My Take on Gold

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Re: My Take on Gold

Postby Jfet » Tue Apr 23, 2013 6:36 pm

Atilla wrote: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.


From real world experience of my wife's grandparents, guns ammo and liquor were worthless, and gold saved their lives (used to bribe Soviet border patrols).

Everyone talks about guns and ammo, but when you are facing an army patrol roadblock and must get through, I think I would rather chance bribing them with a few gold maples instead of trying to take them on with a 9mm.

All of that being said, I think we are a world away from anything like what happened after WWII, so gold has mostly an amusement value to me because I like to prospect and pretend I am an oldtimer.
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Re: My Take on Gold

Postby LH » Tue Apr 23, 2013 6:38 pm

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.

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%?

Keith


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.

90(.2)=18
10(2)=20

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.
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Re: My Take on Gold

Postby Quasimodo » Tue Apr 23, 2013 7:08 pm

NOLA wrote: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.


I doubt that I'm smarter than you, but at 74, I may be older.

During the inflationary 1970s I owned gold coins and stock in Blyvooritzicht, a South African gold mining company. They both did well for most of that decade and moved opposite the regular stock market. When stocks tanked in 1974, Blyvooritzicht went up and so did the value of gold coins.

When stocks dropped in 2008, gold miners went down too, while gold bullion had about a 5% gain. But that was with low inflation.

My amateurish guess is that if and when inflation fears return, the physical metal and the mining stocks could move together again.

Just some memories of an older person. I'm no expert.

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Re: My Take on Gold

Postby hazlitt777 » Tue Apr 23, 2013 7:41 pm

Trailbreaker1 wrote:
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...


The sad thing is somebody who was positive or at least open to gold could have influenced him to apply the principals of modern portfolio theory so that he would have simply changed his allocation form 100% stocks/bonds to 90% with 10% to gold. But since things are sadly polarized when it comes to gold, many needlessly go all in or all out, when it comes to gold. I would love to see that come to an end.
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Re: My Take on Gold

Postby LH » Tue Apr 23, 2013 8:07 pm

Quasimodo wrote:
NOLA wrote: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.


I doubt that I'm smarter than you, but at 74, I may be older.

During the inflationary 1970s I owned gold coins and stock in Blyvooritzicht, a South African gold mining company. They both did well for most of that decade and moved opposite the regular stock market. When stocks tanked in 1974, Blyvooritzicht went up and so did the value of gold coins.

When stocks dropped in 2008, gold miners went down too, while gold bullion had about a 5% gain. But that was with low inflation.

My amateurish guess is that if and when inflation fears return, the physical metal and the mining stocks could move together again.

Just some memories of an older person. I'm no expert.

John


http://m.seekingalpha.com/article/1342351

This explains a bit of importance with miners, if gold price drops below production cost, well then it's over, production ceases, and potentially a gold miner can drop to zero worth/ bankruptcy.

Say ferris price of 500 is realized, well gold itself is 500, most gold miners may go under, open to debate, complex, but just a flavor, of the concept.
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Re: My Take on Gold

Postby Jfet » Tue Apr 23, 2013 9:01 pm

LH wrote:
http://m.seekingalpha.com/article/1342351

This explains a bit of importance with miners, if gold price drops below production cost, well then it's over, production ceases, and potentially a gold miner can drop to zero worth/ bankruptcy.

Say ferris price of 500 is realized, well gold itself is 500, most gold miners may go under, open to debate, complex, but just a flavor, of the concept.


It is probably even a bit more complicated than that. A lot of gold from mining comes as a byproduct of things like copper mining, and you could view the higher gold prices as offsetting the lower price of copper and allowing the mine to turn a profit. If gold drops to $500, then either copper may need to go up or we could end up with a shortage of copper even as the world demand grows because many companies would go out of business.
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Re: My Take on Gold

Postby Rick Ferri » Tue Apr 23, 2013 9:13 pm

$500 dollars is 2011 price. If it took gold 7 more years to go down to it's inflation-adjusted price, and inflation is been 2%-3% per year from now until then, the average nominal price would be about $600.

I think it's perfectly feasible to say that gold can drop below it's production cost. That has certainly happened in the past. It doesn't mean gold won't be mined. It means a slowdown in production and consolidation in the industry.

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Re: My Take on Gold

Postby Clearly_Irrational » Tue Apr 23, 2013 10:36 pm

Trailbreaker1 wrote:I don't think cashing out one's 401k plan to buy gold is a wise idea cuz your gonna end up broke...


Well, he wouldn't be broke, he'd just own a very illiquid asset.

Confiscation of retirement accounts seems unlikely in the short term.
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Re: My Take on Gold

Postby umfundi » Tue Apr 23, 2013 11:24 pm

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.

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%?

Keith


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.

90(.2)=18
10(2)=20

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.

LH,

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.)

Keith
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Re: My Take on Gold

Postby nedsaid » Tue Apr 23, 2013 11:25 pm

This reminds me of discussions with a family member who likes a Gold Fund at our favorite mutual fund company.

At the time of the discussion, his Gold Fund was doing pretty well. My diversified portfolio over time did as well or better. I never bought in. Lately, stocks have zoomed and gold minings stocks. . .have not.

I was interested in owning the fund. I looked for a good entry point. Never had the heart to switch out of something I already owned for this fund. I thought the stocks and stock funds in my portfolio were doing as well or better. The gold fund would not have added to the performance of my portfolio. Would it have reduced the volatility of my portfolio? Hard to say.

So again, Gold or the gold mining stocks might have a place in a portfolio as insurance. Are the "premiums" for this insurance worth the cost? What I mean by the cost is that Gold can be dead money for many years at a time. If you are willing to ride out the volatility, problems in the stock market eventually heal themselves. And heal themselves with real returns above inflation. At best, Gold matches inflation over long periods of time.
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Re: My Take on Gold

Postby LH » Wed Apr 24, 2013 7:08 am

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.

