Gold continues to fall

[athrone]

Clive,

I think you are bringing up some excellent points about the real costs associated with actual investments. Barry's data already shows that the return/volatility between bonds and Gold is already not that different. If we include the drag associated with expense ratios / taxes then the returns change as follows:

Ideal:
World equities: 5.40% real
US bonds: 1.70% real
US bills: 0.90% real
Gold: 1.00% real

With taxes/trading fees:
World equities: (5.40 - 1.25% taxes on diviends - 1% expense ratio) = 3.15% real
US bonds: (1.70% - 1.5% taxes on dividends) = 0.2% real
US bills: (0.90% - 1% taxes on dividends) = -0.1% real
Gold: (no fees or taxes on allocated Gold) = 1.00% real

So taken as a complete picture (fees, taxes, real performance, ease of implementation) Gold is actually a pretty decent asset class when compared against the alternatives. This is one reason why $10 Trillion in worldwide wealth currently resides in Gold.

[Noobvestor]

Clive,

I think you are bringing up some excellent points about the real costs associated with actual investments. Barry's data already shows that the return/volatility between bonds and Gold is already not that different. If we include the drag associated with expense ratios / taxes then the returns change as follows:

Ideal:
World equities: 5.40% real
US bonds: 1.70% real
US bills: 0.90% real
Gold: 1.00% real

With taxes/trading fees:
World equities: (5.40 - 1.25% taxes on diviends - 1% expense ratio) = 3.15% real
US bonds: (1.70% - 1.5% taxes on dividends) = 0.2% real
US bills: (0.90% - 1% taxes on dividends) = -0.1% real
Gold: (no fees or taxes on allocated Gold) = 1.00% real

So taken as a complete picture (fees, taxes, real performance, ease of implementation) Gold is actually a pretty decent asset class when compared against the alternatives. This is one reason why $10 Trillion in worldwide wealth currently resides in Gold.

On what planet do people invest in world equities with a 1% expense ratio? Last I checked, Vanguard Total US and Total International were in the .1% to .2% or so range.

And you are discounting entirely the higher tax when gold is sold, at 28% instead of 15% for long-term cap gains, which is nearly twice as much.

[Clive]

On what planet do people invest in world equities with a 1% expense ratio?

We're looking at it from a retrospective angle Noobvestor. What were the costs and taxes for a fund back in the 1970's/1980's for instance. Some were paying 70% tax on dividends in the 1970's. A 5% (or whatever) real gain is pretty meaningless if in practice you could never actually realise that gain.

Accordingly historic gains measured on a CPI adjusted basis only and that ignore taxes and costs may just reflect the higher taxes and costs that were evident historically.

Did either a 5 year Treasury or a 2 year T/long dated T barbell really generate a 3.4% real gain for investors in practice 1972 - 2011 as Simba's data indicates? I suspect not and that after taxes the actual real gain was closer to 0% real for those assets. Likewise did a Permanent Portfolio achieve actual real gains after costs of 3% to 5% since 1972? If you substitute 5 year T values for inflation in Simba's spareadsheet as a crude form of indication of inflation + costs (taxes etc.) and look at the 4x25 Permanent Portfolio real gains you'll see a much flatter gain progression (0% real net) but with a spike up and dive back down again event across the late 1970's/early 1980's period. In contrast a Fat Tail Minimisation or 3-Fund asset allocation saw more of a progressive rising trend based on the same measure (positive real net reward trend). i.e. the claimed safety of the Permanent Portfolio might just be an illusion and in practice had higher volatility and provided lower rewards. In more recent times however allowances, costs and taxes - or rather tax efficient choices (ISA's, Roth's etc.) are much more prevalent - at least in the UK and US (much less so elsewhere) - which is good for investors. Whether those allowances and efficiencies are permitted to persist into the next decade+ long period ??? I have a suspicion that that trend might have peaked - at least on the taxes and tax efficient choices front.

