Gold

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Re: Gold

Postby Ged » Fri May 17, 2013 12:28 pm

wesleymouch wrote:In the 1930s people held gold in safety deposit boxes. Today almost no Americans own gold. If the Govt wanted to confiscate gold they would take GLD, IAU, and other ETF gold not rummage through millions of safety deposit boxes to look for gold.


Ah, the myth of the safe deposit box searches. It didn't happen.

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Re: Gold

Postby shersch » Fri May 17, 2013 12:38 pm

There's some interesting research being done on whether gold is even the optimal hedge against "surprise" inflation.

http://news.morningstar.com/articlenet/article.aspx?id=541440

Assuming unexpected inflationary shocks are genuine phenomena, I'm still not convinced it's worth the cost to try and hedge against them given the traditionally poor returns and huge volatility associated with commodities. Low/negative correlation only matters if your rebalance strategy extracts incremental return and/or the asset classes have independently satisfactory returns.

I'm just not sure commodities fit the bill, but I could probably be talked out of that.
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Re: Gold

Postby Browser » Fri May 17, 2013 1:09 pm

We can speculate about what the government might or might not do if we fall into the handbasket and the price of gold starts shooting to the moon. But if you don't want to bet on it, and you want to own the gold asset in it's purest form - unencumbered by counterparty risks - you should probably own physical gold outside the reach of counterparties. I'm not doing that because it seems like a bunch of trouble, but I still think it would be a good idea if you really believe the gold case.
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Re: Gold

Postby Clearly_Irrational » Fri May 17, 2013 1:49 pm

I hold 20% in gold right now. Sure, tracking error can be annoying in periods like now where the market is zooming upwards, but it was great in August 2011 when the market plunged and my portfolio didn't. If you can't handle tracking error, don't buy alternative assets. The Fed is talking about tapering QE so eventually they'll start raising rates, real returns will turn positive and I'll rotate out of gold into cash, for the moment I'm doing what I'm supposed to which is not try to time the market.
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Re: Gold

Postby momar » Fri May 17, 2013 1:51 pm

shersch wrote:There's some interesting research being done on whether gold is even the optimal hedge against "surprise" inflation.

http://news.morningstar.com/articlenet/article.aspx?id=541440

Assuming unexpected inflationary shocks are genuine phenomena, I'm still not convinced it's worth the cost to try and hedge against them given the traditionally poor returns and huge volatility associated with commodities. Low/negative correlation only matters if your rebalance strategy extracts incremental return and/or the asset classes have independently satisfactory returns.

I'm just not sure commodities fit the bill, but I could probably be talked out of that.

It's pretty clear to me that gold is the ultimate hedge of people crying wolf about hyperinflation.
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Re: Gold

Postby Browser » Fri May 17, 2013 2:26 pm

The argument that gold is an effective inflation hedge has to deal with a couple of problems: First, the real (inflation-adjusted) price of gold was fairly constant until the 1970s in the U.S. However, this is an artifact since the U.S. operated with a variety of currency regimes “backed” by gold and silver (bimetallism), or just gold, from 1791 until the early 1970s. It "proves" nothing about the inflation-hedging ability of gold in the U.S. Second, since the gold standard was finally abandoned in the 1970s in the U.S., the price of gold has been quite volatile and, as a result, it has been a terrible hedge for inflation. An examination of the correlation between the year-over-year price for gold and the annual inflation rate from 1975-2012 shows that any observed positive relationship was due to just one year - 1980. From 1981 until 2001, the compounded real value of gold declined by over -7% annually. Then from 2002 to 2012 the compounded real value of gold grew by 14.5% annually. This is not the behavior of an effective inflation hedge.
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Re: Gold

Postby TO39 » Fri May 17, 2013 4:21 pm

here is a real chart comparing PP to two 50/50 portfolios; barbell and bullet
There is yearly rebalancing
You can change the dates if you like


http://www.longtermreturns.com/p/histor ... r_1__5yr_1
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Re: Gold

Postby Browser » Fri May 17, 2013 6:37 pm

So, it hasn't been pretty this year. Instead of being up 17% with stocks YTD, if you split that part of your allocation between stocks and gold, that part of your portfolio is down about 1% and has had higher volatility to boot. Usually, you gain some volatility dampening with negatively correlated assets at the expense of returns, but not always.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Gold

Postby Clive » Fri May 17, 2013 6:38 pm

shersch wrote:Low/negative correlation only matters if your rebalance strategy extracts incremental return and/or the asset classes have independently satisfactory returns.

