My Take on Gold

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My Take on Gold

Postby Rick Ferri » Mon Apr 22, 2013 10:06 am

Gold has never been on my buy list because I’m a cash-flow and real-return investor. I like investments that pay dividends or interest, and those that grow in value over the inflation rate. Gold doesn’t fit into either of these categories. A bar of gold produces no income and never grows into two bars of gold. In fact, it costs money to own gold due to trading cost, storage costs, insurance and possibly management fees. Nonetheless, I felt compelled to write about gold given it's recent volatility.

Gold Bugs Swatted Again

Rick Ferri
Last edited by Rick Ferri on Mon Apr 22, 2013 10:21 am, edited 1 time in total.
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Re: My Take on Gold

Postby nisiprius » Mon Apr 22, 2013 10:09 am

You left out an "h" in "http" at the start of the link. You meant:
Gold Bugs Swatted Again
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: My Take on Gold

Postby HardKnocker » Mon Apr 22, 2013 10:15 am

Diamonds are more easily carried when you flee the Nazis to Switzerland. Gold is darn heavy.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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Re: My Take on Gold

Postby Rick Ferri » Mon Apr 22, 2013 10:21 am

nisiprius wrote:You left out an "h" in "http" at the start of the link. You meant:
Gold Bugs Swatted Again


Fixed. Thanks!

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Re: My Take on Gold

Postby beardsworth » Mon Apr 22, 2013 10:36 am

Financial writer Barry Ritholtz recently penned this semi-humorous take on "The 12 Rules of Goldbuggery."

http://www.ritholtz.com/blog/2013/04/th ... ldbuggery/
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Re: My Take on Gold

Postby Sidney » Mon Apr 22, 2013 10:54 am

HardKnocker wrote:Diamonds are more easily carried when you flee the Nazis to Switzerland. Gold is darn heavy.

Wonder how the price compares to, say, saffron.
I always wanted to be a procrastinator.
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Re: My Take on Gold

Postby beardsworth » Mon Apr 22, 2013 11:03 am

Sidney wrote:
HardKnocker wrote:Diamonds are more easily carried when you flee the Nazis to Switzerland. Gold is darn heavy.

Wonder how the price compares to, say, saffron.


Or frankincense, or myrrh. :)
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Re: My Take on Gold

Postby grayfox » Mon Apr 22, 2013 11:03 am

Rick Ferri wrote:Gold Bugs Swatted Again

Rick Ferri


Good charts showing inflation adjusted price of gold.

:?: Question: Should the price of gold mean revert?
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Re: My Take on Gold

Postby Rick Ferri » Mon Apr 22, 2013 11:15 am

grayfox wrote:
Rick Ferri wrote:Gold Bugs Swatted Again

Rick Ferri


Good charts showing inflation adjusted price of gold.

:?: Question: Should the price of gold mean revert?


I'm changing the article wording slightly to say that $600 is the regression price in nominal dollars assuming there is some inflation before it gets there - which may take a decade.

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Re: My Take on Gold

Postby dhodson » Mon Apr 22, 2013 11:22 am

MarcMyWord wrote:Financial writer Barry Ritholtz recently penned this semi-humorous take on "The 12 Rules of Goldbuggery."

http://www.ritholtz.com/blog/2013/04/th ... ldbuggery/



thanks for the link
ill have to pass it along to my gold bug friends
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Re: My Take on Gold

Postby Clive » Mon Apr 22, 2013 12:03 pm

Over its long history, every academic who has studied gold agrees that prices move with inflation over time

In a step, plateau manner.

1850 to 1899 more or less had 0% inflation over that total span, but inflation spiked up and back down again during the interim (nearly doubled by 1869, halved again by 1899). Gold remained pegged at around $19 across that entire period.

Currency could be converted to gold and visa-versa for the pegged $ amount.

By 1919 inflation had doubled back up again - gold remained the same $19.

By 1933 inflation had was falling back down again, and the gold peg was raised to around $35. So broadly 1850 to 1933 gold moved with inflation (but saw volatility along the way).

