Is the Gold Rally Over

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larryswedroe
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Is the Gold Rally Over

Post by larryswedroe »

http://www.cbsnews.com/8301-505123_162- ... ally-over/

Does gold hedge inflation or the risks of loose monetary policy?
Hope you find this of interest
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Langkawi
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Re: Is the Gold Rally Over

Post by Langkawi »

Two months earlier on Oct. 10, 2012, the metal had finished at $1,792, its highest close ever.
Wasn't it at around $1,890 in 2011?
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Re: Is the Gold Rally Over

Post by rmelvey »

Nice article.

I think that people are harsh on gold when they say it isn't an inflation hedge by comparing it to the CPI. Gold protects from you unexpected changes in the inflation rate within a stock/bond portfolio context. I am fine with abbreviating that by saying that gold helps protect me from inflation.
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Re: Is the Gold Rally Over

Post by wesleymouch »

Gold is a hedge for tail risk. It does well during periods of negative real interest rates. It can serve as useful portfolio hedge. The question is how much. David Ranson at Wainwright economics says a 15% gold position hedges hyperinflation risk. If gold is a worthless "barbarous relic" then why do Central banks hold it?
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Re: Is the Gold Rally Over

Post by larryswedroe »

Yes gold did close at 1895 on 9/5/11

remelvy
I don't think one can say that about gold over any reasonable time frame--it cannot protect you against inflation if over a 22 year period it loses 85 percent in real terms. Now it has over hedging values, but unfortunately it doesn't real hedge the type of risks some people buy it for (because they come with machine guns to confiscate your gold)

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Re: Is the Gold Rally Over

Post by Dr. Market »

Langkawi wrote:
Two months earlier on Oct. 10, 2012, the metal had finished at $1,792, its highest close ever.
Wasn't it at around $1,890 in 2011?
Yes. Also, gold closed on October 10, 2012 at $1762...the high for the year was October 4.
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Re: Is the Gold Rally Over

Post by wesleymouch »

It did hedge the stock market debacle of 1973 and 1974 quite well
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Re: Is the Gold Rally Over

Post by rmelvey »

larryswedroe wrote:Yes gold did close at 1895 on 9/5/11

remelvy
I don't think one can say that about gold over any reasonable time frame--it cannot protect you against inflation if over a 22 year period it loses 85 percent in real terms. Now it has over hedging values, but unfortunately it doesn't real hedge the type of risks some people buy it for (because they come with machine guns to confiscate your gold)

Best wishes
Larry
Larry,

One thing I looked at the other day was how a blend of gold and long duration nominal Treasuries has a TIPs like graph. I think that when you hold gold and nominal treasuries together you benefit from real interests going down, and get hurt when real interests go up but you are relatively agnostic towards inflation just like with TIPs. I would appreciate your thoughts on this.

I am starting to think that the HBPP blend of gold and LTT was simply an attempt to create a TIPs like "risk off" asset before TIPs came out. One could probably replicate a PP-like strategy by holding merely TIPs and Stocks at risk parity proportions.
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Re: Is the Gold Rally Over

Post by Dude2 »

It helps me to think of gold as the reference frame. When the dollar weakens, gold goes up (in terms of dollars) because the "value" of gold stayed the same. The market determines value. (Monetary policy may have been responsible or other causes.) When US economy and stock market are showing signs of strength, the dollar becomes more efficient, more valuable, relative to gold. The opposite is also true. My takeaway from the article is that gold is a good holder of value and a good diversifier when held in a fixed proportion to other assets.

US Stocks are making a come-back, and I will not be surprised to see gold drop a bit in the near future. That is what has been happening for the past several years, zig-zagging with a delayed reaction. However, I don't believe it is a gold bubble, and that is not what the article says. A bubble implies that something pops and just disappears into space. If gold drops, I believe it means that other assets will go up. That doesn't bother me. The gold rally being over would be a good sign.
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Re: Is the Gold Rally Over

Post by larryswedroe »

dude2
If the gold rally ends because real rates rise because economy is strong, that will be good thing
But if gold rally ends because inflation rises and FED then must tighten dramatically, then it would be bad for stocks and gold, though good for longer bonds (as expected inflation would fall)
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Re: Is the Gold Rally Over

Post by larryswedroe »

rmelvey
your making the same case I did: owning commodity exposure allows one to take more duration risk because commodities tend to do well in rising inflation. I agree that is the way to look at it in total. I just prefer broader commodity index as that will likely track inflation much closer than gold. Like it did in the period 1980-2001.
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Re: Is the Gold Rally Over

Post by nisiprius »

Dude2 wrote:It helps me to think of gold as the reference frame. When the dollar weakens, gold goes up (in terms of dollars) because the "value" of gold stayed the same.
Except, it doesn't. One of the worst periods of inflation in U. S. history occurred following the first World War, immediately gutting the purchasing power of Ford's $5/day wage, and it happened despite the dollar being pegged to gold. Dollars bought half as much as before, gold bought half as much as before, the value of the dollar with respect to gold did not change.

