Information you should have before buying gold

[larryswedroe]

http://www.cbsnews.com/8301-505123_162-57563828/ignore-the-buy-gold-now-crowd/

The post provides you with what I believe is important information to help you decide if gold should hold a place in your portfolio. The media unfortunately tends to focus on the inflation risks and I hardly ever hear them present the other side. And you'll never hear the gold fanatics discuss these issues
hope you find it helpful

Larry

[wesleymouch]

Larry
It is my understanding that when there are negative real interest rates that gold has a positive return. When real interest rates are greater than 2% then gold does poorly. You do have to admit that gold does serve as portfolio insurance in the case of currency debasement.

[athrone]

Information you should have before buying bonds

60/40 Stocks/Bonds 1972-2011
Real CAGR: +4.79%
Real Worst Year: -26.03%
Real Worst Performance: -44% (1973-1974)

60/40 Stocks/Gold 1972-2011
Real CAGR: +6.41%
Real Worst Year: -24.40%
Real Worst Performance: -24.40% (1981)

[larryswedroe]

wesley
Yes that is the correct way to look at it, as I said in my post, gold doesn't correlate with inflation but monetary policy. A sign of easy monetary policy is real rates are low (and vice versa).
Note low real rated don't necessarily predict inflation. What the Fed has done is two increase the MONETARY BASE (blowing up its balance sheet via QE programs), not the money supply. The money multiplier dropped sharply and thus if Fed did not increase monetary base we might have had that Great Depression. The question is will the FED be able to unwind their balance sheet in timely manner when money multiplier rises again. If they do, we'll likely see real rates rising and gold could easily collapse. But if they don't then inflation would likely take off and so would gold. My crystal ball is cloudy

For ATHRONE--sure look at returns at the peak price of gold or any asset and you'll get the type answer you got. Wonder what you would have said in 2002? Also gold was held at artificially low levels as it was "fixed" prior to abandoning the gold standard. So you started from a "repressed" price. Again, my crystal ball is cloudy. Just providing information, information I find that the gold enthusiasts ignore because it doesn't agree with their "religious" belief. Example of confirmation bias, and rejecting all information to the contrary

Best wishes
Larry

[EDN]

I wanted to look to see if using Gold as a substitute for 5YR T-Notes worked as a more effective return enhancer or risk reducer.

1975-2011 (first year it was legal to own Gold)
12% S&P 500, 18% US Large Value Index, 30% Mid/Small Value, 40% 5YR T-Notes
RET = +12.9%
SD = 11.7

12% S&P 500, 18% US Large Value Index, 30% Mid/Small Value, 40% GOLD
RET = +12.7%
SD = 14.9

So the portfolio with Gold instead of bonds earned 0.2% less with over 3.0 higher volatility. As a matter of fact, one could have gone up to 80% in stocks (20% 5YR T-Notes) and not eclipsed the risk of the 60/40 with Gold (but earned 1.5% higher returns).

Of course, some would argue Gold is a better hedge against inflation (it's not, too volatile). But those same investors worried about inflation should just use TIPS along with 5YR T-Notes. And even without TIPS, a risk-adjusted stock/bond allocation has exceeded the stock/gold mix even during a run of high inflation:

1975-1983 (CPI = 7.7%)
60/40 w/Gold
RET = +21.2%
SD = 19.8

80/20 w/5YR T-Notes
RET = +22.9%
SD = 13.1

Eric

[larryswedroe]

FWIW
Gold does provide a hedge against some types of risks, mostly of easy monetary policy, but also some geopolitical risks. But it cannot be a hedge against inflation for any reasonable horizon (yes it is for VERY LONG HORIZONS) if it can lose 85% of its real value over a 23 year period.
Larry

[athrone]

So the portfolio with Gold instead of bonds earned 0.2% less with over 3.0 higher volatility.

There's something missing in your Standard Deviation analysis: was the volatility sourced from the downside or the upside?

[athrone]

FWIW
Gold does provide a hedge against some types of risks, mostly of easy monetary policy, but also some geopolitical risks. But it cannot be a hedge against inflation for any reasonable horizon (yes it is for VERY LONG HORIZONS) if it can lose 85% of its real value over a 23 year period.
Larry

Larry,

How long do you think it would take for the dollar/tbills/bonds/treasuries to lose 85% of their real value, if interest rates were unable to rise adequately with inflation?

