and on and on. I am concerned people however might try to time when to get in and out. That doesn't work in the long run.

[z3r0c00l]

25% gold can hurt you significantly...

[Atilla]

I can't get myself to hold gold even though I'd like to. Could never afford enough of the stuff to make a difference and not forgo investing more sensibly elsewhere.

I have been stocking top shelf liquor though. I'll get two bottles instead of one and squirrel the extra away down in the cellar with the wife's wine.

I figure that will hold its value and will definitely come in handy if the chit hits the fan. Or even if it doesn't.

It will have street value and be easy to sell if necessary. Or consume while sniping zombies.

[chicagobear]

I think he's about a thousand dollars too late...

[steve r]

So during the last market crash, a 5% gold holding gave your total portfolio a 1% bump, nicely canceling out the 40% drop in your equity holdings?

True. But this would seem to imply more than 5% is needed for adequate diversification.

25% gold can hurt you significantly...

Also true.

That said, it is hard to imagine gold doing poorly and other assets not doing well (most notably long term treasuries or stocks). Conversely, it is hard to see treasuries doing poorly and gold not doing well. This is of course the point of asset diversification in all portfolios (most notably the PP). You will undoubtedly pick some winners and pick some losers - but overall do fine. The focus should be on the returns of the overall portfolio, not the returns of each asset in the portfolio.

Backtesting has its limits - but it clearly shows a chunk of gold in a diversified portfolio has hisorically reduced risk (and at times increased returns).

1972 to 2011(Simba data)

50/50 TSM / TBM CAGR - Sortino .87 (returned 9.12)
40/40/20 TSM/TBM/GOLD - Sortino 1.43 (returned 9.76)

The Sharp ratio is also notably better. Similar results of risk reduction are found going back fewer years - though returns can be higher or lower with gold depending on what period you pick (gold price fell sharply 1981-1984).

Some are concerned that the correlations of gold with other assets may increase overtime due to the ease in which people can now invest in gold. Indeed we can measure the correlation of gold and other assets and they do indeed appear to be increasing (very slightly) thus decreasing the amount of risk reduction. William Berstein recently wrote a booklet where he noted this phenomenon. I am not sure if this is because gold is easier to own. Long term treasuries are also easier to own, and their correlations with equities have decreased in recent years. None-the-less, this is something to pay attention to.

[Joe S.]

Backtesting has its limits - but it clearly shows a chunk of gold in a diversified portfolio has hisorically reduced risk (and at times increased returns).

1972 to 2011(Simba data)

50/50 TSM / TBM CAGR - Sortino .87 (returned 9.12)
40/40/20 TSM/TBM/GOLD - Sortino 1.43 (returned 9.76)

The Sharp ratio is also notably better. Similar results of risk reduction are found going back fewer years - though returns can be higher or lower with gold depending on what period you pick (gold price fell sharply 1981-1984).

I would first say I would like to see what program you are using and how I can access it myself, as I would like to see some of this analysis for myself.

Secondly, I would like to compare portfolios where gold is replaced by bonds only. Specifically I would like to compare
25/75 TSM/TBM
vs
25/50/25 TSM/TBM/GOLD
or maybe
25/25/25/25 TSM/Long Bonds/Cash/GOLD (~The permanent portfolio)

I may also point out that I allege that the period 1971-2011 was a period where the return of gold was aberrantly high. I suspect this would have caused the Sortino ratio to be falsely lower, as well as the Sharpe ratio.

I would also think that evaluating a time period where the return of gold was not "aberrantly high" would be useful. Say the period 1981-2011.

[Joe S.]

Conversely, it is hard to see treasuries doing poorly and gold not doing well.

I have a different view on this. Treasuries do well when nominal interest rates drop. Gold does well when real interest rates drop. When people see that their bank accounts and bonds are not keeping up with inflation, they tend to buy gold, and push the price up.
Crudely put:
1970's; rising nominal rates, bonds do badly. dropping real interest rates, gold does well
1980's and 90's; dropping nominal rates, bonds do well. rising real interest rates, gold does badly
2000-present; dropping nominal rates, bonds do well. dropping real interest rates, gold does well.