The value of gold halved. The dollar and gold both failed as a store of value.

Gold just doesn't behave the way gold advocates say it does. A prime example would be quadrupling in price over the last decade despite the absence of inflation. Gold advocates excuse this by saying it was good bad behavior, but it shouldn't disguise the unpredictability of gold's behavior.

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Re: Is the Gold Rally Over

Post by Dude2 »

I'm with you Nisiprius. I would consider that an example of "gold-dollar" losing value relative to something else -- food, I guess. (But don't we need a reference frame of some sort, not fiat currency?) All of that strange behavior happened when the US left the gold standard. Now they are decoupled.

Do we ignore gold entirely? Seems like it is a diversifier.
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Re: Is the Gold Rally Over

Post by Dr. Market »

Inflation (or its anticipation) has been inconsistent in its affect on all types of financial assets throughout history. This is true for both the stock market and gold.
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Re: Is the Gold Rally Over

Post by Browser »

Larry - I don't mean to brag, but I scooped you by over 2 months on this. My oijia board works better than your crystal ball. :)
I couldn't help noticing that GLD peaked out in August 2011 at 184.59. Then it fell back to the level it is now, about 166. Since then, it has been limping along and has basically gone nowhere for 15 months now. Is the yellow dog finally running out of gas?
Is gold finally stalling out?
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Re: Is the Gold Rally Over

Post by momar »

Dude2 wrote:I'm with you Nisiprius. I would consider that an example of "gold-dollar" losing value relative to something else -- food, I guess. (But don't we need a reference frame of some sort, not fiat currency?) All of that strange behavior happened when the US left the gold standard. Now they are decoupled.

Do we ignore gold entirely? Seems like it is a diversifier.
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Re: Is the Gold Rally Over

Post by Dude2 »

I think what this mostly shows is recency.

Gold hasn't changed in the last year. It's the same atomic number it always was and it has the same commercial uses it always did. Investing principles haven't changed fundamentally, and the global economy hasn't changed fundamentally. Gold remains a wildly speculative asset that undergoes huge fluctuations in value. Those do not follow any simple theoretical patterns. If you look for the patterns that are said to exist, if you actually go look at them and dig out your own data, you will not see them unless you are looking at them through ideologically-tinted glasses.

If you are just a retail investor saving for retirement, do you really believe you have unique insight into the crowd dynamics of the gold market, insight that enables you to outfox the officials of a dozen governments and investors with billions under management? It's unlikely. You have a better chance of arbitaging differences in odds between prediction markets, or finding a loophole in a state lottery.

Your investment decisions on gold shouldn't have changed. Holding it may or may not make sense, but holding it for anything less than the long term makes no sense at all.

Is gold stalling out? I don't know and I don't care. As it happens, my gold allocation is 0% and I'm staying the course and rebalancing to 0% when necessary (so far, it hasn't been necessary). I don't know if craigr will spot this thread; he doesn't have a 0% allocation--I assume it's close to 25%--but I bet that he, too, can say "Is gold stalling out? I don't know and I don't care."
The above was Nisiprius' post in the other thread referenced above (which ended up being locked for some reason). Another insightful post IMHO.

I get the suit of clothes reference frame. It works in the buying, but unfortunately depreciation limits the selling.

I just tend to look at that big chart of correlations that shows gold being something else than stocks, bonds. Keep the Boglehead mentality, but don't ignore. I currently hold 3% and desire 10%. Can't get it in my 401k, so I'm doing my best.
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Re: Is the Gold Rally Over

Post by Browser »

The relationship between gold price and real rates has generally been that around a 2% real rate is "neutral." Rates lower than that have been associated with an increase in gold price and vice versa. The real rate here is the rate on treasury bills, not long term treasuries. In effect, gold acts like a leveraged short position on short-term TIPS. If this model is correct, then the gold price should head down if the real rate on bills begins to head up. The price of gold has not followed the inflation rate, except indirectly as a proxy for real interest rates. As real rates drop, the inflation rate has generally increased - but not more recently.
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Re: Is the Gold Rally Over

Post by LH »

Yes, the rally is over


I just added it to my AA .
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Re: Is the Gold Rally Over

Post by FinancialDave »

There is really nothing about Gold, that makes it a hedge against anything, any more than buying coal, oil, silver, or platinum. It's only value is what someone wants to pay for it, and right now I think there is enough gold, as far as industrial uses go to last us to the year 20000, so about 90% of its value is pure speculation.

In order to have a hedge against inflation you need something that pretty much has to go up as inflation goes up -- gold is NOT that item. If you are talking about US inflation, then the proxy for that would seem to be the US equity market. If inflation goes up and businesses don't follow by raising their prices, they are pretty much out of business. Who cares or can predict where gold will go?? Gold is of no use to most people.

One of the few commodities that might fall into this inflation hedge basket is real estate, as you can't really dig or mine more of it and it does have a built in worth in a lot of cases.