By 1970 inflation had soared and Nixon removed the $ gold peg. Prior to that gold was somewhat comparable to money stuffed into a mattress, but 'adjusted' infrequently along the way for inflation. Since 1970's gold is no longer pegged to money and is allowed to free float as per any other commodity - which broadly might be expected to pace inflation subject to the utility of that commodity. Cotton for instance longer term declined considerably relative to inflation.

1972 - 1980 gold soared relative to inflation (+22% annualised real).
1980 - 1990 gold lagged by -7.6% annualised real
1972 - 2000 gold marginally beat inflation.
2000 - 2012 gold soared +11% real

That's far from a consistent 'shorter term' (decades) inflation hedge. But perhaps averages out to a longer term inflation hedge (generations).
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Re: My Take on Gold

Postby wshang » Mon Apr 22, 2013 12:06 pm

MarcMyWord wrote:
Sidney wrote:Or frankincense, or myrrh. :)

Well that's only because now we have body deodorants and they've mapped out the South Pacific. Gold is still a stalwart storehouse of wealth. The average person can't tell the difference between the grade of diamonds or even if they are zirconium.
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Re: My Take on Gold

Postby Call_Me_Op » Mon Apr 22, 2013 12:11 pm

Rick,

Good article. The data are clear that gold reverts to a constant real value over long periods of time. This is the only metric by which I believe one can value gold, and compared to that value it is currently over-priced by a significant margin.
Best regards, -Op

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Re: My Take on Gold

Postby Boglenaut » Mon Apr 22, 2013 12:21 pm

I agree with Rick...


But this is the other side's argument:

https://www.youtube.com/watch?v=YNvOl_Yml3U
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Re: My Take on Gold

Postby rmelvey » Mon Apr 22, 2013 12:41 pm

ctrl + f "diversification" : no results found

ctrl + f "risk" : no results found

ctrl + f "real interest rates" : no results found

Interesting article on gold. Seems like you hit on all of the major reasons that professional investors hold it :oops: Something about gold attracts the sloppiest analysis from both bulls or bears. The gold debate should always be framed within the context of diversified portfolio. Anything else is just speculative drivel :D
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Re: My Take on Gold

Postby Clearly_Irrational » Mon Apr 22, 2013 1:20 pm

Gold is basically an insurance asset. We don't normally expect insurance to make us money, instead it's role is to help us avoid catastrophic losses. There is a price associated with that function, whether or not you consider that price affordable depends on your situation.
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Re: My Take on Gold

Postby Call_Me_Op » Mon Apr 22, 2013 1:53 pm

Clearly_Irrational wrote:Gold is basically an insurance asset. We don't normally expect insurance to make us money, instead it's role is to help us avoid catastrophic losses. There is a price associated with that function, whether or not you consider that price affordable depends on your situation.


If you are going to buy gold (as insurance or a speculation), then buy it when it is priced attractively. Rick's article suggests a reasonable way to value gold.
Best regards, -Op

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Re: My Take on Gold

Postby Clearly_Irrational » Mon Apr 22, 2013 2:14 pm

Call_Me_Op wrote:
Clearly_Irrational wrote:Gold is basically an insurance asset. We don't normally expect insurance to make us money, instead it's role is to help us avoid catastrophic losses. There is a price associated with that function, whether or not you consider that price affordable depends on your situation.


If you are going to buy gold (as insurance or a speculation), then buy it when it is priced attractively. Rick's article suggests a reasonable way to value gold.


That's not terrible model for speculation, but it would be inappropriate for an insurance purchase. For insurance you need to be measuring the likelihood of a risk event occurring vs. the current price rather than the current price vs. it's long term stable value. For insurance purposes I currently see two strategies as having some viability 1) Buy and hold, just accepting that it may be painful over long periods like in the Permanent Portfolio 2) Own gold during periods of negative real returns, while this doesn't necessarily "time" the market well in speculation terms it does limit the pain of owning gold to periods of instability where you'd really want the insurance component.
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Re: My Take on Gold

Postby HardKnocker » Mon Apr 22, 2013 4:55 pm

You buy some gold and bury it in your backyard. If society collapses you dig it up and use it for currency.

Unless you are a currency speculator that's about it for gold.