[athrone]

For ATHRONE--sure look at returns at the peak price of gold or any asset and you'll get the type answer you got. Wonder what you would have said in 2002? Also gold was held at artificially low levels as it was "fixed" prior to abandoning the gold standard.

Larry,

Which period would you like to talk about?

Real Return, 60/40 Stocks/Bonds vs. 60/40 Stocks/Gold
1972-1980: 5.88% vs. 6.89%
1981-1990: 8.32% vs. 3.30%
1991-2000: 9.64% vs. 5.10%
2001-2011: 1.92% vs. 5.46%
Average: 4.79% vs. 6.41%

It looks to me that Stocks/Gold has delivered pretty consistent returns at 3.30-6.89% Real vs. 1.92-9.64% Real with Bonds.

[larryswedroe]

Athrone
First, I would not look at any particular period per se. But I certainly would not look at the dates you chose for any indication of future because we start at artificially low price of gold and we end up with price way above the longer term average real price and we have gold WAY above it's marginal cost of production. That is an important issue IMO.

Second, what is important IMO is to understand the issues laid out in the piece I wrote and then one can make an informed and intelligent decision about whether to buy gold or not, including asking yourself if you would stick with your gold allocation if the Fed tightens and gold collapses and stays down for 22 years. If you're not prepared to stay the course and rebalance than one should not buy gold because it's real benefit is through rebalancing. There is no logical real return to gold. And in fact for thousands of years there has been no real return. On the other hand short term bank CDs have provided real returns. And should continue to do so.

I have no objection to owning gold. My objection is to the reasons often cited for buying gold which don't hold up to scrutiny and the confirmation bias exhibited by those "religious zealots". What is amusing is I don't recall a single conversation with investors who were asking about buying gold in 2002 or before that. After the big rally everyone wants to buy

Best wishes
Larry

[Clive]

http://www.atimes.com/atimes/Global_Eco ... 7Dj04.html

We observe almost no relationship between gold and breakeven inflation expectations embodied in the 10-year yield, but an extremely close relationship between gold and the inflation-protected Treasury yield.



The r-squared of regression between gold and TIPS yields during the past five years is a remarkable 87%. Between gold and breakeven inflation, it is zero

(As a quick validity check, I calculated a r-squared of 74% using 20 year TIP yields compared to gold for 2004 to 2012 yearly values).

If stocks are considered as an undated variable coupon conventional bond, perhaps gold might be considered as a undated zero coupon TIP, and holding a barbell of both will middle road average.

But it [gold] cannot be a hedge against inflation for any reasonable horizon (yes it is for VERY LONG HORIZONS) if it can lose 85% of its real value over a 23 year period.

UK 20 year Gilts (Treasury) have lost that+more historically (time and amount) on a net real basis (after basic rate taxes and inflation).

In the UK our Gilt capital gains are tax exempt (broadly a zero sum motion that the tax office prefers not to waste time/effort managing taxation on), but income is taxed (unless held in a tax efficient account). In Canada I believe both the inflationary uplift (capital gain) and income from Real Return Bonds are both taxed. In the US ? (you tell me ). Under punitive income taxation policy it might at times be more viable to hold a stock/gold barbell than it would to hold a long term conventional/long term TIPS barbell.

Whether buying a long dated inflation bond (gold) in isolation is appropriate at the present time ??? Hedged with an equal sized purchase of stocks at the same time and that's perhaps a more neutral holding (combination).

[ofcmetz]

Nice article Larry. I'm so sick of those radio ads claiming that gold may rise to $20,000 an ounce. I really hope it doesn't drop off like it did in the past. My dad and many other people I know have a significant portion of their net worth invested in it. I've never been interested in owning it myself except in the form of jewelry or the random cool looking coin. I've read all the threads here and seen all the ads. I keep thinking bubble. I hope I'm wrong.