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Re: Is the Gold Rally Over

Post by nydad »

A friend of mine told me the traditional Indian portfolio was gold and land. Land, because it can produce income, and gold, because when the government changes, or the fiat currency becomes worthless, or if you have to leave town quickly - you can take your gold with you. Indians are still buying gold, in record amounts, and are unlikely to stop doing so anytime soon - even right now when gold is 5x more expensive than the past 20 years... http://moneymorning.com/2012/02/13/how- ... ld-demand/
Who cares or can predict where gold will go?? Gold is of no use to most people.
Gold is special. It doesn't tarnish, it is easily worked, humans love it for jewelry, and it doesn't deteriorate over time. It just sits there, shiny. Try telling the hundreds of millions of middle class Indians busily stocking gold in their safe deposit boxes that it is of no use to them...

Central banks don't (yet) have hoards of silver in their vaults. Gold is widely accepted as a store of value. I agree, it is not a great inflation hedge, at least in short time frames, but it's a great hedge for long time frames. Imagine that you were a pirate in the year 1200, and you wanted to save money for your heirs 800 years into the future. The best way to preserve value over that time period would be gold, and I would predict, barring any advances in alchemy, that this will remain true in the future. Now, most of us are planning for 30-50 years, not 800, but the fact that gold retains it's value over extremely long periods of time is suggestive. I can't think of anything else I could have bought in 1200 where I could be confident it would still be worth something today...
http://fxmadness.com/wp-content/uploads ... m-gold.jpg

Now, of course, it's possible gold I buy today will be worth 2x or 3x less, in purchasing power, in 30 years. But, a dollar I buy today could be worth a *lot* less in 30 years (I don't need to attach pictures of the Zimbabwe dollars to convince you, as you've seen them before). So i don't think of gold as an inflation hedge, I think of it as a store of value - it may lose some value (it may even lose 2x or 3x it's value), but it cannot go to zero, and it has quite a large possible upside.
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Re: Is the Gold Rally Over

Post by umfundi »

Central banks don't (yet) have hoards of silver in their vaults. Gold is widely accepted as a store of value. I agree, it is not a great inflation hedge, at least in short time frames, but it's a great hedge for long time frames. Imagine that you were a pirate in the year 1200, and you wanted to save money for your heirs 800 years into the future.
:oops: Do you think 800 years is a long enough horizon? I worry about that.

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Re: Is the Gold Rally Over

Post by nydad »

:)

It's really just to make the point that gold has the ability to retain value
Even in light of everything around it changing. Gold blows past wars,
changes in government, hyperinflation, etc etc,
and while it may fluctuate, even sometimes 10x,
It never goes to zero. Another way to put it is
that gold has no agency risk - it's value is not
linked to the existence of any given human institution.

I can't think of *anything* else in the world that
Really behaves like that. So IMHO it's useless to compare
Gold against other commodities, as none of them
Behave like gold in the long run...
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Re: Is the Gold Rally Over

Post by larryswedroe »

nydad
Yes gold has all those attributes, but the horizon over which it is meaningful must match your horizon or irrelevant, especially if you are in the withdrawal phase
On the other side one should note that unlike say oil all the gold in world ever mined is basically available for sale at any time, and if people perceive that gold has a high carry cost (opportunity cost) they can decide to sell in droves. Same thing with Silver. You may not recall but in the sliver/gold "bubble" of late 70s people were bringing in gold and silver jewelry and "silverware" etc to be melted down and sold, and the two commodities collapsed. Not making any prediction but just providing bit of historical information
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Re: Is the Gold Rally Over

Post by Kevin M »

Gold has gone up a lot during a period of tame inflation, and other estimates and indicators for inflation do not point to high inflation in the future. I don't see the correlation of gold to inflation or inflation expectations over the last few years. It seems like a purely speculative investment. I'm not interested in it.

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Re: Is the Gold Rally Over

Post by camaro327 »

Maybe we are beginning the "lost decade" for gold.
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Re: Is the Gold Rally Over

Post by umfundi »

The first thing we want to address is that one of the main premises behind investing in gold is that it's a good hedge for inflation. But that's true only if your investment horizon is extremely long, perhaps a century. Over the very long term, gold has provided virtually no real return, basically maintaining its purchasing power. And if gold was a good inflation hedge, we would expect to see a high correlation between the two. Yet since 1968 gold and inflation have been virtually uncorrelated. Through 2012, the annual correlation was just 0.08. The following example makes this point well.
Even if gold is a hedge for inflation, how useful is that? Over long periods of time you can expect zero real return, and inflation protection only for the part of your portfolio that is in gold.

The problem with explicit inflation protection is that you generally give up the possibility of equity returns, and as Larry Swedroe points out, that is too conservative for many people. In "Winning Investment Strategy" he makes a distinction between savings and investments. It seems to me that the best long-term protection against inflation is a diversified investment portfolio with a significant allocation to equities.