See my signature for Warren Buffett's opinion on gold.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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Re: My Take on Gold

Postby Clive » Mon Apr 22, 2013 5:08 pm

You buy some gold and bury it in your backyard. If society collapses you dig it up and use it for currency

Japan 1947, soap and cigarettes were more valued as a currency.
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Re: My Take on Gold

Postby Clearly_Irrational » Mon Apr 22, 2013 5:14 pm

HardKnocker wrote:You buy some gold and bury it in your backyard. If society collapses you dig it up and use it for currency.


That's one possible use, an alternate of that is foreign storage if you're worried about confiscation. In both cases you're talking about physical possession which I wouldn't put in the investment category at all, more of a crisis tool like a bug out bag or Mormon style food storage.

In general, gold should return zero (real) plus a small increase due to the overall growth of industrial demand. Fluctuations are really about exchange rates (inflation / devaluation) and the fear premium.

When is zero a good thing? When you're comparing it to a negative number. "Cash" right now has a value of -1.13% (or so, depending on which numbers you want to use). Of course gold is also about 40x more volatile, so that may or may not be valuable to you depending on what you're trying to do.

It's a hard asset like land or artwork so in many ways it's different than stocks or bonds, I'm don't think that makes it useless but you certainly need to be aware of it's properties before deciding whether or not it's appropriate for your strategy.
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Re: My Take on Gold

Postby Jfet » Mon Apr 22, 2013 5:21 pm

My wife's grandparents used gold and silver to bribe their way out of Soviet occupied territory into west germany in 1945 (or 1946) and eventually made it to the USA.

It definately had more value to them than soap or russian savings bonds...

But I don't see us needing to bribe our way into Canada or Mexico anytime soon...

I would like gold to go back to $600 only because I like to prospect for fun and all of the decent land has been claimed since the recent rush. At $600 people would start to release those claims instead of paying the yearly fee and/or doing claim work in lieu of it.
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Re: My Take on Gold

Postby Epsilon Delta » Mon Apr 22, 2013 5:25 pm

The Shekel, a coin originally weighing 11.3 grams of gold, became a standard unit of measure in the Middle East in 1500 BC and took its place as the recognized standard medium of exchange for international trade.

Something is wrong with this picture. There is wide spread agreement that the first coins appeared somewhere near the Aegean around 700BCE.
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Re: My Take on Gold

Postby LH » Mon Apr 22, 2013 5:41 pm

I always find the widesread perjorative tone against gold fascinating.

Gold per report, does have a bit of a support level around 12k, because that is where gold miners start to become unprofitable.

It's the Argentinian pesos in 2001 issue at heart, scary stuff.

The 500 is interesting, but gold was pegged a lot during that time. In the 70s is when it started its market driven float, being a barberous relic valued only by bugs, and one supposes the armored tank division at Fort Knox , et al.

Gold will zig a lot, when other things zag. Nice in a portfolio.
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Re: My Take on Gold

Postby ruanddu » Mon Apr 22, 2013 6:00 pm

Rick, thanks for your article. Can you clarify for me on your comment - " I anticipate gold prices will continue a descent until eventually reaching its inflation-adjusted long-term average". What is the inflation adjusted long-term average number that it should eventually reach?

Thanks.
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Re: My Take on Gold

Postby interplanetjanet » Mon Apr 22, 2013 6:20 pm

Sidney wrote:
HardKnocker wrote:Diamonds are more easily carried when you flee the Nazis to Switzerland. Gold is darn heavy.

Wonder how the price compares to, say, saffron.

Not even close. An (avoirdupois) ounce of high-quality Sargol goes for under $100. The key is to avoid buying tiny fancy 1 gram jars in boutique sections of grocery stores and to instead order it in bulk online (it keeps quite well).

Saffron has an interesting marketing story. Many boutique sellers will claim that their saffron is "Spanish", however - Spain imports considerably more saffron than it exports and exports much more than it grows - essentially "laundering" saffron from the middle east (largely from Iran and Afghanistan). This is not a quality issue, for the most part, as good Iranian and Afghani saffron is some of the best in the world.
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Re: My Take on Gold

Postby Clearly_Irrational » Mon Apr 22, 2013 6:29 pm

ruanddu wrote:Rick, thanks for your article. Can you clarify for me on your comment - " I anticipate gold prices will continue a descent until eventually reaching its inflation-adjusted long-term average". What is the inflation adjusted long-term average number that it should eventually reach?