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%?

Keith


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.

90(.2)=18
10(2)=20

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.

LH,

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.)

Keith


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.
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Re: My Take on Gold

Postby LH » Wed Apr 24, 2013 7:49 am

There are two seperate but conflated issues with gold

1) the end of the world, caves, gold to 20,000 side of issue.

2) the behavior of gold under MPT variance correlation, in a rebalanced portfolio consisting of anywhere from 5-10 percent in a boglehead portfolio with gold in it, to the Permanent portfolio where gold is 25 percent.

The first part gets silly on both sides for and against, ad hominem, red herring, straw men etc. caves, bugs, barberous relics etc. etc. It would like talking about stocks, and brining up Dow 36,000 book every time, talking about stock bugs using margin leverage and blowing up.

The second part, has solid real world performance evidence. Makes sense rationally under MPT. I do not see any evidence of problem with 5 -10 gold in a portfolio buy and hold rebalance, over the long term. Now capitulation risk sure. Recency sure, I would dca in over time to a position.

Investors have to get past the first part, subtract it out, and look hard at MPT, variance, correlation, and examine world financial history over just past 100 years. No one knows what is coming. Roaring twenties then the 30s great depression... Weimar, argentina 2001, zimbabwe, etc. etc. Yeah, it all seems "worlds away" inconcievable until it's there. It happens with great frequency. One has to realize that every moment is "modern" and that "modern" does not protect you. Gold protects in certain states where bonds and stocks will not do so well.
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Re: My Take on Gold

Postby Clive » Thu Apr 25, 2013 2:24 am

LH wrote:Gold protects in states where both stocks bonds may not. Gold can jump up not just twice, but 4-5 times in such states.

Hyperinflation/high inflation events are often a consequence of collapse of a domestic currency relative to others. Iceland 2008 gold soared in domestic currency terms, but remained relatively level in other currencies. A 4-5 times increase in the price of gold might just signify a 75%-80% decline in value of a currency relative to others. Holding foreign currencies can serve as equally as well as gold during bad times, and if those currencies are invested in income/earnings generating businesses they can earn more during better/stable times.

Gold is a bit like holding just a basket of currencies alone. Most FX traders however wont just hold a currency directly, but will instead hold assets such as stocks in those currencies for their greater income/gain generation potential.

One investor might opt to hold perhaps 25% in a bunch of currencies, 25% in stocks and keep 50% in domestic bonds. That investor isn't working their money as hard as another investor who perhaps opted to hold 25% in a bunch of foreign stocks (international), 25% domestic stocks and 50% in bonds.

International stocks will provide stock + currency change gains/losses. Two risk exposures for the same amount of investment. The Permanent Portfolio separates out those two risks and holds them individually - somewhat like investing twice as much to gain similar risk/reward exposure.

This chart compliments of yahoo finance, shows how McDonald's share price, which has diverse global exposure to costs and earnings, performed over the 2008/9 crisis period.

Image

Over other periods when gold is losing -7% annualised real for decades (1980's/1990's), the likes of MCD might be yielding positive real rewards.
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Re: My Take on Gold

Postby LH » Thu Apr 25, 2013 4:17 am

Clive wrote:
LH wrote:Gold protects in states where both stocks bonds may not. Gold can jump up not just twice, but 4-5 times in such states.

Hyperinflation/high inflation events are often a consequence of collapse of a domestic currency relative to others. Iceland 2008 gold soared in domestic currency terms, but remained relatively level in other currencies. A 4-5 times increase in the price of gold might just signify a 75%-80% decline in value of a currency relative to others. Holding foreign currencies can serve as equally as well as gold during bad times, and if those currencies are invested in income/earnings generating businesses they can earn more during better/stable times.

Gold is a bit like holding just a basket of currencies alone. Most FX traders however wont just hold a currency directly, but will instead hold assets such as stocks in those currencies for their greater income/gain generation potential.

One investor might opt to hold perhaps 25% in a bunch of currencies, 25% in stocks and keep 50% in domestic bonds. That investor isn't working their money as hard as another investor who perhaps opted to hold 25% in a bunch of foreign stocks (international), 25% domestic stocks and 50% in bonds.

International stocks will provide stock + currency change gains/losses. Two risk exposures for the same amount of investment. The Permanent Portfolio separates out those two risks and holds them individually - somewhat like investing twice as much to gain similar risk/reward exposure.

This chart compliments of yahoo finance, shows how McDonald's share price, which has diverse global exposure to costs and earnings, performed over the 2008/9 crisis period.

Image

Over other periods when gold is losing -7% annualised real for decades (1980's/1990's), the likes of MCD might be yielding positive real rewards.


Enron worldcom chrysler GM and yeah, even McDonald's can fail and goto zero.

Gold, expectantly will not go to zero, or cease to exist, like horse buggy whip company did.

Ditto land btw, Atlantis, Chernobyl excepting

For stocks, I use index funds, otherwise you are taking risk that is expectantly non compensated.

It's apples and oranges.

Ditto a basket of currencies. what basket of currencies spiked up relative to usd 4-5 times recently?
Last edited by LH on Thu Apr 25, 2013 5:02 pm, edited 2 times in total.
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Re: My Take on Gold

Postby rmelvey » Thu Apr 25, 2013 12:21 pm

Clive wrote:
Gold is a bit like holding just a basket of currencies alone. Most FX traders however wont just hold a currency directly, but will instead hold assets such as stocks in those currencies for their greater income/gain generation potential.


That is definitely part of the story. We cannot forget that gold is a physical asset though that takes energy to mine. Every other foreign currency exposure is either a liability of the governments treasury (a bond), or a liability of the governments CB (a reserve).