[Noobvestor]

The other thing missing from the analysis (by athrone) I quoted before: the bid/ask spread on gold (which I assume was as high historically as it is today, and it is still high-ish today).

As for mutual funds: average ER was similar to what it is today (a little lower), according to Vanguard, though index funds were a little more expensive (closer to .5%):



Anyway, I find all of this analysis and debate interesting from the sidelines, I just wanted to weigh in with a critique of some of the numerical simplification that seems to underestimate the cost of holding gold and overestimate the cost of other forms of investing, at least for a Boglehead (though to be fair, if the average is 1.whatever percent, then that's the average being paid, regardless). It is definitely worthwhile to look at the actual achievable results of a real investor, regardless.

[athrone]

Noobvestor,

You can currently buy bullion bars from reputable mints for $29.99/oz over spot. That is a one time bid/ask spread of 1.8%. Averaged over 20 years, this becomes an expense ratio of 0.09%.

Stocks have trading fees, a bid/ask spread, and annual expense ratios. So the idea that Gold has a much higher barrier to entry than Stocks is I think, false.

[Clive]

Thanks for those figures noobvestor.

...underestimate the cost of holding gold...

Using the data that nisiprius linked to and charted earlier



gold 1% real from 1900 is a rather localised recent value. For much of the period gold would have shown a negative real yield since 1900.

In the UK some physical gold traders were charging a 10% spread on gold for smaller size trade amounts, 5% for modest sized trade amounts prior to the recent surge in interest in gold. Then there's insurance costs and maybe taxes etc.

Equally however over here some bond market makers really mug private investors - who might not even see a live bid/ask price when trading. I suspect in the past when some traded stocks via post there were market makers who might also have exploited investors.

All little tricks to harvest some of investors funds in a discrete manner.

I recall buying gilts yielding 15%+ back in the mid 1970's. Being fresh out of school I was under the tax level at that time so got to keep it all, but for most who were working and even just paying basic rate tax, around a third of that would have gone in tax. At a time when inflation was running at similar 15% levels.

We tend to take greater transparency and tax efficient options much more for granted nowadays - and perhaps forget to account for the lack of such efficiencies in the past when looking back at historic returns.

[STC]

Noobvestor,

You can currently buy bullion bars from reputable mints for $29.99/oz over spot. That is a one time bid/ask spread of 1.8%. Averaged over 20 years, this becomes an expense ratio of 0.09%.

Stocks have trading fees, a bid/ask spread, and annual expense ratios. So the idea that Gold has a much higher barrier to entry than Stocks is I think, false.

The bid/ask spread on VTI (total stock market) is $0.01. Or 0.014%. The spread you just talked about with Gold is 128.57 TIMES that of VTI. So, yes.. the barriers to entry are orders of magnitude higher. Not to mention you quote a PER Oz price. I can buy 1 share or 10,000 shares of VTI and my price doesn't change. $0 transaction cost and $0.01 spread. What if you wanted to buy 10oz? $299 in trading cost for a $17k investment?! Try to be factual please.

What are the exit costs of gold?

[hazlitt777]

Noobvestor,

You can currently buy bullion bars from reputable mints for $29.99/oz over spot. That is a one time bid/ask spread of 1.8%. Averaged over 20 years, this becomes an expense ratio of 0.09%.

Stocks have trading fees, a bid/ask spread, and annual expense ratios. So the idea that Gold has a much higher barrier to entry than Stocks is I think, false.

The bid/ask spread on VTI (total stock market) is $0.01. Or 0.014%. The spread you just talked about with Gold is 128.57 TIMES that of VTI. So, yes.. the barriers to entry are orders of magnitude higher. Not to mention you quote a PER Oz price. I can buy 1 share or 10,000 shares of VTI and my price doesn't change. $0 transaction cost and $0.01 spread. What if you wanted to buy 10oz? $299 in trading cost for a $17k investment?! Try to be factual please.

What are the exit costs of gold?

At www.golddealer.com you can get some sense of the costs involved, both in purchasing and selling....if you are interested in the physical market, which I personally prefer.