Thanks.


I believe the article was suggesting $500 as the long term inflation adjusted average. Gold tends to be plateau stable for long periods then experience sharp rises followed by volatility and sharp declines. During a "healthy" economy period I would actually expect the price to be lower than $500.

Under the optimism scenario we've worked out most of our crash related problems and the economy will continue to heal and unemployment will fall back to more normal levels. In this case the fed will begin to tighten sooner rather than later, gold prices will continue to fall and over the next few years will retrace to a more subdued level.

Under the muddle through scenario government intervention has staved off disaster but also prevented the market from fully working through all of the issues, growth will be lower, unemployment will not fall very quickly and interest rates will remain very low for an extended period of time. Under this case gold should mostly go sideways though with considerable volatility as the bulls or bears gain temporary advantage.

Under the disaster scenario government intervention has done nothing more than paper over the cracks and a new market crash is now approaching. Barely recovered job markets will be slammed as corporations shed workers like fleas and the Fed will be largely impotent as they've already used their heavy weapons. Under this scenario gold will significantly increase in value as people seek the safety of hard assets.

Personally I think the muddle through scenario is the most likely one at the moment. At a rough guess I'd say the chances are something like 15% - 75% - 10% That's all speculation though and not really actionable.
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Re: My Take on Gold

Postby Call_Me_Op » Mon Apr 22, 2013 6:34 pm

Clearly_Irrational wrote:
Call_Me_Op wrote:
Clearly_Irrational wrote:Gold is basically an insurance asset. We don't normally expect insurance to make us money, instead it's role is to help us avoid catastrophic losses. There is a price associated with that function, whether or not you consider that price affordable depends on your situation.


If you are going to buy gold (as insurance or a speculation), then buy it when it is priced attractively. Rick's article suggests a reasonable way to value gold.


That's not terrible model for speculation, but it would be inappropriate for an insurance purchase. For insurance you need to be measuring the likelihood of a risk event occurring vs. the current price rather than the current price vs. it's long term stable value. For insurance purposes I currently see two strategies as having some viability 1) Buy and hold, just accepting that it may be painful over long periods like in the Permanent Portfolio 2) Own gold during periods of negative real returns, while this doesn't necessarily "time" the market well in speculation terms it does limit the pain of owning gold to periods of instability where you'd really want the insurance component.


If you buy insurance, you have to believe you are paying a reasonable price. At some level, it just isn't worth it. So I think you always need some valuation metric before you buy.
Best regards, -Op

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Re: My Take on Gold

Postby Clearly_Irrational » Mon Apr 22, 2013 6:42 pm

Call_Me_Op wrote:If you buy insurance, you have to believe you are paying a reasonable price. At some level, it just isn't worth it. So I think you always need some valuation metric before you buy.


I agree, I was just saying that the valuation metric has be based on your risk assessment. For example, in California you'd be crazy not to have Earthquake insurance even though it's fairly expensive. In Oregon on the other hand, it's unusual to carry Earthquake insurance even though it's quite cheap.
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Re: My Take on Gold

Postby larryswedroe » Mon Apr 22, 2013 7:03 pm

Funny I wrote a similar piece about week ago and it will be posted this week

Best wishes
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Re: My Take on Gold

Postby minesweep » Mon Apr 22, 2013 7:13 pm

Yesterday I noted the comment of Charlie Munger, Vice-Chairman of Berkshire Hathaway [BRK.A BRK.B] comment that “civilized people don’t buy gold”. They are not simply involved in a zero-sum game in which the goal is to outsmart the computer system in the trading markets. They invest in productive businesses that add value to society.

Warren Buffett, Chairman of Berkshire Hathaway, expressed similar reservations about gold as an investment:

“When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000. Or you can take a broader example. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.