Let's imagine an oil crisis. Every commodity becomes more expensive to mine in this scenario and this would be a global phenomenon. No foreign currency would protect you from this. Gold (or most commodities) can protect you from both elements of unexpected inflation, demand shock or supply shock. Foreign currency exposure largely just protects you from the former.

My example is not terribly abstract either. It is exactly what happened in the 1970s. A global FX basket would not have save a stock/bond portfolio the same way that gold did. The idea of inflation being only a monetary phenomenon is a ridiculous meme that assumes that the supply of real goods and services is constant. Sometimes the supply curve shifts violently left (such as when you lose a war, or global oil supply is jeopardized). Most of the historical hyperinflations had this supply component as well as the monetary kicker.
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Re: My Take on Gold

Postby Rick Ferri » Thu Apr 25, 2013 12:41 pm

Gold (or most commodities) can protect you from both elements of unexpected inflation, demand shock or supply shock. Foreign currency exposure largely just protects you from the former.


At any price?

Gold is already trading at near 3 times it's inflation-adjusted average price. At what price does it reflect these possible crisis scenarios?

There must be a price limit on how high gold can go before this "protection" goes away. Gold can triple and triple again and some people will continue saying that owning it is a good idea because it's suppose to protect you from unexpected inflation, demand shock, supply shock, etc. That's not reality.

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Re: My Take on Gold

Postby rmelvey » Thu Apr 25, 2013 12:53 pm

Rick Ferri wrote:
Gold (or most commodities) can protect you from both elements of unexpected inflation, demand shock or supply shock. Foreign currency exposure largely just protects you from the former.


At any price?

Gold is already trading at near 3 times it's inflation-adjusted average price. At what price does it reflect these possible crisis scenarios?

There must be a price limit on how high gold can go before this "protection" goes away. It doesn't seem to matter. Gold can triple and triple again and some people will continue saying that owning it is a good idea because it's suppose to protect you from unexpected inflation, demand shock, supply shock, etc.

Rick Ferri


I am not smart enough to time a market as speculative and wild as gold. I don't think it can truly be valued. I don't see a logical or reasonable limit to how high or low gold can go it. However, it's speculative fervor/depression is affected by what is happening in other markets, making it a potent diversifier. I understand your job is to develop easily explainable and low cost plans to retail investors, but thats not my job. I am trying to pursue consistent inflation adjusted returns and I think a blend of stocks, sovereign bonds, and gold can do that for me. I am not asking you to change how you do business, but to simply respect how other people conduct theirs.

Besides, going with your assumption that gold is only likely to match a geometric average of the inflation rate over long periods of time does not mean that it wouldn't be able to boost returns of a portfolio. You must concede that gold is very volatile correct? That means that its arithmetic return is going to be higher than its geometric return. When combined with other low correlation asset classes (correlations driven by real fundamental differences, such as stocks/bonds/gold meaning that they are likely to persist going forward) you get to capture part of that arithmetic return, contributing to your overall portfolios geometric return through volatility harvesting (which is entirely within the confines of perfectly efficient markets).

Finally, can you honestly say that your piece was anything more than mere schadenfreude over a recent price drop? Do you think an investor reached a stunning new realization after reading it? It didn't even mention the word diversification once. Sophisticated investors only care about what an asset contributes to a diversified investment portfolio, anything else is just noise.
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Re: My Take on Gold

Postby JMacDonald » Thu Apr 25, 2013 1:03 pm

I don't think that this article has been posted yet. I found it interesting:
Gold’s Declining Price Is a Reversion to the Mean

http://economix.blogs.nytimes.com/2013/ ... -the-mean/
Best Wishes, | Joe
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Re: My Take on Gold

Postby hazlitt777 » Thu Apr 25, 2013 1:04 pm

Rick Ferri wrote: Gold is already trading at near 3 times it's inflation-adjusted average price. At what price does it reflect these possible crisis scenarios?

There must be a price limit on how high gold can go before this "protection" goes away.

Rick Ferri


When I try to examine the fundamentals of gold, I prefer to look not at gold's "price inflation"-adjusted average price, but rather at gold's "monetary inflation" adjusted average price. By monetary inflation I mean the increase in the money supply, through, to start with, the over 85 billion dollars of treasuries being purchased monthly for the foreseeable future.

Price inflation is an eventual effect of monetary inflation, which can show itself rather irradically, and suddenly, via prices. We just never know when. So I've put myself on my own gold standard, rebalance and wait it out.
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Re: My Take on Gold

Postby hazlitt777 » Thu Apr 25, 2013 1:10 pm

JMacDonald wrote:I don't think that this article has been posted yet. I found it interesting:
Gold’s Declining Price Is a Reversion to the Mean

http://economix.blogs.nytimes.com/2013/ ... -the-mean/


Or maybe it is just on sale for a little while?

Personally, I needed to rebalance (purchase some more) because my allocation was too low after this drop in price. If it increases in value such that it is higher than what my investment plan calls for, I will sell for a second time.
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Re: My Take on Gold

Postby rmelvey » Thu Apr 25, 2013 1:10 pm

hazlitt777 wrote:When I try to examine the fundamentals of gold, I prefer to look not at gold's "price inflation"-adjusted average price, but rather at gold's "monetary inflation" adjusted average price. By monetary inflation I mean the increase in the money supply, through, to start with, the over 85 billion dollars of treasuries being purchased monthly for the foreseeable future.

Price inflation is an eventual effect of monetary inflation, which can show itself rather irradically, and suddenly, via prices. We just never know when. So I've put myself on my own gold standard, rebalance and wait it out.


How are you defining the money supply growth though? Surely you don't think that the Fed buying Treasury bonds is the equivalent of creating more money do you? When you shift money from your savings account account your checking account is that creating more money?