[ofcmetz]

What is amusing is I don't recall a single conversation with investors who were asking about buying gold in 2002 or before that. After the big rally everyone wants to buy

Best wishes
Larry

Quote placed in bold for emphasis. ^This is what I'm afraid of.

[larryswedroe]

ofmetz
Actually you should hope you are right because that would mean that the economy was recovering well, the Fed took action to reverse policy of QE and real interest rates rose and that is why gold collapsed. The news was good for all but gold investors after Fed tightened in 1980.
The worst thing would be if gold soared because inflation soared because Fed failed to do its job and Congress never addressed the spending problem.
Larry

[billjohnson]

What is amusing is I don't recall a single conversation with investors who were asking about buying gold in 2002 or before that. After the big rally, everyone wants to buy.

What asset class conversations are you not having with investors now?

[larryswedroe]

Bill
Off the top of my head, here are the top five I'm currently having to address
A) we need to invest in fast growing economies like China
b) we need to buy gold
c) we need to stay short with bonds
d) we need to avoid Europe
e) structured notes with downside protection
Best wishes
Larry

[matt.danley]

Bill
Off the top of my head, here are the top five I'm currently having to address
A) we need to invest in fast growing economies like China
b) we need to buy gold
c) we need to stay short with bonds
d) we need to avoid Europe
e) structured notes with downside protection
Best wishes
Larry

So basically, everyone should:
A. Dump emerging markets
B. Sell Gold
C. Buy Long Bonds
D. Buy Europe
E. Buy Goldman Sachs

Edit: Yes, I am mildly joking...

[athrone]

Larry,

What markets would you consider yourself an expert in? Would you count Gold among them?

[EDN]

So the portfolio with Gold instead of bonds earned 0.2% less with over 3.0 higher volatility.

There's something missing in your Standard Deviation analysis: was the volatility sourced from the downside or the upside?

athrone,

Good question--a bit of both, actually. In the early 80s the portfolio with Gold earned +68%, much greater than the traditional 60/40 ever earned in a calendar year. But the higher SD of the 60/40 wGold portfolio also came from greater drawdowns. In the 4 years (excluding one year of -0.3%) that 60/40 declined, it shed -11.2% vs. just -7.7% for the 60/40 with 5YR T-Notes. The average loss of the 60/40 wGold was actually closer to an 75/25 w5YR T-Notes (-11.8%), however the 75/25 compounded at 120bps more per year.

Eric

[learning_head]

Larry,

What markets would you consider yourself an expert in? Would you count Gold among them?

Why does it matter? If someone is a self-proclaimed expert in some market (i.e. they consider themselves to be an expert), would you think their advice is better? I think cases should be argued based on their merits, not based on who has the bigger egos...

[Elbowman]

--deleted-- I thought it was funny, but I realized the mods wouldn't like it.

[larryswedroe]

athrone
Certainly would not say I'm an "expert" on gold. Though have read much of the literature, worked in trading rooms that trading gold, have advanced degrees in economics and finance, and so on.
Best wishes
Larry

[Browser]

OMGNAGT!!!!

[athrone]

athrone
Certainly would not say I'm an "expert" on gold. Though have read much of the literature, worked in trading rooms that trading gold, have advanced degrees in economics and finance, and so on.
Best wishes
Larry

Larry,

Thank you for your responses. I do realize you have an extensive background and expertise with financial markets, I was just curious about your involvement in particular sectors, such as Gold.

[athrone]

EDN,

Here are the numbers I see for the 1975-2011 period you quoted:

60/40 Stocks/Bonds vs. 60/40 Stocks/Bonds
Down StdDev: 5.42% vs. 6.71%
Up StdDev: 6.79% vs. 11.07%
StdDev: 11.14% vs. 14.48%
Worst Year: -20.20% vs. -20.24%

Based on these numbers, wouldn't you agree that most of the volatility is actually associated with the upward movement in Gold, as opposed to downward movement?

So here we have the CAGR, Worst Year , and Down StdDEV roughly matched between Gold and Bonds over the 40 year period of which we have data when a part of a 60/40 allocation with stocks, wouldn't you say?