I suspect that if in the future we have rising nominal rates and rising real rates, gold and bonds will drop together. They did well together in 2000-2012, why can't they drop together?

Gold's relationship to real interest rates is well documented, and extends way back into the days when we were on the gold standard.
https://www.google.com/#hl=en&tbo=d&scl ... 41&bih=673

[steve r]

I suspect that if in the future we have rising nominal rates and rising real rates, gold and bonds will drop together. They did well together in 2000-2012, why can't they drop together?

Thanks Joe

They could do poorly together, but stocks would need to do well if real rates rise. On a smaller scale, this happened in the 1990s. In my view, gold and TIPS rise has more to do with inflation expectations ... expectations that are not shared by the buyers of treasuries. Stange days indeed.

The data link - found on Bogleheads (search Simba)
http://www.bogleheads.org/wiki/Simba's_backtesting_spreadsheets

[steve r]

[quote="Joe S]
I would like to compare portfolios where gold is replaced by bonds only. Specifically I would like to compare
25/75 TSM/TBM
vs
25/50/25 TSM/TBM/GOLD
or maybe
25/25/25/25 TSM/Long Bonds/Cash/GOLD (~The permanent portfolio)

I may also point out that I allege that the period 1971-2011 was a period where the return of gold was aberrantly high. I suspect this would have caused the Sortino ratio to be falsely lower, as well as the Sharpe ratio.

I would also think that evaluating a time period where the return of gold was not "aberrantly high" would be useful. Say the period 1981-2011.[/quote][/quote]

I agree that going back to 72 (the year after we left the gold standard) may be problematic. While I view markets as effecient, I can see why a may take a few years for the price of gold to sort it self out. Going back to 81 (in my view) is also problematic as it is the start of a great bull market in both stocks and bonds.

The speadsheet data on the "compare portfolio" tab/worksheet lets you change dates. I like to test back to mid 1970s OR mid 1980s. Picking 1980 or 1981 is the only start date that you might like the risk/returns of your 25 TSM /75 TBM portfolio more. A real judement call.

[nisiprius]

Gold does well when real interest rates drop.

Not to pick on you, but I'm finding more and more that when I check out one of these facile generalizations... they never seem to be reliable. Nothing behaves the way it's theoretically "supposed" to. For example, assuming that this web page is accurate, it appears as if real interest rates dropped from 9% to 4.5% from 1980 to 1992.



So, gold should have "done well" from 1980 to 1992.



It didn't.

The implications for investing strategy are disheartening. It means that in effect you need to make a double prediction.

1) We must correctly predict that the real interest rate will drop.
2) We must correctly predict that if the real interest rate drops, gold will do well.

If either prediction fails, then the strategy fails.

[Clive]

...or maybe
25/25/25/25 TSM/Long Bonds/Cash/GOLD (~The permanent portfolio)

I may also point out that I allege that the period 1971-2011 was a period where the return of gold was aberrantly high.

Calculate the yearly average of each of the four Permanent Portfolio assets since 1972, and then calculate the average of those four averages .... and you'll have a result that is close to what the Permanent Portfolio averaged over those years. i.e. the Permanent Portfolio provides the weighted average reward of the four assets.

Since 1972 both gold and Long Bonds have provided above average returns. Stocks and cash were more in alignment with longer term averages. The choice of rebalance bands (40%) was also favourable. Potentially that might reverse going forward, with long bonds and gold perhaps providing below average returns (mean reversion), and/or the choice of rebalance bands might work more unfavourably (after rebalancing if the prior trend subsequently continues it would have been better to have deferred rebalancing, if the trend subsequently reverses then it was better to have rebalanced).

Assuming longer term averages of stocks 5% real, long bonds 2% real, cash and gold 0% real, a fair expectancy for the Permanent Portfolio is 1.75% real. Given a 5% real reward from the Permanent Portfolio since 1972, a mean reversion could involve enduring a phase of -3.25% real. Add 2% to 4% withdrawals for a retired investor on top of that and a decade into retirement might see less than 50% of the original investment amount remaining - and perhaps having to draw a 8% yearly amount to maintain prior income/spending power.