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Re: Is the Gold Rally Over

Post by Browser »

Down 4.1% YTD as of yesterday (2/19) and down another 1.6% today so far. The yellow dog is limping. Long treasuries down 4.1% YTD yesterday too. Am I seeing a pattern here? How come an inflation-hedging asset (gold) and a deflation-hedging asset (long treasuries) are both going down together? Maybe because they have both been going up together for the last few years?
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Re: Is the Gold Rally Over

Post by craigr »

Gold is an insurance asset. It’s not perfect (what is?), but when currencies are having a problem people want gold.

It’s interesting because some often describe the use of gold as the mythical ‘long time horizon’, but the actuality is much different. The lifespan of paper currencies is short and brutal in terms of history. Indeed, there are perhaps a small handful of currencies on the planet that even exist in somewhat the same form today as they did even 100 years ago (not to mention their stock and bond markets). Most others have vanished. That’s pretty incredible when you think about it. Go ahead and write down a list of countries and then research them to see if their governments even still exist today as they did 100 years ago (along with their issued currency). You’ll probably be surprised just how short that list is.

The odds of a currency (take your pick whereever you live) having a problem in your particular lifetime is actually quite high if you look at the number that have come and gone even over the last 100 years. And when I say lifetime, I don’t mean your investing lifetime. I mean your actual lifetime of around 70-80 years. A lot happened over the last 80 years and a lot more will happen in the next. I personally don't feel the last 80 years of U.S. history is likely to repeat into the future. It may be better, or it may be worse, but it won't be the same and this uncertainty means I want to diversify.

Instability in currencies has pretty much held true no matter where you look. It could be your typical basket cases like Argentina (currently having 20-30% inflation). Or it could be Iceland in 2008. Or it could be any number of European currencies that have come and gone. It could even be the U.S. dollar which had 50% losses due to inflation in the 1970s as a somewhat nearer example. Gold insures against these things because while I can’t say when a currency will have a problem, all I know is that the probabilities of it happening in my lifetime are quite high. Much higher in fact than I think most people realize even if we can’t put an exact figure on it. So gold is not perfect, but I'm reasonably sure it will still be valuable over my lifetime as an expression of my work and savings. It may be I won't need it. Then again, I don't know that I won't.

Next, I will say that gold is not worthless as an inflation hedge. There’s a reason every major central bank on the planet holds it and it isn’t because they have nothing better to do with their vault space. I’ve asked this question about why central banks hold gold when it is supposedly worthless as an inflation hedge and I usually get either no response, or some answer like “investors are not central banks.”

And indeed we aren’t central banks, but why is that relevant? If I can own an asset in my portfolio that the people printing the dough think highly enough to hold themselves, isn’t that a good idea? Probably. For governments, gold is an emergency reserve asset. It’s the one asset everyone accepts when they don’t want your paper money any more. The central banks know it. Major Swiss banks know it. The governments that control the issuance of money know it. And yes, the average guy on the street knows it too. That’s just the reality of the thing.

Arguing that gold is worthless, not money, not an inflation hedge, etc. doesn’t match the historical and present day record in how the metal is used. Until governments, banks and virtually the entire human race stops behaving this way towards gold, I don’t really see the point in trying to argue against this position. Now someone may not want gold in their portfolio (the same way I don't want to sink a lot of money into some other assets), but saying that gold is not an asset class with benefits for diversification is just not correct.

Should gold be the only thing in your portfolio? Of course not. Same as 100% stocks is also a dumb idea. But should it be part of a diversified portfolio of stocks, bonds and cash? Absolutely. Everything in my personal experience, business experience, travel experience, historical research, and discussions with people that have experienced very bad inflation first hand shows this to be true. Owning some gold in a diversified portfolio is just prudent when you take the long, or even short, view of world history.
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Re: Is the Gold Rally Over

Post by Jack »

craigr wrote:There’s a reason every major central bank on the planet holds it and it isn’t because they have nothing better to do with their vault space. I’ve asked this question about why central banks hold gold when it is supposedly worthless as an inflation hedge and I usually get either no response, or some answer like “investors are not central banks.
Good question. Why do central banks hold gold? The U.S. government holds about $400 billion in gold at today's price. That is equivalent to a little more than one month of the federal budget. It is about one week of GDP. About a third of the currency in circulation. That's what is going to save the country when everything goes to hell? What would the government do with it? Cut it up in little pieces and pay their employees and suppliers?

I'm guessing that the central bank today holds gold just out of tradition. Much like the penny, there isn't really any point anymore, but eliminating it isn't worth the political grief. The gold bugs would go ballistic. So they just sit on it and ignore it.
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Re: Is the Gold Rally Over

Post by craigr »

Jack wrote:
craigr wrote:There’s a reason every major central bank on the planet holds it and it isn’t because they have nothing better to do with their vault space. I’ve asked this question about why central banks hold gold when it is supposedly worthless as an inflation hedge and I usually get either no response, or some answer like “investors are not central banks.
Good question. Why do central banks hold gold? The U.S. government holds about $400 billion in gold at today's price. That is equivalent to a little more than one month of the federal budget. It is about one week of GDP. About a third of the currency in circulation. That's what is going to save the country when everything goes to hell? What would the government do with it? Cut it up in little pieces and pay their employees and suppliers?