The Fed doesn't add more purchasing power. The simply entice people to shift money from the savings account (a Treasury bond) to their checking account (reserves). It's the exact same thing. QE affects interest rates but does nothing to increase peoples amount of spending power.
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Re: My Take on Gold

Postby hazlitt777 » Thu Apr 25, 2013 1:37 pm

rmelvey wrote:
hazlitt777 wrote:When I try to examine the fundamentals of gold, I prefer to look not at gold's "price inflation"-adjusted average price, but rather at gold's "monetary inflation" adjusted average price. By monetary inflation I mean the increase in the money supply, through, to start with, the over 85 billion dollars of treasuries being purchased monthly for the foreseeable future.

Price inflation is an eventual effect of monetary inflation, which can show itself rather irradically, and suddenly, via prices. We just never know when. So I've put myself on my own gold standard, rebalance and wait it out.


How are you defining the money supply growth though? Surely you don't think that the Fed buying Treasury bonds is the equivalent of creating more money do you? When you shift money from your savings account account your checking account is that creating more money?

The Fed doesn't add more purchasing power. The simply entice people to shift money from the savings account (a Treasury bond) to their checking account (reserves). It's the exact same thing. QE affects interest rates but does nothing to increase peoples amount of spending power.


The Federal Reserve, our central bank, increases the money supply when they buy treasuries from the US Treasury. The treasury gives the central bank IOUs, treasuries, in return for cash. Where did the central bank get that cash which it hands over to the treasury? Out of thin air. When the government spends that money on anything, it get's into circulation thus bidding up prices of the goods and services it is used to purchase. This is how the dollar is devalued. Of course most of this cash is just in the form of electronic data and not 100 dollar bills of course.

When you or I shift money from our savings account to our checking account, no new money is created by that action. So no monetary or price inflation is caused.

If the US treasury could find enough buyers from the public, instead of the Federal Reserve, for all the treasuries it needs to sell each year, then no new money would be created and there would be no monetary inflation.
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 2:04 pm

hazlitt777 wrote:The Federal Reserve, our central bank, increases the money supply when they buy treasuries from the US Treasury. The treasury gives the central bank IOUs, treasuries, in return for cash. Where did the central bank get that cash which it hands over to the treasury? Out of thin air. When the government spends that money on anything, it get's into circulation thus bidding up prices of the goods and services it is used to purchase. This is how the dollar is devalued. Of course most of this cash is just in the form of electronic data and not 100 dollar bills of course.


I'm sorry, although it seems like that makes sense it's actually wrong. QE is an asset swap that has no impact on the total amount of outside money. By depressing interest rates QE does encourage the creation of inside money but that's another phenomenon altogether. Here's a decent explanation of the whole inside/outside concept:

http://pragcap.com/understanding-inside-money-and-outside-money

The sectoral balances equation will help us understand how QE effects inside money:

(S – I) = (G – T) + (X – M)

When interest rates are lowered (normally or artificially via QE) banks tend to lend more due to increased demand, this increases the values of both S and I but the changes net out to zero for the most part. (Interestingly the interest creates an imbalance on the left side of the equation that requires a positive balance of trade or government deficit spending to compensate)

If the above were not true then QE would have been horribly inflationary and the gold bugs would all be laughing and saying I told you so. I know it's strange but bank lending isn't reserve constrained as in the classical models, they lend first then seek reserves if legally necessary. All of this has only applied since we left the gold standard so the knowledge is still trickling it's way through the system. Many of the foremost experts grew up and were trained when the older model applied and are having trouble grasping that the rules are different now.

The same knowledge allows us to explain why Europe is such a mess, it's due to the fact that they have a currency union but not a fiscal union. Until that gets fixed then the major exporting nations of the Euro are going to continue sucking wealth out of the periphery countries. Eventually a breaking point will be reached and either they'll have to disolve the union or move to a shared fiscal system like we have here in the US.

This knowledge also explains why austerity measures often cause recessions. Although there can be some benefits to austerity like improving the productivity of government spending, reducing the size of the right hand part of the equation forces the private sector to shrink in total size as well.
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Re: My Take on Gold

Postby statsnerd » Thu Apr 25, 2013 2:17 pm

rmelvey wrote:That means that its arithmetic return is going to be higher than its geometric return.


Small nit. The arithmetic return is ALWAYS (weakly) greater than the geometric return due to Jensen's inequality because log is a concave function. The only time they equal each other is if the return is the exact same in every time period.
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Re: My Take on Gold

Postby hazlitt777 » Thu Apr 25, 2013 2:32 pm

Clearly_Irrational wrote:
hazlitt777 wrote:The Federal Reserve, our central bank, increases the money supply when they buy treasuries from the US Treasury. The treasury gives the central bank IOUs, treasuries, in return for cash. Where did the central bank get that cash which it hands over to the treasury? Out of thin air. When the government spends that money on anything, it get's into circulation thus bidding up prices of the goods and services it is used to purchase. This is how the dollar is devalued. Of course most of this cash is just in the form of electronic data and not 100 dollar bills of course.


I'm sorry, although it seems like that makes sense it's actually wrong. QE is an asset swap that has no impact on the total amount of outside money.


What assets are being swapped by the treasury for the money they receive from the Central bank/Federal Reserve, other than bonds? If it is only bonds, this is called monetizing the debt and is inflationary (in terms of money supply) and will be inflationary (in terms of prices.)

Relatively speaking, a lot of price inflation hasn't occurred as of yet because much of the cash(TARP funds) given to the banks in return for their "troubled assets" has not left the banks. But I think all the cash the treasury is getting is being spent into circulation. We have a annual budget debt of over 1 trillion dollars every year.

So as the monetary supply increases, the new ratio of dollars to gold(and goods and services) will continue to increase and we can expect gold (and other goods and services), volatile as it can be, to continue to rise over the long run.

So I've put myself on a gold standard just like most central banks have and rebalance.