[Akiva]

http://www.cbsnews.com/8301-505123_162-57563828/ignore-the-buy-gold-now-crowd/

The post provides you with what I believe is important information to help you decide if gold should hold a place in your portfolio. The media unfortunately tends to focus on the inflation risks and I hardly ever hear them present the other side. And you'll never hear the gold fanatics discuss these issues
hope you find it helpful

Larry

Larry, we recently had a discussion about commodity funds over here. Since your article recommends them instead, I'd be interested in your thoughts on that discussion.

Information you should have before buying bonds

60/40 Stocks/Bonds 1972-2011
Real CAGR: +4.79%
Real Worst Year: -26.03%
Real Worst Performance: -44% (1973-1974)

60/40 Stocks/Gold 1972-2011
Real CAGR: +6.41%
Real Worst Year: -24.40%
Real Worst Performance: -24.40% (1981)

I pointed out in another thread (about the permanent portfolio allocation scheme) that the rational a priori allocation you would follow based on historic covariances and no expectations about relative returns would have been 25/15/60 -- stocks/gold/fixed income with an average fixed income duration of about 5 years. Interestingly someone else pointed out that a computer optimization routine on historic data arrives at numbers very close to these back-of-the-book figures. So I think you probably want to rerun your numbers to use those figures since they are substantially more reasonable.

As an aside, if you replace a market cap weighted index with a volatility minimizing one (like the MSCI ACWI minimum volatility index) you should be able to increase your stock exposure significantly (45/15/40) without increasing overall volatility, which would boost returns to the extent that stocks earn more than bonds. Unfortunately, I don't have access to a Bloomberg or Reuters terminal to pull up long-term data on this index and calculate historic performance numbers. (And in any event, it wasn't until last year that someone made a fund tracking it.) Still, since the allocation I'm suggesting is one suggested by purely theoretical considerations, it seems worth noting this option because there is some academic theory that would argue that this method of index construction should generally second order stochastically dominate market cap weighting, i.e. it should be preferred by every rational risk-adverse investor who cares only about maximizing his own wealth. Research with simpler versions of this method bears that out, but this dominance seems to work because you are accepting benchmarking risk which isn't accounted for as a risk factor by standard models, but is certainly accounted for by real investors.

[Chet]

Larry,

In the article you wrote:

The laws of economics state that prices tend to move toward the marginal cost of production over the long term.

Does this law also apply to Federal Reserve Notes?

This is a valid comparison, because gold is valued mainly as a monetary asset (just ask the world's central banks) than as an industrial or jewelry commodity.

[magician]

The laws of economics state that prices tend to move toward the marginal cost of production over the long term.

This is true for pure competition, but isn't true for monopolistic competition, oligopoly or monopoly.

Is the market for gold purely competitive? I, for one, doubt it; I suspect that it's an oligopoly.

[athrone]

Larry,
This is a valid comparison, because gold is valued mainly as a monetary asset (just ask the world's central banks) than as an industrial or jewelry commodity.

Just in case anyone is thinking about contesting this, maybe read The Washington Agreement first:

http://en.wikipedia.org/wiki/Washington ... nt_on_Gold

Which is was worldwide treaty formally ratified by over a dozen National Banks in 1999, 2004, and 2009 where item one is given as:

1. Gold remains an important element of global monetary reserves.

If you want to argue this point, write a letter to the:

European Central Bank
Banca d'Italia
Banco de España
Banco de Portugal
Bank of Greece
Banque Centrale du Luxembourg
Banque de France
Banque Nationale de Belgique
Central Bank & Financial Services Authority of Ireland
De Nederlandsche Bank
Deutsche Bundesbank
Österreichische Nationalbank
Suomen Pankki
Schweizerische Nationalbank
Sveriges Riksbank

Among others.

[normaldude]

For digital gold, you should also consider..

1) GLD might be a huge scam. The auditors of GLD are not allowed to touch the gold. Although GLD is probably legit, there's always a chance that it's another huge scam like Bre-X mines, Enron, etc.

2) GLD tax reporting is obnoxious. A bond index fund will send you year-end tax forms with numbers that you can just plug into TurboTax, and you're done. With GLD, you'll get some forms, and be told that you have to manually calculate the cost basis of a whole bunch of distributions.
- https://ttlc.intuit.com/questions/13570 ... or-gld-etf


For physical gold, you should also consider..