I'm guessing that the central bank today holds gold just out of tradition. Much like the penny, there isn't really any point anymore, but eliminating it isn't worth the political grief. The gold bugs would go ballistic. So they just sit on it and ignore it.
The arguments against gold as a form of money are completely duplicitous when you look at the actions of central banks and governments even today in the gold market. They buy it and store it and will continue to do so because it serves a function. Why behave this way of still buying the asset if they didn't think it had a purpose?

I'll entertain the idea of not holding gold in a portfolio when I hear the major central banks on the planet have dumped their stores. But until that happens, I'm more than happy to sit on it and ignore it just like the banks supposedly are doing.
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Re: Is the Gold Rally Over

Post by Joe S. »

nydad wrote: Gold is widely accepted as a store of value. I agree, it is not a great inflation hedge, at least in short time frames, but it's a great hedge for long time frames. Imagine that you were a pirate in the year 1200, and you wanted to save money for your heirs 800 years into the future. The best way to preserve value over that time period would be gold
If you look over the last 200 years, one could argue that stocks are the best inflation hedge over the look run:
Image
nydad wrote: (I don't need to attach pictures of the Zimbabwe dollars to convince you, as you've seen them before.
Here's my new improved picture of the Zimbabwe dollar. Smaller, so you can use it without taking up so much space like my old picture:
Image
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Re: Is the Gold Rally Over

Post by athrone »

If we invoke the law of forums, that the number of positive posts about something means we are approaching a bubble, I wonder what it means that there are currently zero Gold discussions aside from one titled "Is the Gold Rally Over"
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Re: Is the Gold Rally Over

Post by nydad »

If you look over the last 200 years, one could argue that stocks are the best inflation hedge over the look run
Not really. $1 in gold in 1800 gives you $1 in gold purchasing power in 2012, more or less (not exactly). Stocks have soared - but then again, there are few stocks you could have invested in in 1800 that would still be around today. A bar of gold from 1800 is hard to distinguish from a bar of gold today. Nobody digs up old stock certificates from the bottom of the ocean, and old bills are worth, well, usually nothing.

Again, I think inflation hedge is the wrong word - stocks beat the heck out of inflation it seems. Gold, on the other hand, does not increase in value over time, it just maintains it's value (with speculative swings).
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Re: Is the Gold Rally Over

Post by larryswedroe »

Craig Basically agree, and as I have said I don't have problem with owning small allocation of gold as long as it's "investment" and you'll rebalance and have discipline to do that knowing it can go for decades with lousy results and then experience sometimes relatively short bursts due to poor monetary policy or "black swans"

Unfortunately, I think you would agree, most investors don't act that way. The real benefit if there is one from gold is from rebalancing.

The other problem IMO with gold is that many buy it for reasons that don't hold up--just ask say the Jews in Nazi Germany, the Cambodians or many other people--if the problems show up like some worry about, they come with machine guns and confiscate your gold. Or if you have it say in Switzerland there is no way to access it. Just a reminder.

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Re: Is the Gold Rally Over

Post by umfundi »

athrone wrote:If we invoke the law of forums, that the number of positive posts about something means we are approaching a bubble, I wonder what it means that there are currently zero Gold discussions aside from one titled "Is the Gold Rally Over"
Yes. The final indicator will be a cover story in Time or Business Week proclaiming "The Death of Gold". :wink:


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Re: Is the Gold Rally Over

Post by Clive »

Jack wrote:Why do central banks hold gold? The U.S. government holds about $400 billion in gold at today's price. That is equivalent to a little more than one month of the federal budget. It is about one week of GDP. About a third of the currency in circulation. That's what is going to save the country when everything goes to hell? What would the government do with it? Cut it up in little pieces and pay their employees and suppliers?

I'm guessing that the central bank today holds gold just out of tradition. Much like the penny, there isn't really any point anymore, but eliminating it isn't worth the political grief. The gold bugs would go ballistic. So they just sit on it and ignore it.
The central banks book price their gold to around $40 to $50 (set in the 1970's). If there were agreement to price that gold at current market value - as some have called for (UK), then they'd dump gold (lowering the market price). US and Canada have opposed that - suggesting other steps to repricing and selling some of the IMF's 113.5m ounces of gold should be taken to boost its balance sheet towards providing resource for debt relief.