What am I missing here? And what do you mean by outside and inside money?
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 3:06 pm

hazlitt777 wrote:What assets are being swapped by the treasury for the money they receive from the Central bank/Federal Reserve, other than bonds? If it is only bonds, this is called monetizing the debt and is inflationary (in terms of money supply) and will be inflationary (in terms of prices.)


QE swaps Treasuries for Bank Reserves. Under our current monetary system this doesn't actually create any money, it just swaps a higher yielding asset for a lower yielding one.

hazlitt777 wrote:But I think all the cash the treasury is getting is being spent into circulation. We have a annual budget debt of over 1 trillion dollars every year.


This is a separate issue. Federal budget deficits do increase the money supply (if they're larger than the trade deficit and any negative delta in the private sector), although the main problem is that right now they're too small. (As a fiscally conservative Libertarian it really pains me to say that, but it's true)

hazlitt777 wrote:So as the monetary supply increases, the new ratio of dollars to gold(and goods and services) will continue to increase and we can expect gold (and other goods and services), volatile as it can be, to continue to rise over the long run.


True, but all of this extraordinary activity has been to avoid deflation, which is what would be happening right now without government/Fed intervention. Actual inflation is low and likely to stay that way.

hazlitt777 wrote:So I've put myself on a gold standard just like most central banks have and rebalance.


I happen to like gold but that's nonsensical. Gold has a low level of moneyness in our current setup. It's pretty much impossible to put yourself on a gold standard.

hazlitt777 wrote:What am I missing here? And what do you mean by outside and inside money?


I posted an explanatory link above but here's the long version if you're a masochist: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

Basically our monetary system is a public/private hybrid that's mostly run by the banks but has some government inputs and supervision. In simplest terms outside money is created by the government, inside money is created by the banking system.

The level of inside money is partially controlled by the Fed when they adjust the yield curve (either by setting rates or by more extraordinary measures like QE), this indirectly affects loan demand which in turn affects loan/deposit creation rates. The level of outside money is partially controlled by congress due to changes in deficit spending levels, the other portion is due to our current account balance (trade deficit or surplus).
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Re: My Take on Gold

Postby rmelvey » Thu Apr 25, 2013 3:26 pm

Hazlitt,

The real takeaway is that the Fed buying Treasury securities only increases the "money supply" if you are saying that Treasury bonds aren't money. When you realize that Treasury bonds are just an interest bearing form of money (like a savings account or CD is an interesting bearing form of money) the world suddenly begins to make a lot more sense.

Keep in mind that with your model of the world we would have already had a massive inflation. Either the world is wrong or the mainstream model is wrong.

My money is betting that the mainstream model is wrong. If QE was inflationary we would have had inflation in Japan a long time ago.
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Re: My Take on Gold

Postby Phineas J. Whoopee » Thu Apr 25, 2013 3:48 pm

hazlitt777 wrote: ...
The Federal Reserve, our central bank, increases the money supply when they buy treasuries from the US Treasury.
...

Hi Hazlitt,

No third agreement between us yet I'm afraid. :(

Although if absolutely unavoidable it can do so, the Fed does not buy treasuries directly from the US Treasury. It buys them on the secondary market.

I'm not necessarily speaking about you in particular, but one cause of this misconception is that as the federal government's banker, the Fed provides the service of auctioning the treasuries, which go only to the primary dealers and the noncompetitive bidders.

The Fed is not a principal in the transaction, although I believe it has legal authority to act as one should there not be enough bids to cover the offering. The system is specifically set up so that in practice there will be more than enough bids, as in fact history shows there always are. If the US and Russia have a nuclear exchange or something similar happens then of course all bets are off.

Naturally the primary dealers take the Fed's stated policy into account when they make their competitive bids (which they always must make if they wish to retain their status), but it is absolutely incorrect to say that the Fed buys treasuries from the Treasury.

PJW
[Edited (slightly) to (slightly) improve clarity.]
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Re: My Take on Gold

Postby LH » Thu Apr 25, 2013 3:59 pm

Rick Ferri wrote:
Gold (or most commodities) can protect you from both elements of unexpected inflation, demand shock or supply shock. Foreign currency exposure largely just protects you from the former.


At any price?

Gold is already trading at near 3 times it's inflation-adjusted average price. At what price does it reflect these possible crisis scenarios?

There must be a price limit on how high gold can go before this "protection" goes away. Gold can triple and triple again and some people will continue saying that owning it is a good idea because it's suppose to protect you from unexpected inflation, demand shock, supply shock, etc. That's not reality.

Rick Ferri


I agree, buying gold now, you have to be able to eat the loss for 20 years, and keep buying, wait for the next price hike. I would certainly DCA in at these prices, as well as take a good bit of time before going in, think about it, if its not timing or hopping on a hot asset, there is no rush per se : )

No one knows what will happen, gold may level out, or even go up some more and stay there. But mean reversion may happen to historical mean (whichever one one picks). Heh, in fact, mean reversion WILL happen, but we just do not know what the mean is going forward. http://www.norstad.org/finance/rtm-and- ... g.html#rtm

High inflation of say 5-10 percent for several years may well already be priced in. Maybe even higher longer. devaluations/confiscations/bail ins/etc. are priced in to some extent.
Its unknow to what extent the various negative events are priced in, as well as to what negative events and magnitudes of negative events, if any (heheh), going forward will occur. Its a very interesting experiment that is being run by western economies with the monetary base elevation in the face of high debt GDP ratios and negative current accounts(US).

http://www.amazon.com/When-Money-Dies-D ... 1586489941

http://www.amazon.com/Great-Depression- ... depression

Good books if you want to read about some recent negative states. Very counter intuitive things happen. Perfectly fine new buildings demolished to save money, milk poured on ground while people hungry, etc. etc. A college kid can buy multiple houses with his college allowance. individual links off a gold chain used for survival. etc.
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Re: My Take on Gold

Postby hazlitt777 » Thu Apr 25, 2013 4:00 pm

People,

This is basically where I am coming from. http://en.wikipedia.org/wiki/Quantitative_easing

The only point I disagree with is where it is written, "According to the IMF and various other economists, quantitative easing undertaken since the global financial crisis has mitigated the adverse effects of the crisis." I don't think it has.