“Why do you think gold bugs get so irate? Because they really do come out. If you go on CNBC and say that bonds are kind of a poor investment, people don’t get mad at you. You don’t hear from the Treasury. You can knock almost any investment and nothing happens. But when you talk about gold it’s different. Of course that says something about their motivation for ownership. They want people to agree with them. They want everybody to get so scared they run to a cave with gold. Caves might be a better investment than gold. At least they’re not producing more caves all the time. So they want people to be as afraid as they are. Incidentally, they’re right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money. But where they run to is the mistake.”

Why Warren Buffett Won't Invest In Gold

Forbes article is dated 5/09/2012.

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Re: My Take on Gold

Postby Jfet » Mon Apr 22, 2013 7:24 pm

TBH, people did get kind of upset at Meredith Whitney when she was saying muni bonds were a terrible investment. (refering to the Buffett article)
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Re: My Take on Gold

Postby Rick Ferri » Mon Apr 22, 2013 10:07 pm

Warren Buffett, Chairman of Berkshire Hathaway, expressed similar reservations about gold as an investment:

“Why do you think gold bugs get so irate? Because they really do come out. If you go on CNBC and say that bonds are kind of a poor investment, people don’t get mad at you. You don’t hear from the Treasury. You can knock almost any investment and nothing happens. But when you talk about gold it’s different.
"

This is very true. I received a lot of emails and comments about this article when it posted on Forbes.com this morning. I believe my life would be in danger now if I wrote that GLD was a good short, which I didn't do!

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A different take on Gold

Postby hazlitt777 » Mon Apr 22, 2013 11:19 pm

Mr. Ferri, I wouldn't be so confident as of yet. Gold is still over twice the price you predicted several years ago to which it was suppose to fall. As far as the numbers you used, there are others that put inflation much higher, for example www.shadowstats.com There are large businesses that use these numbers to plan for the future, so there are some big players that take these and other higher numbers on inflation very seriously.

Also, what happened to the belief in the efficiency of markets? Does it only apply for stocks and bonds?

Furthermore, there is no denying that gold is a major financial asset for central banks and many larger investors, especially in the West. At the same time, there are many central banks who have little exposure to gold such as China and India, relative to their national reserves, that are anxious to pick up more so as to have a more balanced national portfolio. Why shouldn't an average investor protect themselves by a 5-10% allocation to this asset too? Swiss bankers recommend to their clients an allocation of 10-20 percent. Why is it irrational for the small investors to do the same, rebalancing as needed? I know many Argentinians wish they had.

If a gold bug is somebody that is a performance chaser, then they deserved to suffer the set back they experienced recently. If a gold bug is somebody who has been buying and rebalancing these past 10 years, let me assure you from personal experience, we haven't been swatted at all.
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Re: A different take on Gold

Postby Clearly_Irrational » Mon Apr 22, 2013 11:28 pm

hazlitt777 wrote:As far as the numbers you used, there are others that put inflation much higher, for example http://www.shadowstats.com


I used to think that shadowstats had some really good points, but frankly the MIT billion prices project matches the official numbers so closely that I decided that perhaps I had been wrong.
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Re: A different take on Gold

Postby hazlitt777 » Mon Apr 22, 2013 11:47 pm

hazlitt777 wrote:Mr. Ferri, I wouldn't be so confident as of yet. Gold is still over twice the price you predicted several years ago to which it was suppose to fall. As far as the numbers you used, there are others that put inflation much higher, for example http://www.shadowstats.com There are large businesses that use these numbers to plan for the future, so there are some big players that take these and other higher numbers on inflation very seriously.

Also, what happened to the belief in the efficiency of markets? Does it only apply for stocks and bonds?

Furthermore, there is no denying that gold is a major financial asset for central banks and many larger investors, especially in the West. At the same time, there are many central banks who have little exposure to gold such as China and India, relative to their national reserves, that are anxious to pick up more so as to have a more balanced national portfolio. Why shouldn't an average investor protect themselves by a 5-10% allocation to this asset too? Swiss bankers recommend to their clients an allocation of 10-20 percent. Why is it irrational for the small investors to do the same, rebalancing as needed? I know many Argentinians wish they had.