You've probably heard "Don't fight the Fed". Some suggest that holding gold is fighting every central bank in the world. The central banks can manipulate the price of gold as they see fit (in the scale of things the amount of gold value is relatively small). Releasing some to suppress the price when then want to calm/reduce inflation, not releasing any when they want to create inflation (as per recent).
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Re: Is the Gold Rally Over

Post by Browser »

Might be a good idea to read the work of Erb & Harvey before deciding to jump onto the gold bandwagen.
In a new working paper titled "The Golden Dilemma", the pair take up the key drivers of gold and put them to the test.
According to the authors of the paper, some of the most common claims about the influencers of gold's value are not true.
http://www.businessinsider.com/5-huge-m ... z2LSxgMFXk
MYTH #1: Gold is a good hedge against inflation
This graph shows spot gold prices against the U.S. consumer price index, a common measure of inflation. The red line is a regression that projects the implied price of gold were it determined by the CPI. It shows a mild positive relationship, but also that gold is volatile, does a bad job of tracking the CPI, and is wildly expensive compared to its utility as a hedge. The current price implied by the CPI is $780

MYTH #2: Gold is a good currency hedge
Since 1975 the real price of gold in these eight countries seems to have moved largely in tandem. The real price of gold reached a high level in 1980 amongst all eight countries. The real price of gold fell to a low level in each of the eight countries in the 1990s, and more recently the real price of gold has risen to very high levels in all eight countries. The historical evidence of a seemingly common local currency movement in the real price of gold does not lend itself to a convenient ‘gold as a currency hedge’ explanation. In fact, the change in the real price of gold seems to be lar gely independent of the change in currency values. Furthermore, since the real price of gold seems to move in unison across currency perspectives, it is unlikely that currency movements help in explaining why the real price of gold

MYTH #3: Gold is an alternative to low real returns
Claude Erb and Campbell Harvey argue that this is a classic case of spurious correlation. One could argue that low yields cause high gold prices and vice versa. It is additionally possible that low yields and high gold prices are both driven by the some common external force, like fears of hyperinflation

MYTH #4: Gold is a reliable safe haven in times of financial stress

MYTH #5: There is already a de-facto gold standard
Gold prices have little to do with either the U.S. monetary base, or its official holdings of gold. Official government holdings of gold have remained nearly constant in spite of the expansion of the Federal Reserve's balance sheet
Presentation here: https://faculty.fuqua.duke.edu/~charvey/Gold.pdf

Paper here: http://papers.ssrn.com/sol3/papers.cfm? ... id=2202645
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Re: Is the Gold Rally Over

Post by HenryPorter »

I still say stack copper. In the form of one cent 0.1 troy ounce US coins minted until 1982. You get copper at roughly 42% of spot metal value. Would you buy gold right now if you had a trusted person selling it to you for $660 an ounce? If so, you'll sleep better at night stacking copper cents that retain a one cent face value. More demand for copper than gold by a practical industrial standpoint. Easy to get copper. Go to a bank and buy a $25 box of pennies. How much interest does your bank give you for parking money in an account with them? Beautiful thing is you can set aside copper and not worry a bit about it. The day interest rates climb back up, you take your $25 boxes of pennies back to a bank and buy a CD or deposit the cash into an interest-bearing account.
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craigr
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Re: Is the Gold Rally Over

Post by craigr »

larryswedroe wrote:Unfortunately, I think you would agree, most investors don't act that way. The real benefit if there is one from gold is from rebalancing.
I agree that a lot of investors can't rebalance rationally. Emotions run high when you are expected to buy into a sinking asset when your others are high flyers. In fact, I'm expecting now that stocks are at all-time high, we'll soon see more threads about the best way to slice and dice a 100% stock portfolio for diversification. Should they add more large cap? Or diversify a bit with a new frontier market value fund and some junk bonds for safety?
The other problem IMO with gold is that many buy it for reasons that don't hold up--just ask say the Jews in Nazi Germany, the Cambodians or many other people--if the problems show up like some worry about, they come with machine guns and confiscate your gold. Or if you have it say in Switzerland there is no way to access it. Just a reminder.
I think the point for me is it's got a better shot in these extremes than most other assets. I like having options. But the extremes really are too unpredictable to know what to do. You just spread the wealth and hope the dice roll OK for you. Nobody today accepts Nazi government bonds/currency either.

However in less extreme situations I still think it's a really good idea to own some hard assets. I just got back from Argentina. They have 20-30% inflation now and recently froze food prices. There was a report a couple months back that they were using dogs to sniff out dollars people may have been taking outside the country at some ports to control currency flows. It's a mess.

But you know people that have some hard asset exposure will be OK. They probably won't go door to door with machine guns. What they will do is basically crater their currency as usual. Those citizens will still have their wealth protected in part if they are holding some of it as precious metals. Same thing as in 2001. In this case you are still having something bad happen, but it's not likely going to result in door to door searches. Just to name one example.
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Re: Is the Gold Rally Over

Post by craigr »

Browser wrote:Might be a good idea to read the work of Erb & Harvey before deciding to jump onto the gold bandwagen.
In a new working paper titled "The Golden Dilemma", the pair take up the key drivers of gold and put them to the test.
According to the authors of the paper, some of the most common claims about the influencers of gold's value are not true.
Already wrote about that here:

http://crawlingroad.com/blog/2012/07/26 ... -rebuttal/

The disconnect is that individual investors should not be trying to maximize every corner of their portfolio with growth assets like stocks and bonds. Their primary wealth driver is their lifetime of work and savings. The portfolio growth all flows from that. So there should be a part of the portfolio that is always set aside for assets that can weather extreme events, because they probably are going to go through one in their lifetime. And, they can't go back and re-earn money they lose if one of those events happens to take out their favorite asset that they built up a huge concentration in.
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grayfox
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Re: Is the Gold Rally Over

Post by grayfox »

I sold what little GLD I had at $168 on 11/19/2012.
I said I would buy it back at $152.
Right now it's $152.88.
But I'm getting cold feet.
I'll wait to see if it goes lower.