What it all comes down to is be diversified and rebalance and if gold is in the portfolios of the central banks, it will be in mine.

To each their own and good luck.

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Re: My Take on Gold

Postby rmelvey » Thu Apr 25, 2013 4:05 pm

hazlitt777 wrote:People,

This is basically where I am coming from. http://en.wikipedia.org/wiki/Quantitative_easing

The only point I disagree with is where it is written, "According to the IMF and various other economists, quantitative easing undertaken since the global financial crisis has mitigated the adverse effects of the crisis." I don't think it has.

What it all comes down to is be diversified and rebalance and if gold is in the portfolios of the central banks, it will be in mine.

To each their own and good luck.

Hazlitt


Hazlitt,

FWIW 25% of my target allocation is gold, so this is not a matter of fiat bug vs. gold bug. The mainstream view of how QE affects the economy is all wrong. After all, if it was right we would have already had inflation and an economic recovery. The old school fractional reserve and money multipler models do not describe the way our banking system actually functions today.

You should check out the paper on SSRN by Cullen Roche that was posted earlier. It would involve a paradigm shift in your thinking, but the logic is unassailable and you will become a better investor because of it.
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 4:40 pm

hazlitt777 wrote:This is basically where I am coming from. http://en.wikipedia.org/wiki/Quantitative_easing


I like Wikipedia and although there is a lot of good information in that article, some of it is just flat out wrong.

hazlitt777 wrote:The only point I disagree with is where it is written, "According to the IMF and various other economists, quantitative easing undertaken since the global financial crisis has mitigated the adverse effects of the crisis." I don't think it has.


QE1 was extremely effective in combination with the government guarantee of money market funds in keeping the entire system from collapsing, mostly for psychological reasons. QE2 & QE3 helped marginally by pushing real interest rates more negative but they were much less effective than QE1.

I hold gold as well, but not because I expect extreme levels of inflation.
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Re: My Take on Gold

Postby btenny » Thu Apr 25, 2013 4:51 pm

Some guys who hold a lot of gold do die broke or nearly broke. See below for Nevada gold bug. But the key thing from this hoarder is to hold gold coins. They are part art value which appreciates and part gold value which moves with inflation. Probably not as much risk. Plus the coins are very marketable. I know back in the 1970s we bought gold Krugerounds for $200ish and we sold them later for $1100ish. We thought we were rich with our $4K profit.....

http://www.foxnews.com/us/2012/09/17/ne ... side-home/

But since this Nevada guy never did anything with his gold the state is auctioning off most of it. See here.

http://www.marinij.com/business/ci_2267 ... -5-million

Bill

PS. Rick if the gold price really does move back to $600ish in the near future Nevada will really become a basket case. Vegas is already in trouble. Then if gold goes down it will take down the rest of the state. There are dozens of towns and developers and companies spending tons of $$$ on various mines and smelters and so forth all depending on big gold and related metal prices.
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Re: My Take on Gold

Postby btenny » Thu Apr 25, 2013 5:02 pm

I hold a bunch of oil companies all with huge oil reserves instead of gold for a portion of my portfolio. Everything I read and study on portfolio construction all comes back to some sort of inflation hedge and protection against currency manipulation that does not correlate well with regular stocks. Some people own commodities for this same reason. Others hold gold. I own oil. It has worked great for 20 plus years....

Bill
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 5:09 pm

btenny wrote:I hold a bunch of oil companies all with huge oil reserves instead of gold for a portion of my portfolio. Everything I read and study on portfolio construction all comes back to some sort of inflation hedge and protection against currency manipulation that does not correlate well with regular stocks. Some people own commodities for this same reason. Others hold gold. I own oil. It has worked great for 20 plus years....

Bill


Except you don't own oil, you own shares of a company that works with oil, not the same thing at all. Additionally, oil is pro-cyclical which kind of kills the whole point.
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Re: My Take on Gold

Postby Rick Ferri » Thu Apr 25, 2013 5:39 pm

rmelvey wrote:Rick, going with your assumption that gold is only likely to match a geometric average of the inflation rate over long periods of time does not mean that it wouldn't be able to boost returns of a portfolio. You must concede that gold is very volatile correct? That means that its arithmetic return is going to be higher than its geometric return. When combined with other low correlation asset classes (correlations driven by real fundamental differences, such as stocks/bonds/gold meaning that they are likely to persist going forward) you get to capture part of that arithmetic return, contributing to your overall portfolios geometric return through volatility harvesting (which is entirely within the confines of perfectly efficient markets).


The opportunity cost of owning gold is enormous. You're giving up the cash flow from stocks or bonds and the real growth in stocks to invest in an hard asset that we know has no real return in the long-term (negative net of costs). To hope that low-correlation makes up for it is a stretch. Larry Swedroe has been making the same argument about commodities funds for years - and I have disagreed with him for years.

Rick Ferri
Mutual fund investing is simple. There is risk, there is return, and there are costs. All else is marketing.
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 5:51 pm

Rick Ferri wrote:The opportunity cost of owning gold is enormous. You're giving up the cash flow from stocks or bonds and the real growth in stocks to invest in an hard asset that we know has no real return in the long-term (negative net of costs).