If a gold bug is somebody that is a performance chaser, then they deserved to suffer the set back they experienced recently. If a gold bug is somebody who has been buying and rebalancing these past 10 years, let me assure you from personal experience, we haven't been swatted at all.


I forgot something. Here is a financial professional who has a very different take than Mr. Ferri on the recent correction:

http://www.youtube.com/watch?v=7G1IqcvbSwc
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Re: My Take on Gold

Postby Rick Ferri » Tue Apr 23, 2013 12:42 am

Gold is easy. There's a 5000 year history to look at. Gold pays no cash flow and does not grow. When the price spikes, either there will be hyperinflation or the price will fall back to its long-term average price. Not much else to talk about.

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Re: My Take on Gold

Postby momar » Tue Apr 23, 2013 12:49 am

Clearly_Irrational wrote:
Call_Me_Op wrote:If you buy insurance, you have to believe you are paying a reasonable price. At some level, it just isn't worth it. So I think you always need some valuation metric before you buy.


I agree, I was just saying that the valuation metric has be based on your risk assessment. For example, in California you'd be crazy not to have Earthquake insurance even though it's fairly expensive. In Oregon on the other hand, it's unusual to carry Earthquake insurance even though it's quite cheap.

I know many people in the bay area without earthquake insurance.
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Re: My Take on Gold

Postby momar » Tue Apr 23, 2013 12:51 am

Sidney wrote:
HardKnocker wrote:Diamonds are more easily carried when you flee the Nazis to Switzerland. Gold is darn heavy.

Wonder how the price compares to, say, saffron.

How about big white truffles?
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Re: My Take on Gold

Postby LH » Tue Apr 23, 2013 6:01 am

minesweep wrote:
Yesterday I noted the comment of Charlie Munger, Vice-Chairman of Berkshire Hathaway [BRK.A BRK.B] comment that “civilized people don’t buy gold”. They are not simply involved in a zero-sum game in which the goal is to outsmart the computer system in the trading markets. They invest in productive businesses that add value to society.

Warren Buffett, Chairman of Berkshire Hathaway, expressed similar reservations about gold as an investment:

“When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000. Or you can take a broader example. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.

“Why do you think gold bugs get so irate? Because they really do come out. If you go on CNBC and say that bonds are kind of a poor investment, people don’t get mad at you. You don’t hear from the Treasury. You can knock almost any investment and nothing happens. But when you talk about gold it’s different. Of course that says something about their motivation for ownership. They want people to agree with them. They want everybody to get so scared they run to a cave with gold. Caves might be a better investment than gold. At least they’re not producing more caves all the time. So they want people to be as afraid as they are. Incidentally, they’re right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money. But where they run to is the mistake.”

Why Warren Buffett Won't Invest In Gold

Forbes article is dated 5/09/2012.

Mike


There it is again:

Civilized people don't buy gold?

So buy a simple piece of metal, albeit a barbarous one, and you become uncivilized, heck you become a bug. It's a fascinating thing.

Barbarous relic, bug, uncivilized, etc etc etc. Read near any article against gold, one will find simple name calling.

Now, if all that is the case, we should quit being a buggy barbarous uncivilsed nation, and sell all the gold in fort knox.

Right? Heheh.

My main thing, is when reading gold articles, just pay attention to the name calling, subtract it out, and see what's left. Then beyond the direct name calling, how many gold buyers are running to a cave for instance with their gold? Subtract that stuff out too.

Then stuff like, caves maybe a better investment than gold.... Well ok, consider that on its merits.

There often is not much there there.
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Re: A different take on Gold

Postby Call_Me_Op » Tue Apr 23, 2013 6:37 am

hazlitt777 wrote:
Also, what happened to the belief in the efficiency of markets? Does it only apply for stocks and bonds?



How does market efficiency factor-in? An efficient market does not mean the underlying assets are priced "correctly", it just means that the price reflects all publicly available information. People can still trade on greed and fear when fully armed with information.
Best regards, -Op

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Re: My Take on Gold

Postby NOLA » Tue Apr 23, 2013 8:16 am

Sorry to change the subject a little bit. However, can someone that's a little smarter than me tell how Gold affects the performance of the Precious Metals & Mining Fund (VGPMX)? Always been curious how they are correlated. Obviously there is some sort of correlation.
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Re: My Take on Gold

Postby ofcmetz » Tue Apr 23, 2013 9:42 am

Thanks for the article Rick. What you wrote really seems to make sense to me.