Applying Robert Lichello's AIM to UK gold prices since 1968

Image

Considering the -22% in the mid 1970's was when the UK was being bailed out by the IMF, and even treasury's lost out heavily in net real terms, a 2% plus real reward from half of funds in high street cash deposits (often better rates can be achieved elsewhere than the 0.5% level presently being paid), half in gold, yielding a modestly consistent real gain, perhaps suggests that its wrong to just look at individual asset returns alone.
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Re: Gold

Postby topper1296 » Fri May 17, 2013 6:39 pm

I haven't read all of the other replies on this subject, however I've always believed that gold is a lousy investment (has no earnings, no dividend, no interest payments). Having said that, I do believe is has some value for diversification/insurance purposes as part of an overall diversified portfolio. Full disclosure: I hold 5-10% in gold.
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Re: Gold

Postby avalpert » Fri May 17, 2013 8:27 pm

Ged wrote:The best projection of gold performance over time is that it will match inflation. One ounce of gold buys a nice suit today, and will continue to do so in the future. I need better performance than that.


This is patently silly - did the price of a suit go up from 400 to 1800 dollars in less than a decade? Has it dropped 20% recently? Does a nice suit cost the same in New York that it costs in Bangkok?
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Re: Gold

Postby Ged » Fri May 17, 2013 10:37 pm

avalpert wrote:
Ged wrote:The best projection of gold performance over time is that it will match inflation. One ounce of gold buys a nice suit today, and will continue to do so in the future. I need better performance than that.


This is patently silly - did the price of a suit go up from 400 to 1800 dollars in less than a decade? Has it dropped 20% recently? Does a nice suit cost the same in New York that it costs in Bangkok?


No, it is not silly. It is a very commonly used example of how gold is an inflation hedge. Here is one of many articles you can find online that discuss the idea.

http://www.businesswire.com/news/home/2 ... uals-Price
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Re: Gold

Postby momar » Fri May 17, 2013 10:45 pm

Ged wrote:
avalpert wrote:
Ged wrote:The best projection of gold performance over time is that it will match inflation. One ounce of gold buys a nice suit today, and will continue to do so in the future. I need better performance than that.


This is patently silly - did the price of a suit go up from 400 to 1800 dollars in less than a decade? Has it dropped 20% recently? Does a nice suit cost the same in New York that it costs in Bangkok?


No, it is not silly. It is a very commonly used example of how gold is an inflation hedge. Here is one of many articles you can find online that discuss the idea.

http://www.businesswire.com/news/home/2 ... uals-Price

Translation: the price of suits spans a wide range.
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Re: Gold

Postby 168gr » Fri May 17, 2013 11:30 pm

Ged wrote:No, it is not silly. It is a very commonly used example of how gold is an inflation hedge.

It's silly because it's wrong. The fact that people commonly use it as a (wrong) example is what makes it silly.
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Re: Gold

Postby avalpert » Sat May 18, 2013 11:13 am

Ged wrote:
avalpert wrote:
Ged wrote:The best projection of gold performance over time is that it will match inflation. One ounce of gold buys a nice suit today, and will continue to do so in the future. I need better performance than that.


This is patently silly - did the price of a suit go up from 400 to 1800 dollars in less than a decade? Has it dropped 20% recently? Does a nice suit cost the same in New York that it costs in Bangkok?


No, it is not silly. It is a very commonly used example of how gold is an inflation hedge. Here is one of many articles you can find online that discuss the idea.

http://www.businesswire.com/news/home/2 ... uals-Price

No it is quite silly - and just because it is a commonly used example doesn't make it a good one. Notice how you don't address the substantive reasons I gave for why it is silly - it is far more volatile than the price of suits, it is far more standardized across geographies than the price of suits, etc. The only thing the example is good for is confusing people into thinking Gold hedges inflation over time - why don't you actually track it to inflation instead of an arbitrary good at a subjectively defined quality level.
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Re: Gold

Postby TO39 » Sat May 18, 2013 12:31 pm

avalpert wrote:
Ged wrote:
avalpert wrote:
Ged wrote:The best projection of gold performance over time is that it will match inflation. One ounce of gold buys a nice suit today, and will continue to do so in the future. I need better performance than that.


This is patently silly - did the price of a suit go up from 400 to 1800 dollars in less than a decade? Has it dropped 20% recently? Does a nice suit cost the same in New York that it costs in Bangkok?


No, it is not silly. It is a very commonly used example of how gold is an inflation hedge. Here is one of many articles you can find online that discuss the idea.

http://www.businesswire.com/news/home/2 ... uals-Price

No it is quite silly - and just because it is a commonly used example doesn't make it a good one. Notice how you don't address the substantive reasons I gave for why it is silly - it is far more volatile than the price of suits, it is far more standardized across geographies than the price of suits, etc. The only thing the example is good for is confusing people into thinking Gold hedges inflation over time - why don't you actually track it to inflation instead of an arbitrary good at a subjectively defined quality level.