Of course that's also a strong argument not to own "cash" or short term bonds right now either. Even intermediate bond funds are only returning maybe a quarter of a percent real return.
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Re: My Take on Gold

Postby btenny » Thu Apr 25, 2013 6:56 pm

Clearly. Yes you are sort of right but IMO owning a good profit producing company is miles better than a zero return commodity fund or hard gold. And my approoach also provides a large amount of inflation protection. So IMO a little procyclical in a stock is OK if there is also a good return over the long haul while you wait and a good dividend as well. Which is exactly the case with XOM. Plus they own so much oil/NG and oil/NG properties they are sort of like owning the commodity directly. And I also own a good slug of KMP as complement to XOM. Yes I know I have single stock risk but I also have single BIG OIL company stock stability and returns versus the wild swings of the commodity itself..

Bill
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Re: My Take on Gold

Postby LH » Thu Apr 25, 2013 7:18 pm

Clearly_Irrational wrote:
hazlitt777 wrote:What assets are being swapped by the treasury for the money they receive from the Central bank/Federal Reserve, other than bonds? If it is only bonds, this is called monetizing the debt and is inflationary (in terms of money supply) and will be inflationary (in terms of prices.)


QE swaps Treasuries for Bank Reserves. Under our current monetary system this doesn't actually create any money, it just swaps a higher yielding asset for a lower yielding one.




Let me get this straight.

You are saying, that when the Fed buy Treasuries, this does not increase the monetary base?

Also the corollary, that when the Fed sells treasuries, it does not decrease the monetary base?

http://en.wikipedia.org/wiki/Quantitative_easing
Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective.[1][2] A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus creating money and injecting a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to change money supply, in order to keep market interest rates at a specified target value.
(the pretty blue added by myself)

You had best get busy, you have a lot of textbooks, wikipedia, and other things to rewrite : )

I dunno, maybe its the term money creation? Its hard to figure where you are coming from?

http://en.wikipedia.org/wiki/Money_creation
In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased.


ergo

when the fed buy treasuries, it is:

1) increasing the money supply

and by definition

2) creating money

This is accepted/standard.
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Re: My Take on Gold

Postby Epsilon Delta » Thu Apr 25, 2013 7:29 pm

LH wrote:
Clearly_Irrational wrote:
hazlitt777 wrote:What assets are being swapped by the treasury for the money they receive from the Central bank/Federal Reserve, other than bonds? If it is only bonds, this is called monetizing the debt and is inflationary (in terms of money supply) and will be inflationary (in terms of prices.)


QE swaps Treasuries for Bank Reserves. Under our current monetary system this doesn't actually create any money, it just swaps a higher yielding asset for a lower yielding one.




Let me get this straight.

You are saying, that when the Fed buy Treasuries, this does not increase the monetary base?


Money supply ≠ Monetary base.

The reason there are so many definitions of money supply is that none of them work.
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 7:38 pm

LH wrote:Let me get this straight.

You are saying, that when the Fed buy Treasuries, this does not increase the monetary base?

Also the corollary, that when the Fed sells treasuries, it does not decrease the monetary base?


That's exactly what I'm saying, but if you don't believe me, let's get Fed Chairman's view:

“What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed." --Ben Bernanke

LH wrote:You had best get busy, you have a lot of textbooks, wikipedia, and other things to rewrite : )


In this case wikipedia is just flat wrong, but it's an understandable mistake as a lot of people still don't understand the post Bretton-Woods system. I didn't invent any of this and more and more experts are shifting their opinions in that direction all the time.

For me, when they announced QE1 I was like "Wow, that's banana republic style money printing with a fancy name, I bet inflation goes gangbusters!" When that didn't happen, I had to re-evaluate the models I was using and search around for something that fit the data. Monetary Realism as described by the paper I cited earlier seems to match all of the observable facts, classical economic theories don't. (Including Classical, Keynesian, Austrian, Monetarism or Marxism) When I first got into it they were calling it Modern Monetary Theory which is an offshoot of Chartilism however the MR and MMT folks had a big split last year and seem to be moving in different directions now.

Feel free to draw your own conclusions of course, personally I'm going with the theory that best fits observable reality since I need it to explain and predict events.
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Re: My Take on Gold

Postby LH » Thu Apr 25, 2013 7:54 pm

Clearly_Irrational wrote:
LH wrote:Let me get this straight.

You are saying, that when the Fed buy Treasuries, this does not increase the monetary base?

Also the corollary, that when the Fed sells treasuries, it does not decrease the monetary base?


That's exactly what I'm saying, but if you don't believe me, let's get Fed Chairman's view:

“What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed." --Ben Bernanke

LH wrote:You had best get busy, you have a lot of textbooks, wikipedia, and other things to rewrite : )


In this case wikipedia is just flat wrong, but it's an understandable mistake as a lot of people still don't understand the post Bretton-Woods system. I didn't invent any of this and more and more experts are shifting their opinions in that direction all the time.

For me, when they announced QE1 I was like "Wow, that's banana republic style money printing with a fancy name, I bet inflation goes gangbusters!" When that didn't happen, I had to re-evaluate the models I was using and search around for something that fit the data. Monetary Realism as described by the paper I cited earlier seems to match all of the observable facts, classical economic theories don't. (Including Classical, Keynesian, Austrian, Monetarism or Marxism) When I first got into it they were calling it Modern Monetary Theory which is an offshoot of Chartilism however the MR and MMT folks had a big split last year and seem to be moving in different directions now.

Feel free to draw your own conclusions of course, personally I'm going with the theory that best fits observable reality since I need it to explain and predict events.


So there is your conflation. No one is talking cash in circulation that is printed by a printing press. That is but a small part of monetary base.

Increasing monetary base does not per se lead to inflation. low velocity of money can neutralize it.

To put it in simple terms, say the govt actually has printed 50 "one trillion dollar bills". they are sitting in a govt vault right now. Well, the monetary base is now hugely increased, but to maybe be a bit loose, just a wacky extreme example, the velocity of those bills is effectively zero, because not only are they not changing hands, the economy does not even know they exist. (now maybe technically, the trillion dollar bills are not in money supply since not enough people know about em... I dunnno the technical details of this)

......