I often wonder how much of the gold run up has been due to all the Gold will reach a gazillion dollars commercials that are all over the AM radio as well as day time news TV.
Showing up at the donut shop at 5 am to get them hot out of the oil is an example of successful market timing.
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Re: My Take on Gold

Postby hazlitt777 » Tue Apr 23, 2013 6:09 pm

Rick Ferri wrote:Gold is easy. There's a 5000 year history to look at. Gold pays no cash flow and does not grow. When the price spikes, either there will be hyperinflation or the price will fall back to its long-term average price. Not much else to talk about.

Rick Ferri


I don't think it is that easy. The average price of gold, in terms of dollars, has been around only 200 some years. And over those years, the average price of gold, in terms of gold, has gone up and up, on average, not down.

Diversification into physical gold is a real hedge against a real possibility of the loss of a large portion of the dollar's value and of bonds despite its cash flow in terms of dollars, in a relatively short time, as happened in Argentina and many other modern countries.

American exceptionalism is misleading.

Perhaps the main point I would like to make in this and my prior post is that a 5-10% allocation into gold is isn't buggish at all. It is prudent. But to each their own.
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Re: My Take on Gold

Postby Trailbreaker1 » Tue Apr 23, 2013 6:27 pm

Nice article Rick. Thanks for posting. I have a co-worker that completely cashed out his 401K and took all the penalties and taxes so he could buy gold with it. He told me that he thought the government would come after everyone's retirment $$ in the future and he wanted something physical and of value that he could touch, and that the government wouldn't take. He has it all stashed in a saftey deposite box. And he's broke! Some people have lost their damn minds! lol.

Only time I'll buy gold is when I buy my wife some jewelry that already has gold in it. That gold investment is just to make the wife happy. But gold as an investment? I'll pass.....
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Re: My Take on Gold

Postby nisiprius » Tue Apr 23, 2013 6:33 pm

Trailbreaker1 wrote:Nice article Rick. Thanks for posting. I have a co-worker that completely cashed out his 401K and took all the penalties and taxes so he could buy gold with it. He told me that he thought the government would come after everyone's retirment $$ in the future and he wanted something physical and of value that he could touch, and that the government wouldn't take. He has it all stashed in a saftey deposite box. And he's broke!...
I don't understand. Why would he be broke? If he bought it at the very peak, about $1800, he's lost 20-25% If he bought it any time before 2011, he's made money. He shouldn't be "broke."
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Re: My Take on Gold

Postby Trailbreaker1 » Tue Apr 23, 2013 6:46 pm

nisiprius wrote:
Trailbreaker1 wrote:Nice article Rick. Thanks for posting. I have a co-worker that completely cashed out his 401K and took all the penalties and taxes so he could buy gold with it. He told me that he thought the government would come after everyone's retirment $$ in the future and he wanted something physical and of value that he could touch, and that the government wouldn't take. He has it all stashed in a saftey deposite box. And he's broke!...
I don't understand. Why would he be broke? If he bought it at the very peak, about $1800, he's lost 20-25% If he bought it any time before 2011, he's made money. He shouldn't be "broke."


Well I shouldn't say "broke". But he took a big hit cahing out his 401k and his everyday spending habits are pretty bad. His conspiracy theories about the government coming after our money just kills me...

I don't think cashing out one's 401k plan to buy gold is a wise idea cuz your gonna end up broke...
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Re: My Take on Gold

Postby Atilla » Tue Apr 23, 2013 6:59 pm

I'm of the opinion that if things get bad enough to warrant having physical gold....physical gold will be relatively worthless. In the heat of the moment, you will never get current price or anything near it-if you can find a buyer at all.

