umfundi wrote: LH wrote: umfundi wrote: 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.
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%?
Well, its unclear exactly what either one of you is talking about exactly, I mean I get the gist of what you both say. But here is my take. If I missed one/both of you, just take it as a segue:
Say your portfolio drops 80 percent in real terms.
You had 100 dollars of a 80/20 stock/bond portfolio.
So it drops to 20 dollars.
Now say you had 100 dollars of a 70/20/10 stock/bond/gold portfolio. the rest drops same 80 percent, the gold however doubles.
you have 38 dollars. Not 20 dollars.
this is almost TWICE as much money. Its 90 percent more money.......
Now, one can say, oh well, it didnt protect much of my money...... etc. etc.
But you have to look at the END state, that if it happens, will BE your current NOW. It would be your current reality.
You could have 20, or you could have 38. 90 percent difference in the state you would end up in if things go bad.
We are not talking roses here people, there is no way to save it all unless you can time.
But you can make a huge difference in the end state you live in.
Humans, I posit, have a great difficulty looking at it this way, but this is the way you will eat, live, and buy stuff in, in hard core reality you could experience. 20 versus 38.
Thats 100 dollar figure is GONE. It was great you had it in the past. Yeah, one way you lost 80 percent, the other way you lost 62 percent, a horrible tragedy both ways surely.
But in the end, give me the 38. Its 90 percent insurance, for 10 percent of a portfolio, that likely will do quite fine anyway with rebalancing, might even come out ahead people...... I mean a 80/20 versus a 70/20/10 portfolio over 30 years rebalancing.....? I do not see much problem with it returnwise expectationally.
With all respect, your response makes no sense.
Suppose I have A and B. Suppose A goes almost to zero and B doubles. There is no rational reason to assume B is gold.
The fact is, gold has no expected return. It does not pay a dividend. The best one can expect for gold is that it keeps pace with inflation, albeit with a wide variance. IMO, investing on the basis of that variance is speculation.
My point is that an investment in gold does nothing to protect that part of your portfolio which is not in gold. You seem to agree. The flip side is, what does investing in gold provide protection for? (Conspiracy and Armageddon theories aside.)
If you are in the great depression, Wiemar, Argentina 2001, Zimbabwe, confederate us, etc etc. gold will spike relative to the currency. Have you read books on what happens in such states? In such conditions, it's rational to assume gold will spike. Argentina 2001, would you rather hold gold, or dollar deposits at the local bank? In Weimar, would you rather have Deutschmarks, or a gold chain? Cyprus, have 200k euro in gold, or 200k or more in the local bank? Then just run of the mill high inflation, albeit that is likely priced in to gold current price.
Your statement "investment in gold does nothing to protect that part of your portfolio which is not in gold" I do not follow its significance. No gold protects the portfolio.... Not stocks..... Ditto, bonds protects the portfolio, not stocks.....
Do your bonds makes your stocks stay high? No... It's the portfolio. do stocks make your bonds stay high? No, it's the portfolio. I do not see your point, or at best it's trivial?
Now the argument about no return, ergo you do not want to hold it in a portfolio, fine at gut level. and at some point, variance and correlation will be overwhelmed by lack of return sure. Depends on level of variance, correlation level, etc. But from this and your comment above about gold not protecting stocks in isolation versus protecting the portfolio, I think you may be missing the concept of a portfolio being more than the sum of its parts risk return wise given correlation benefits continuing in the admittedly uncertain future over the medium to long term....
Look at the permanent portfolio, it has cash, near zero return, and gold, zero return, for 50 percent of the portfolio.....look at the reality of performance. I am leery of PP myself, my gestalt is too much non performing asset, that under different scenarios going forward that will be experienced, the variance correlation benefit of the 4 asset mix may fail.... It may be overwhelmed by lack of return of assets in isolation. To get the benefit, the good correlation and the variance has to show up at the proper times. Then confiscation risk ala 33 as well. This is complex. Now it's possible, that PP can be run 100-1000 years, and have good performance, maybe it's underlying theory is spot on. Maybe not. Very interesting.
Look at swedroes ccf argument, the ommodities component, subtract out the bond return, as one could just be in bonds, and the commodity component really has zero expected return. Yet makes the point that the correlation makes it beneficial. This is more complex. But point is same.
Gold protects in states where both stocks bonds may not. Gold can jump up not just twice, but 4-5 times in such states
. Even mild ones like 80 and last ten years.
Its the portfolio that matters. Correlation and variance matter in MPT.