As ever, when an asset or combination of assets has performed well there are those investors who will be attracted to buy that asset/portfolio in expectation that they'll achieve similar historic rewards going forward. Sooner or later they'll be disappointed and typically will sell at a loss to hunt out the next in-vogue.

It would perhaps be easier for you to simply evaluate the weighted average expectancy of each asset allocation. Three fund 33% domestic stocks, 33% foreign stocks, 34% bonds for instance might be assessed as the average of 5, 5, 2 (=4%) real reward expectancy.

[Clive]

...it appears as if real interest rates dropped from 9% to 4.5% from 1980 to 1992.

So, gold should have "done well" from 1980 to 1992.

It didn't.

Why would you have expected gold to do well when real yields remained positive? Generally gold is only sought when real yields turn negative. If you can't earn a positive real reward from treasury's and in effect have to pay to lend your money, its generally considered better to be invested in a 0% real reward asset. When real yields turn positive again, gold will be sold in order to move funds into positive real reward assets.

[Clive]

Picking 1980 or 1981 is the only start date that you might like the risk/returns of your 25 TSM /75 TBM portfolio more.

The Permanent Portfolio 1981 to 2001 significantly lagged 2 year Treasury and/or 5 year treasury - primarily due to gold declining at a -7.2% annualised real rate over those years after its strong rise in the 1970's.

[steve r]

Picking 1980 or 1981 is the only start date that you might like the risk/returns of your 25 TSM /75 TBM portfolio more.

The Permanent Portfolio 1981 to 2001 significantly lagged 2 year Treasury and/or 5 year treasury - primarily due to gold declining at a -7.2% annualised real rate over those years after its strong rise in the 1970's.

Absolutely ... the question with all backtesting is what dates to pick and exclude. The start of a bull market in stocks and bonds seems arbitrary. It also happens that this coincides with a gold bear market.

My preference in backtesting is to use as much data (years) as possible. Clearly back testing one year is "very bad" and testing for twenty (above) or forty is considerably better - but better than "very bad" does not always mean "good."

Forty is all the data we have because of the real unique situtation of comming off the gold standard which others point out only happens once. So, that leaves one with economic theorey - which I think many will agree is not always solid.

[Joe S.]

...or maybe
25/25/25/25 TSM/Long Bonds/Cash/GOLD (~The permanent portfolio)

I may also point out that I allege that the period 1971-2011 was a period where the return of gold was aberrantly high.

Calculate the yearly average of each of the four Permanent Portfolio assets since 1972, and then calculate the average of those four averages .....

I was actually interested in calculating things like the volatility, Sharpe ratio etc, not just the return...

[Joe S.]

Gold does well when real interest rates drop.

Not to pick on you, but I'm finding more and more that when I check out one of these facile generalizations...

You are right the statement should be changed to:

Gold tends to do well when real interest rates drop.

Many people allege that since we went off the gold standard, gold is running on a new system of rules and has a positive expected real return. This may be true, but people have not explained the economic theories behind it. I suspect that that much of gold's behavior is following the old rules of being affected by real interest rates. This is admittedly an oversimplification.

As far as the graph you show, I am unclear to how they are calculating real interest rates. So I don't know if the chart is accurate.

[nisiprius]

As far as the graph you show, I am unclear to how they are calculating real interest rates. So I don't know if the chart is accurate.

I have all the necessary data in Excel somewhere and I can do a chart when I get a Round Tuit, just pointing out that I just posted the first relevant thing I Googled and it's not an obviously reliable source. Interest rates are readily found in the vicinity of http://www.treasury.gov/resource-center ... ation.aspx and the CPI is readily found at http://www.bls.gov .

With regard to "tends," to me that's just qualifying your wording and making the statement unfalsifiable. To repeat my point. Whenever I look at what has actually happened in the past, I usually find that things didn't do what they are said to tend to do. That's not singling out gold advocates, others are just as bad. It's really important to try to verify these things yourself. Usually, you can't. But you can't disprove an alleged "tendency."

With regard to theory, I guess I don't see why the value of an asset with zero real return would be expected to respond to all to changes in the real interest rate. The present value of a future payment of zero is zero, regardless of how far in the future the payment is made or what the interest rate is; so the present value of a stream of future payments of zero is also zero, regardless of the interest rate.