1) Transaction Costs. The spread for buying & selling gold bullion is around 3% (sometimes more). Consider that to be like a 3% sales load. Meanwhile, a Vanguard Total Bond Market Index fund has zero sales load or transaction cost.

2) Storage Cost. You have to store your gold somewhere safe. Maybe you'll pay for a safety deposit box with a monthly fee. Or maybe you'll buy a safe for your house (although home invasions at gunpoint are common).

3) Global Access. You could be in Hong Kong, and can easily liquidate your bond index fund back in the US (online, or by phone), then do an EFT/wire transfer to your US bank account and/or HK bank account. Much harder to do with a pile of gold sitting in your safe on the other side of the world.

[Epsilon Delta]

Just in case anyone is thinking about contesting this, maybe read The Washington Agreement first:

http://en.wikipedia.org/wiki/Washington ... nt_on_Gold

Which is was worldwide treaty formally ratified by over a dozen National Banks in 1999, 2004, and 2009 where item one is given as:

Do you actually read the links you post?

• The agreement is not an international treaty, as defined and governed by international law.
• The agreement is a sui generis, gentlemen’s agreement among Central Bankers, of doubtful legality given the objectives and public law nature of Central Banks.

[normaldude]

This is a valid comparison, because gold is valued mainly as a monetary asset (just ask the world's central banks) than as an industrial or jewelry commodity.

False. The vast majority of gold is used for jewelry (mainly in India & China).
- http://www.numbersleuth.org/worlds-gold/gold.jpg
- http://etfdailynews.com/wp-content/uplo ... raphic.png

India's Love Affair With Gold. "No gold, no wedding," is a saying in India, indicating the importance of gold to Indian culture and tradition.
- http://www.youtube.com/watch?v=sUr2E4dfs0Y
- http://www.cbsnews.com/8301-18560_162-5 ... with-gold/

Gold is a globally traded commodity, and the price is driven by global supply & demand. In America, we think of gold in terms of Fort Knox and doomsday preppers. But that doesn't reflect how gold is used around the world.

[larryswedroe]

Akiva
As I have explained to me the main role of commodities and gold is to have inflation risks and some geopolitical risks. IMO commodities do a much better job of hedging inflation risk over most investors horizons. Gold only works for periods that can be much longer than the typical horizon. The correlation with inflation risk is much higher for commodities than for gold. Thus I prefer broader based commodities index. but don't object to small percent gold, though only if one is prepared to endure perhaps 20+ years of awful returns and rebalance along the way. I don't know many investors who could actually do that.
With any data set one needs to consider valuations at the start and end. Gold was artificially held down at the start and it is now not only at all time high but very close to all time REAL high (for an asset with no expected real return). that to me is danger sign that the past might not be helpful at all in looking at returns. It's like looking at stock returns starting in say 1942 and ending in 1999.
Best wishes
Larry

[Browser]

Bottom line: never invest any more in any asset (including gold) that you can stick with if you catch a period of 20+ years in which it is dead money or, even worse, a black hole in your portfolio. It's happened with stocks (er, it's happening with stocks since 2000), it's happened with bonds, it's happened with gold. Gold is a real danger here, because after a period in which an asset has shined it's very difficult to get into a mindset where it crashes and burns. I don't know if that will happen, but I know that we're about 11 years closer to when it will happen if it does, since the runup began in 2002.

[nydad]

GTU is probably a better option for digital gold.

For physical, a safe deposit box does not cost that much money annually. You just have to check how much you're paying over spot when you buy it.

[athrone]

Larry,

How do events like this factor into your analysis of the Gold market?

Germany Wants Its Gold Back—Should You Worry?
http://www.cnbc.com/id/100382718

-athrone

[larryswedroe]

athrone
Zero, though you will hear typical scare cries from gold fanatics.
What should this have to do with anything?
Germany has gold in several places, including US, France, UK. They currently hold about 37% in Germany I believe and plan to move toward 50%, recalling some from other places.
Whether we hold Germany's gold or they hold it why should it matter?
Best wishes
Larry

[athrone]

athrone
Whether we hold Germany's gold or they hold it why should it matter?
Larry

Because financial/credit markets operate on trust. Doesn't it matter whether I trust a bank to hold my money, or I hold it at home?