I think it depends on real interest rates.
If real rates are negative, GLD goes up.

Real rates increased slightly recently
10-Year TIP yield was about -0.80% last November and now it's -0.50%

Image

Whither real interest rates? When real interest rates go back to positive, gold will go way down.
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Re: Is the Gold Rally Over

Post by Browser »

Already wrote about that here:

http://crawlingroad.com/blog/2012/07/26 ... -rebuttal/

The disconnect is that individual investors should not be trying to maximize every corner of their portfolio with growth assets like stocks and bonds. Their primary wealth driver is their lifetime of work and savings. The portfolio growth all flows from that. So there should be a part of the portfolio that is always set aside for assets that can weather extreme events, because they probably are going to go through one in their lifetime. And, they can't go back and re-earn money they lose if one of those events happens to take out their favorite asset that they built up a huge concentration in.
But I thought there were supposed to be fundamental economic arguments for owning gold -- you keep bringing them up. But you punt when it comes to the Erb & Harvey research paper that debunks all these arguments and argue instead that it's the correlations with other assets that really count and fundamental economic arguments be damned. So, which is it?
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Re: Is the Gold Rally Over

Post by Clearly_Irrational »

Currently we still have negative real rates:

Today's Federal Funds rate: 0.15
January CPI-U is released tomorrow, but as a proxy today's MIT Billion Prices Project inflation rate is 1.68%
So today's real rate is roughly -1.53%
Using SHV as a proxy for "cash" the nominal yield is 0.01% giving a real yield of -1.67%

Since gold is assumed to produce zero real yield and zero is better than a negative number I'm standing pat for now. Gold has a higher volatility obviously, but that's acceptable with my portfolio design. Once the Fed raises interest rates over the rate of inflation I'll rotate from Gold to "cash", in the mean time I prefer my insurance asset. (FYI, I tend to use SHY or VFISX instead of SHV as the risk/reward ratio has traditionally been much better)
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Joe S.
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Re: Is the Gold Rally Over

Post by Joe S. »

nydad wrote:
If you look over the last 200 years, one could argue that stocks are the best inflation hedge over the look run
Not really. $1 in gold in 1800 gives you $1 in gold purchasing power in 2012, more or less (not exactly). Stocks have soared - but then again, there are few stocks you could have invested in in 1800 that would still be around today. A bar of gold from 1800 is hard to distinguish from a bar of gold today. Nobody digs up old stock certificates from the bottom of the ocean, and old bills are worth, well, usually nothing.

Again, I think inflation hedge is the wrong word - stocks beat the heck out of inflation it seems. Gold, on the other hand, does not increase in value over time, it just maintains it's value (with speculative swings).
I may suggest (tongue in cheek) That if the pirate's descendants are multiplying exponentially, he needs an investment that is also growing exponentially. When I say invest in stocks, I am referring to investing in a diversified portfolio, something close to whatever index you can find, and reinvest the dividends in new companies. You can take some of your profits to pay someone to manage the fund and to research who is and who isn't a descendant of the pirate. Pirates' children were sometimes hard to document. (Google the term son-of-a-gun)
http://en.wikipedia.org/wiki/Son_of_a_gun

A pirate investing in gold would have to sell a small amount each year to pay for storage, management, and insurance. He'd also have to pay someone to hide the gold in the 1930's when the U.S. government tries to confiscate it.

I also have to add that the data on stocks from 1802-1870 is of poor quality, and foreign stocks have done somewhat worse than U.S. stocks. Most pirates invest internationally.
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Re: Is the Gold Rally Over

Post by umfundi »

When I say invest in stocks, I am referring to investing in a diversified portfolio, something close to whatever index you can find, and reinvest the dividends in new companies.
The indexes exhibit survivorship bias as the dogs are taken out. There are very few companies older than 100 years.

My guess is that buy and hold the original companies in the Dow Jones Average in 1896 would not have fared very well. Here they are:
Here are the original dirty dozen of 1896 and where they are today:

American Cotton Oil – Ancestor of Best Foods, now part of Unilever.
American Sugar – Became Amstar in 1970 and subsequently Domino Foods.
American Tobacco – Broke up into separate businesses in 1911, expanded beyond tobacco and renamed itself American Brands; now Fortune Brands.
Chicago Gas – Absorbed by Peoples Gas, which replaced it in the Dow in 1898. Now part of Integrys Energy.
Distilling & Cattle Feeding – After a series of deals became National Distillers, then sold liquor assets to Diageo and fellow Dow component progeny American Brands. Rest of business now part of Millennium Chemicals.
General Electric –Still an independent company with diversified assets around the world. Was removed from the Dow twice around the turn of the 20th century, but was reinstated both times.
Laclede Gas – Still around, as the primary subsidiary of the Laclede Group.
National Lead – Changed its name to NL Industries in 1971, 83% owned by conglomerate Valhi. Once known for mining, moved into paints (Dutch Boy brand), pigments and coatings. Sold paint business in 1970s.
North American – Dissolved by a federal court in 1938, surviving successor became Wisconsin Electric, part of Wisconsin Energy.
Tennessee Coal Iron and RR – During the panic of 1907, TC&I was acquired by U.S. steel, with banker J.P. Morgan playing a key role in arranging the merger.
U.S. Leather – The only preferred stock in the original Dow, U.S. Leather is also the only company to have vanished with nary a trace since the trust was dissolved in 1911.
United States Rubber – Merged first into Uniroyal in 1950s then with B.F. Goodrich in 1986. Resulting company was bought by France’s Michelin in 1990.
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Re: Is the Gold Rally Over

Post by Browser »

OH NO! The dreaded gold "death cross"!!!!
Gold’s decline on Comex came as talk of a “death cross” in the market among analysts and traders emerged Wednesday.

A death cross is “a crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level,” said Chintan Karnani, an independent bullion analyst based in New Delhi. “Additionally, the long-term moving average becomes the new resistance level in the rising market.”

In layman’s terms, “this implies that gold’s long-term bull run is over and that it could be in a bear phase,” he said. “Fundamentals are there as investors are shunning gold exchange-traded funds. Indian gold demand is not there due to a nationwide strike today by workers.” Read: Could China ride to gold’s rescue this week?

The death cross hasn’t been reached because both moving averages need to be moving lower, said Ross Norman, chief executive officer of Sharps Pixley.
Image
http://www.marketwatch.com/story/gold-i ... =countdown
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Re: Is the Gold Rally Over

Post by craigr »

Browser wrote:But I thought there were supposed to be fundamental economic arguments for owning gold -- you keep bringing them up. But you punt when it comes to the Erb & Harvey research paper that debunks all these arguments and argue instead that it's the correlations with other assets that really count and fundamental economic arguments be damned. So, which is it?
I already wrote about the Erb and Harvey paper and I was being diplomatic. It's not very good and I don't have the time nor desire to point out every error in it. Here is just one error in their logic:
Erb and Harvey wrote:During the first period of full convertibility the inflation rate was close to zero, and during the two subsequent periods [ed: post gold convertibility] the annual inflation rate was in excess of 3% per annum. The rate of inflation in the U.S. has increased over time. – Erb an Harvey – The Golden Dilemma
To which I wrote:
Yet, if the full gold convertibility standard produced inflation rate close to zero as they state then wasn’t that an inflation hedge? Yes, it was. It was only after the gold standard ended in various degrees that they note: “…during the two subsequent periods the annual inflation rate was in excess of 3% per annum.”

And I agree. But the prior period of 100% gold conversion standard there was no inflation. Some data even shows slight deflation over that entire period.

So if gold was not matching inflation then shouldn’t it have shown this tendency over 100+ years? Bretton Woods fell apart in only 40 years when the gold conversion was ended by Rooselvelt in 1933 (died in 1971 with Richard Nixon’s closing of the gold conversion window for international holders of dollars). I find it hard to believe we would have not seen this inflation sooner during the prior 100+ years if gold wasn’t doing what it advertised itself to do.
But these debates compare against the wrong bogey anyway. Gold functions more as a currency than as a stock and bond which have internal rates of return. So someone that points out to me that gold does not go up in value like a stock or bond is just stating the obvious.

The real bogey they should be using is how gold performed in relation to other currencies over these periods of time. And if you look at it from that criteria, gold stomped the living daylight out of them. Assuming gold has a purchasing power of 1.0, then what is the list of currencies both current and historic and how do they match gold in terms of maintaining purchasing power? The answer is they all compare (if they are even still around), very poorly.

And again this debate gets into looking at the asset in isolation which is not how it should be used. Gold should be used in a diversified portfolio.
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Re: Is the Gold Rally Over

Post by Clearly_Irrational »

A death cross is a negative signal, but in an of itself isn't a viable trading system. The recent bollinger band squeeze meant there was a big move coming so the recent drop isn't exactly a surprise. RSI is showing oversold, MACD is highly divergent and the Chaikin money flow derivative is positive so while it probably hasn't bottomed yet you can expect a turnaround at some point within the next couple of weeks. There is a strong support level around 147 or so for GLD so I'd start looking for a turnaround candle pattern like a doji for a good buy point. The Point and Figure chart is calling a double bottom breakdown with a price target of 132 but given the other readings I think that's overblown, though obviously if it breaks through that lower support level then run for the exits.
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Re: Is the Gold Rally Over

Post by craigr »

Here's my summary on this topic in terms of gold, currencies and the duplicity of the arguments against gold as an asset in a diversified portfolio:

Image
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