Liquor, guns and ammo seem like a better bet. You can't hunt food or defend yourself with gold. And the guy in the neighborhood with a cellar full of hooch will get cash/needed goods much more readily than the guy with a sack of shiny coins. And if you have spare ammo or a gun or two to sell to a desperate buyer...:beer

Can't picture finding a reliable desperate gold buyer in a crisis.
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Re: My Take on Gold

Postby LH » Tue Apr 23, 2013 7:11 pm

Rick Ferri wrote:Gold is easy. There's a 5000 year history to look at. Gold pays no cash flow and does not grow. When the price spikes, either there will be hyperinflation or the price will fall back to its long-term average price. Not much else to talk about.

Rick Ferri


Well, I would add in flat out devaluation too, Argentinian style, I guess that could be called an instantaneous hyperinflation : P

The thing about gold is, that barring when its price is fixed, it doesnt really seem to stay anywhere for long. Its pretty volatile.

It tends to be non correlated. It does tend to mean revert too. So buy low, sell high behavoir is a pretty likely occurrence with an asset that jumps from 2451 to 400 range, to 1921, to 1300-1400s now..... If one can stay the course in a boglehead plan... what is not to like????? buy low at 400, rebalance, sell at 1900s, 2400s. thats like a range of 5 times....... that occurs when other things are likely tanking people..........

5-10 percent of something like that in a Boglehead portfolio over 30 years, whats not to like?

Think of that behavior within a rebalanced portfolio???????

I fail to see what is not to like if one can actually do it within a portfolio expectantly. Sure there is name calling and such. Oh well. But portfoliowise, 5X jumps up and down while rebalancing, with an asset that wont go to zero expectantly, and has not for thousands of years?

I have signed on to it. Slowly acquiring 3 percent for now.

I expect it to tank to maybe around 600-800 range at worst near medium term, maybe lower given its volatile nature. Buy low. rebalance high. Its kinda interesting the 1200 cost figure for new production of gold I hear bandied about, if that is in fact true, that is somewhat of a possible real floor to what I do not know. Just interesting to think about. But in reality, it does not matter.

For about 5-10 percent of my portfolio I seek

1)very high volatility
2)good correlation with rest of portfolio
3)an asset that wont drop to zero

Now sure, income is nice too, but high volatility and correlation can trump that for a small amount of portfolio, if the asset mean reverts expectantly, and doesnt go to zero. Now the Permanent portfolio, seems to make the point that even large amounts of non production (say 50 percent worth of non production of cash and gold in real terms), can be saved by correlation and volatility.... Has done so for 30 years. Its there. I just dont buy into it that much, seems a lot of nonproduction, but cant say its wrong per se. But its hard to see how 5-10 percent of nonproduction is not outweighed in a portfolio by huge 5 time volatility swings to me, with beneficial correlation to rest of portfolio.

Image
http://www.rickferri.com/blog/investmen ... ted-again/

I wonder to what level this chart averages to since 1975? 800 to 900 range? Gold was just pegged for such a long time. 500 is the low range here.

Nice article, I have been swatted!!!!! ouch. Hehehheh.

LH
Last edited by LH on Tue Apr 23, 2013 7:27 pm, edited 2 times in total.
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Re: My Take on Gold

Postby umfundi » Tue Apr 23, 2013 7:23 pm

hazlitt777 wrote:
Rick Ferri wrote:Gold is easy. There's a 5000 year history to look at. Gold pays no cash flow and does not grow. When the price spikes, either there will be hyperinflation or the price will fall back to its long-term average price. Not much else to talk about.

Rick Ferri


I don't think it is that easy. The average price of gold, in terms of dollars, has been around only 200 some years. And over those years, the average price of gold, in terms of gold, has gone up and up, on average, not down.

Diversification into physical gold is a real hedge against a real possibility of the loss of a large portion of the dollar's value and of bonds despite its cash flow in terms of dollars, in a relatively short time, as happened in Argentina and many other modern countries.

American exceptionalism is misleading.

Perhaps the main point I would like to make in this and my prior post is that a 5-10% allocation into gold is isn't buggish at all. It is prudent. But to each their own.

How does 5%-10% help anything? There is no evidence that an investment in gold provides leverage.

If you are invested 5%-10% in gold, then 5-10% of your investments are possibly "a real hedge against a real possibility of the loss of a large portion of the dollar's value".

And the other 90%-95%?

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