[larryswedroe]

athrone
Like I said, IMO fanatics of gold are making the case this shows lack of trust. IMO that is total BS story. If it was lack of trust they would have removed ALL THEIR GOLD from US, which they did not do. Don't listen to the fanatics who see conspiracies everywhere. There are many of the fanatics who think we don't actually hold any real gold amounts, that it's all a fraud. It's like believing we did not land on the moon, which some claim
Just my opinion
Larry

[dual]

Larry,

I, for one, could do without your repeated references to "fanatics", "religious zealots", etc. It is an ad-hominem argument. State your points and let them stand on their own. And BTW, I do not have much of my assets in gold and do not plan to expand my holdings.

[Browser]

Larry,

I, for one, could do without your repeated references to "fanatics", "religious zealots", etc. It is an ad-hominem argument. State your points and let them stand on their own. And BTW, I do not have much of my assets in gold and do not plan to expand my holdings.

Agree. I think there's too much emotion and ego on both sides of the gold debate, so it's hard to take either side seriously sometimes. I always feel like the pro and the con are both motivated by "fanaticism" to some degree.

[umfundi]

Agree. I think there's too much emotion and ego on both sides of the gold debate, so it's hard to take either side seriously sometimes. I always feel like the pro and the con are both motivated by "fanaticism" to some degree.

Disagree. I tend to be con, and I tend to be indifferent.

Keith

[athrone]

Why would Germany ask to move 700 tonnes of "useless" metal, if not for trust issues? Either the trust by the German leaders or the German public.

Already the news states it will take seven years to deliver 300 tonnes, which is only $16.2 billion at today's prices. Why even bother to put in the effort over such amounts? If it takes seven years to deliver 300 tonnes, how long would it have taken if they requested the entire 1500?

Larry,

What happened in 1971 when France asked for delivery of 130 tonnes of Gold?

[athrone]

So,

From the OP's link which started this thread:
http://www.cbsnews.com/8301-505123_162- ... now-crowd/

Where it is asserted of Gold that:
"it's not a good hedge of currency risk."

If it is not a good hedge of currency risk, then what on earth are national banks, such as the Bundesbank, thinking when the Bundesbank spokesman comments on the phone Wednesday, explicitly that “[the relocation] is in case of a currency crisis.”

And perhaps more importantly, what is a good hedge of currency risk, if not Gold?

[Akiva]

Why would Germany ask to move 700 tonnes of "useless" metal, if not for trust issues?

My impression was that they ran into some kind of technical issue dealing with the interaction of German constitutional law with German administrative law and that this was the easiest way to fix the legal problem.

Already the news states it will take seven years to deliver 300 tonnes, which is only $16.2 billion at today's prices. Why even bother to put in the effort over such amounts?

Because the Germans are sticklers for following the rules, and their rules say that things have to be done this way.

If it takes seven years to deliver 300 tonnes, how long would it have taken if they requested the entire 1500?

I think it's taking that long because that's how the Germans wanted to space it out.

What happened in 1971 when France asked for delivery of 130 tonnes of Gold?

The US going off the gold standard was a case of the US simply refusing to honor it's obligations. That situation has more to do with the safety of treasuries than the current value of gold. (E.g. "Twice in the 20th century the US unilaterally altered the terms of it's financial obligations when the agreed upon terms became financially untenable, who is to say that they won't just repudiate the debt if it becomes financially untenable?")

As I have explained to me the main role of commodities and gold is to have inflation risks and some geopolitical risks.

Well, I would argue that they have different roles. Commodities are correlated with unexpected inflation while gold is correlated with unexpectedly loose monetary policy. These things can coincide but don't have to.

[Browser]

I hate to encourage this vacuous line of discussion, but don't you think it's sorta comical for individuals to be offering interpretations about why the Germans are repatriating their gold? I figure that the real explanation is probably so many levels above where we are sitting that it's like taking a Rorschach test - the explanations offered say much more about the explainer than the event itself, assuming that we even have accurate information about that to begin with.