This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period
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Re: Gold

Postby rmelvey » Sat May 18, 2013 1:04 pm

Keep in mind that the CPI represents a basket of finished goods that has a changing composition over time. Gold is a raw commodity. Comparing them is kind of an apples to oranges comparison. Productivity increases mean that we can produce more finished goods with the same amount of raw commodities. So inflation measured by the CPI could be going down even if raw commodity prices remain flat or are going up.

Look at this chart that shows the CPI versus oil and gold.
Image

Clearly, comparing gold to other raw commodities makes way more sense than comparing it to the CPI.
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Re: Gold

Postby avalpert » Sat May 18, 2013 1:17 pm

TO39 wrote:

This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period


I don't look for volatility in my hedges - kind of defeats the purpose.
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Re: Gold

Postby Browser » Sat May 18, 2013 2:50 pm

This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period

In my up-post I pointed out that the USD was pegged to gold or gold/silver from 1791 until the early 1970s. So it means nothing that gold and the inflation rate (which is measured in US dollars of course) tracked closely until the early 1970s, as this chart clearly shows. If the dollar had been pegged to squirrel pelts until the 1970s, then the price of squirrel pelts would have tracked the inflation rate in U.S. dollars better than gold or silver.
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Re: Gold

Postby Ged » Sat May 18, 2013 3:13 pm

avalpert wrote:No it is quite silly - and just because it is a commonly used example doesn't make it a good one. Notice how you don't address the substantive reasons I gave for why it is silly - it is far more volatile than the price of suits, it is far more standardized across geographies than the price of suits, etc. The only thing the example is good for is confusing people into thinking Gold hedges inflation over time - why don't you actually track it to inflation instead of an arbitrary good at a subjectively defined quality level.


You seem to have ignored the descriptions of the comparison in the article I linked to.

1. The suits are obtained from a particular location, usually a major capital in the developed world where people are accustomed to buying bespoke suits. Not some place like Bangkok. This eliminates your objection to variations in price by location.

2. The volatility issue is eliminated by the simple phrase "over time" that was used in my original statement. Yes gold is variable in price. Suits are also according to demand and economic conditions. Over time however the correspondence between the price of a good suit and an ounce of gold works well.

The reason this description is used is that it eliminates an element of abstraction from the dialog, thereby making it easier for many readers to understand.

It is not 'silly'.
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Re: Gold

Postby avalpert » Sat May 18, 2013 3:44 pm

Ged wrote:
You seem to have ignored the descriptions of the comparison in the article I linked to.

1. The suits are obtained from a particular location, usually a major capital in the developed world where people are accustomed to buying bespoke suits. Not some place like Bangkok. This eliminates your objection to variations in price by location.


So which world capital - Toronto, New York, London, Rome? Seems they all tell you different stories: http://mms.businesswire.com/bwapps/medi ... 7912&vid=5


2. The volatility issue is eliminated by the simple phrase "over time" that was used in my original statement. Yes gold is variable in price. Suits are also according to demand and economic conditions. Over time however the correspondence between the price of a good suit and an ounce of gold works well.

Of course, great cop out - by saying it is 'over time' you never need it to actually track at all because some day, over time it will again. If you think the volatility of gold is anything like the volatility of suit prices you are nuts, and if you think the trajectory of gold prices over time has tracked suits you are just being very selective in your data points.

The reason this description is used is that it eliminates an element of abstraction from the dialog, thereby making it easier for many readers to understand.

Yes, eliminates the abstraction and all those pesky details that make it untrue - that way readers can understand what you want them to and not have to worry about actual performance expectations. Who cares if between 1981 and 2004 gold prices declined 67% in real Canadian dollars terms while the price of a suit increased - over time it will all work out...

It is not 'silly'.

Yes, yes it is - very silly.
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Re: Gold

Postby TO39 » Sat May 18, 2013 3:52 pm

Browser wrote:
This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period

In my up-post I pointed out that the USD was pegged to gold or gold/silver from 1791 until the early 1970s. So it means nothing that gold and the inflation rate (which is measured in US dollars of course) tracked closely until the early 1970s, as this chart clearly shows. If the dollar had been pegged to squirrel pelts until the 1970s, then the price of squirrel pelts would have tracked the inflation rate in U.S. dollars better than gold or silver.