Simply put, if the fed buys bonds, there has been money creation (which is NOT the same as circulating cash creation) because the monetary supply is increased. This is basically true almost by definition/textbook for twenty plus years to my experience. Wiki has it right.

Now, Inflation or no, is a separate question, and then one brings in concept of velocity of money to address that. Then one is off and running, schools of thought, and we cannot go there here...............

http://en.wikipedia.org/wiki/Velocity_of_money

I am gonna end it here. This is just standard basic wikipedia level facts and definitions. Just trying to help out.

Have a nice day,

LH
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Re: My Take on Gold

Postby Clearly_Irrational » Thu Apr 25, 2013 8:26 pm

LH wrote:So there is your conflation. No one is talking cash in circulation that is printed by a printing press. That is but a small part of monetary base.


That's not what I was getting at.

LH wrote:Increasing monetary base does not per se lead to inflation. low velocity of money can neutralize it.


No argument there.

LH wrote:To put it in simple terms, say the govt actually has printed 50 "one trillion dollar bills". they are sitting in a govt vault right now. Well, the monetary base is now hugely increased, but to maybe be a bit loose, just a wacky extreme example, the velocity of those bills is effectively zero, because not only are they not changing hands, the economy does not even know they exist. (now maybe technically, the trillion dollar bills are not in money supply since not enough people know about em... I dunnno the technical details of this)


The semantics start to get a bit esoteric, but essentially bank reserves are sort of equivalent to your hypothetical money sitting in a warehouse.

LH wrote:Simply put, if the fed buys bonds, there has been money creation (which is NOT the same as circulating cash creation) because the monetary supply is increased. This is basically true almost by definition/textbook for twenty plus years to my experience. Wiki has it right.


I don't believe that is true this case, however I agree we're starting to veer off topic and into areas this forum doesn't allow so let's stop there.
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Re: My Take on Gold

Postby nedsaid » Thu Apr 25, 2013 9:40 pm

Gold is an excellent store of value and retains purchasing power. The problem is if you bought it at the wrong time, you could see a lot of years of negative real return. Think of the folks who bought gold at $800 per ounce during the previous gold craze (early 1980's, late 1970's?? memory a bit foggy) only then to see the price languish at about $300 per ounce for
many years. It would have taken many years to get back to the $800. So a lot depends on when you buy.

I wouldn't mind holding gold, it is a matter of investing my funds as productively as I could. I have always seen gold as a store of value and not something that would generate growth. Those same funds invested in Gold would have done much better in stocks.

Gold and silver coins are beautiful. I sold out to put the funds to better use.
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Re: My Take on Gold

Postby nedsaid » Thu Apr 25, 2013 10:27 pm

Easy answer. Your holding period may have to be a very long time.

Over long periods of time, gold retains purchasing power. But it is an asset vulnerable to human emotion like any other asset class. It can have extreme highs and lows.

If you buy high, you might have a big problem. To get back to even in purchasing power after a big dip, you might have a long wait.

If Gold wasn't an excellent store of value, Governments wouldn't have so much in vaults. Governments have longer life spans than us mortals and can wait things out better than we can.
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Re: My Take on Gold

Postby umfundi » Thu Apr 25, 2013 10:41 pm

Keith's Law:

Every Boglehead thread with "Gold" in the title will be locked, sooner or later.

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Re: My Take on Gold

Postby nedsaid » Thu Apr 25, 2013 10:42 pm

I would say that if you inherited gold coins from your parents that were purchased many, many years ago that they would have held their purchasing power.

If you received instead currency that had been stored in a mattress for the same period of time, that paper would have a fraction of the purchasing power that it had when it was issued.

So which was the better store of value, the currency or the gold coins?

I was making a point about valuation and the timing of purchases. What works over very long periods of time may not work over shorter time spans.

I could have also made the statement that stocks produce a real return over time and then talked about the 80% drop experienced during the depression years. I could have warned about keeping an eye on valuation when making purchases.

Frankly, from a moderator on this forum I found your sarcasm to be very unbecoming.
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Re: My Take on Gold

Postby nedsaid » Thu Apr 25, 2013 11:31 pm

I will make one more comment.

I am a recent joiner to the Bogleheads forum. I have been here only since November 2012. Having a forum moderator quote something I said in bold Capital Letters and in large font and then ridiculing my point was very unbecoming behavior.

What I was guilty of was not stating my point very well. It wasn't a sin and I did not deserve to be held up for ridicule.

This forum exists to promote civil discussion on investment topics. To be ridiculed by a moderator on this forum who should know better is in my book pretty inexcusable.

I also find the use of profanity on the forum and a misquote of what I said to be very unexcusable.

I for one will not stand for it. Moderators should be encouraging new posters to the forum and not discouraging them.

[There is a check and balance system between the moderators and site admins. I removed the posts and will follow through. --admin LadyGeek]
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Re: My Take on Gold

Postby AndrewJackson » Fri Apr 26, 2013 12:50 am

I view gold as insurance against asset confiscation and mass hyperinflation/loss of faith in the system. I believe that PHYSICAL gold/silver should make up around 10% of ones portfolio, 15% if you are have an affinity for holding the shiny stuff. I think those that are against holding gold in a portfolio need to broaden their minds to possible risks that ones wealth will face in the future. I hope those two issues do not rear their ugly head around, however, I would rather be prepared if they do.
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Re: My Take on Gold

Postby nedsaid » Fri Apr 26, 2013 12:58 am

Your view is a rational view. I have considered holding gold but have chosen not to.

It depends on your investment philosophy and your view of the world. Gold is a universally recognized store of value and is a good hedge against currency devaluation. All currencies lose purchasing power over time.

There is no right answer to the proper amount of Gold to hold in a portfolio. My holdings are zero at this time. If others choose to hold some in their portfolios, that is fine with me. 5% to 10% makes sense to me.
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