[Akiva]

I hate to encourage this vacuous line of discussion, but don't you think it's sorta comical for individuals to be offering interpretations about why the Germans are repatriating their gold? I figure that the real explanation is probably so many levels above where we are sitting that it's like taking a Rorschach test - the explanations offered say much more about the explainer than the event itself, assuming that we even have accurate information about that to begin with.

No, AFAIK, there's an actual public court case with a resulting court order that they are complying with. We don't need to theorize -- we need a German lawyer to explain the decision to us. The only reason I know about it is because I read an article about the case in a legal publication. I presume the article was accurate, but I neither speak German nor know the details of German administrative and constitutional law, so I hardly qualify as an expert.

[larryswedroe]

dual
Sorry I meant no offense and one doesn't have to be a fanatic to be a believer in including gold in a portfolio. As I said I have no objection to it.
Having said that there are a group of fanatics who for example believe that there is no gold in Fort Knox and no matter what evidence is presented if it doesn't agree with their religion your an idiot for thinking so

Best wishes
Larry,

[Valuethinker]

http://www.atimes.com/atimes/Global_Economy/NB07Dj04.html

We observe almost no relationship between gold and breakeven inflation expectations embodied in the 10-year yield, but an extremely close relationship between gold and the inflation-protected Treasury yield.



The r-squared of regression between gold and TIPS yields during the past five years is a remarkable 87%. Between gold and breakeven inflation, it is zero

(As a quick validity check, I calculated a r-squared of 74% using 20 year TIP yields compared to gold for 2004 to 2012 yearly values).

If stocks are considered as an undated variable coupon conventional bond, perhaps gold might be considered as a undated zero coupon TIP, and holding a barbell of both will middle road average.

But it [gold] cannot be a hedge against inflation for any reasonable horizon (yes it is for VERY LONG HORIZONS) if it can lose 85% of its real value over a 23 year period.

UK 20 year Gilts (Treasury) have lost that+more historically (time and amount) on a net real basis (after basic rate taxes and inflation).

In the UK our Gilt capital gains are tax exempt (broadly a zero sum motion that the tax office prefers not to waste time/effort managing taxation on), but income is taxed (unless held in a tax efficient account). In Canada I believe both the inflationary uplift (capital gain) and income from Real Return Bonds are both taxed. In the US ? (you tell me ). Under punitive income taxation policy it might at times be more viable to hold a stock/gold barbell than it would to hold a long term conventional/long term TIPS barbell.

Whether buying a long dated inflation bond (gold) in isolation is appropriate at the present time ??? Hedged with an equal sized purchase of stocks at the same time and that's perhaps a more neutral holding (combination).

Clive

25% of UK government debt is Indexed Linked Gilts ie inflation linked.

So the UK is a relatively easy country in which to purchase inflation protection.

Also we have a well developed commercial property market, and, again, commercial RE tends to have a high correlation with inflation (with the caveat that there is a supercycle in commercial property-- there was a bust in the 1974 period (Slater Walker and the Bank of England lifeboat) 1990 (Canary Wharf when Barclays Bank owned something like 10% of the commercial property in the country as chief creditor) and then again in 2008 (Central London has recovered, but the rest of the country has not-- if you track HMV and Jessops this week, we can see why ).

Gold I think of primarily as a hedge on a weak US dollar-- that tends to come with inflation, but does not have to.

[Valuethinker]

I hate to encourage this vacuous line of discussion, but don't you think it's sorta comical for individuals to be offering interpretations about why the Germans are repatriating their gold? I figure that the real explanation is probably so many levels above where we are sitting that it's like taking a Rorschach test - the explanations offered say much more about the explainer than the event itself, assuming that we even have accurate information about that to begin with.

If you think of German domestic politics, the rise of 'gold buggism' in Germany with fears over the Euro, and what has been happening in the Euro, (really the worst things the Germans feared when they gave up the D Mark), then you can see that once it was known that physical custody of the gold was outside Germany, the government HAS to bring it home.

The British gold reserves sat in Halifax, Nova Scotia, during WW2, and then were transferred to New York as the money was spent on US arms and raw materials. That, I believe, was Top Secret throughout WW2.