Gold was linked to the dollar not inflation, especially from 1935 to 1971, as this chart clearly shows to me.

http://www.longtermreturns.com/p/histor ... lots1=none

Also clear is the volatility of gold compared to inflation went up post 1971.
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Re: Gold

Postby TO39 » Sat May 18, 2013 4:00 pm

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Re: Gold

Postby Browser » Sat May 18, 2013 7:07 pm

Gold was linked to the dollar not inflation, especially from 1935 to 1971, as this chart clearly shows to me.

http://www.longtermreturns.com/p/histor ... lots1=none

Also clear is the volatility of gold compared to inflation went up post 1971.

My take is that if there were a 1:1 relationship between dollars and gold, and inflation is measured in dollars, then gold would be a perfect hedge for inflation by definition. In fact the link has not been a perfect 1:1 for all time periods even when the dollar was backed by gold. It was also backed by silver (remember the "silver cerficate"?) and there were times when the gold/dollar ratio was changed, etc. Nonetheless, there was a pretty strong linkage between dollars and gold until the early 1970s. When the linkage was completely severed, the dollar value of gold was set free to roam the range far and wide. It has since become a terrible hedge for inflation, as measured in dollar terms. From 1972-1981 the price of gold far exceeded the actual inflation rate. Then for the next two decades the price of gold was far below the dollar inflation rate. Then over the last 12 years it once again increased in dollar value far more than the inflation rate. Squirrel pelts anyone?
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Re: Gold

Postby RandyAdams1978 » Sat May 18, 2013 9:23 pm

According to Wikpedia, there is an internet hoax circulating regarding FDR's order and the seizure of gold stored in safety boxes.

https://en.wikipedia.org/wiki/Executive_Order_6102#The_myth_of_a_safe_deposit_box_seizures_order

Another web site, which appears to have the full text of Executive Order 6102, makes no mention of safety deposit boxes.

http://www.presidency.ucsb.edu/ws/?pid=14611
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Re: Gold

Postby momar » Sat May 18, 2013 9:31 pm

avalpert wrote:
TO39 wrote:

This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period


I don't look for volatility in my hedges - kind of defeats the purpose.

Hedges should be volatile. If it just increases incrementally, it's not hedging the rest of your portfolio. It needs to spike up and make up for the rest of your portfolio if the event you are hedging against happens.

For example, TIPS aren't an inflation hedge, in that they don't protect the rest of your portfolio from inflation. They only protect the part that you have in TIPS.

This is not a comment on the utility of gold.
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Re: Gold

Postby avalpert » Sat May 18, 2013 9:56 pm

momar wrote:
avalpert wrote:
TO39 wrote:

This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period


I don't look for volatility in my hedges - kind of defeats the purpose.

Hedges should be volatile. If it just increases incrementally, it's not hedging the rest of your portfolio. It needs to spike up and make up for the rest of your portfolio if the event you are hedging against happens.

I should have been more precise - I don't want my hedges to be volatile relative to what they are hedging against.
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Re: Gold

Postby TO39 » Sat May 18, 2013 10:23 pm

avalpert wrote:
momar wrote:
avalpert wrote:
TO39 wrote:

This chart has gold staying close to US inflation over very long periods. lots of volatility though

http://www.longtermreturns.com/p/histor ... _1__Gold_1
edited to add: if it tracks inflation it looks like its going down, if I have the right starting period


I don't look for volatility in my hedges - kind of defeats the purpose.

Hedges should be volatile. If it just increases incrementally, it's not hedging the rest of your portfolio. It needs to spike up and make up for the rest of your portfolio if the event you are hedging against happens.

I should have been more precise - I don't want my hedges to be volatile relative to what they are hedging against.


I'm not sure what that means.

Try looking at this chart. It sure looks to me like the Permanent portfolio was using gold to hedge against something in the years 1971 to 1980. After that the permanent portfolio had decent returns even tho gold had a 20 year slump.

http://www.longtermreturns.com/p/histor ... _2__10yr_2

I think the PP used the volatility of gold to good effect in those years, and performed decently after wards.
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Re: Gold

Postby HomerJ » Sun May 19, 2013 12:14 am

Clive wrote:Image


LOL... Talk about cherry-picking the dates... 1971? when gold has been artificially held at $35 for like 40 years? So yeah it popped...

And then the chart ends in May 2009, very close to the near bottom when the S&P 500 was at 800-something... I wonder how that chart would look going to today with the S&P 500 at 1660....

By the way, I own about 5% in GLD, SLV, and CEF (which has dropped to 3%, so I really need to buy)... I like gold and silver as a insurance policy... 5% may not be worth much, but it seemed to help when the stock market crashed 5 years ago... But that chart is way too misleading.
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