Typically per ounce (American Eagles, you pay $70 over spot. (No shipping or insurance if you buy $2000 or more.) They buy back at $20 over spot, again American Eagles. So that is about a 3 percent spread. If you ship back to them to sell, the only cost is $15 dollars for insurance and then postage. That varies but is close to the mark.

[STC]

Ok. So call it a 3% load. Ill be very generous and ignore the parabolic deviation from the historical mean that gold has experienced over the last 10 years, and go with the averages mentioned earlier.

1% real return - 3% load = 3 years to break even, with a 12 - 20 standard deviation.

Im still curious as to the ROLE of gold proposed in a portfolio? I understand WHY we have stocks and bonds. I get the argument for REITs. I even understand Golds role in the Permanent Portfolio. What I am trying to understand is what gold is supposed to accomplish in the earlier proposed 80/20 (equities/gold) portfolio? I still haven't seen an argument here for it that wasn't debunked?!

[Clive]

Taylor Larimore posted a link in another thread viewtopic.php?f=10&t=107379#p1560163

invest $50,000 in a mutual fund, never sell a single share, then seven weeks later receive a federal tax-bill of almost $9,000 for short-term gains?

within the linked to document it suggests "think twice before buying a shrinking fund"

Could that have implications for gold ETF investors if/when real yields turn positive and perhaps there's a large/fast outflow from gold into bonds?

[wshang]

Last summer with gold cracking $1900/oz we had quite a discussion here about gold with some of us asserting that gold was in a bubble and others saying that gold still had room to rise.

Following that, gold fell into the $1650-$1750 level, there to tread water for a while, but now it's falling again, and is at $1567 as I write this. In doing so it smashed through alleged "support levels".

I don't understand this alleged technical interpretation at all. This summer saw a two month period of lower lows. Its technical support is lower still. Look at the Chalkin Money Flow, cathartic selling passed, as of today, we are within 6% of a technical bottom. You wanted gold in the past? Here is your Christmas present.

Oh, yes, you are mocking Technical Analysis right? For an asset without an internal rate of return, quantitative measures of crowd psychology is the best method.

[Noobvestor]

Noobvestor,

You can currently buy bullion bars from reputable mints for $29.99/oz over spot. That is a one time bid/ask spread of 1.8%. Averaged over 20 years, this becomes an expense ratio of 0.09%.

Stocks have trading fees, a bid/ask spread, and annual expense ratios. So the idea that Gold has a much higher barrier to entry than Stocks is I think, false.

The bid/ask spread on VTI (total stock market) is $0.01. Or 0.014%. The spread you just talked about with Gold is 128.57 TIMES that of VTI. So, yes.. the barriers to entry are orders of magnitude higher. Not to mention you quote a PER Oz price. I can buy 1 share or 10,000 shares of VTI and my price doesn't change. $0 transaction cost and $0.01 spread. What if you wanted to buy 10oz? $299 in trading cost for a $17k investment?! Try to be factual please.

What are the exit costs of gold?

And the expense ratio for Vanguard Total Stock, Admiral Shares, is just .06%, so still less than the theoretical on gold being discussed, *and* on top of the spread issue: when you cash out it's at the cap gains rate, which is about half of the collectable tax rate on gold (not to mention if you have to rebalance in the interim). I'm not anti-gold by any means, but to have a serious discussion we need to be realistic about the cost differences.

[STC]

I agree. There are some things gold actually does. And those things can support a rationale to include gold in a portfolio. However, all I am seeing here is marketing material and hype. Nothing thought out enough in the context of a portfolio.

[halfnine]

Noobvestor,

You can currently buy bullion bars from reputable mints for $29.99/oz over spot. That is a one time bid/ask spread of 1.8%. Averaged over 20 years, this becomes an expense ratio of 0.09%.

Stocks have trading fees, a bid/ask spread, and annual expense ratios. So the idea that Gold has a much higher barrier to entry than Stocks is I think, false.

The bid/ask spread on VTI (total stock market) is $0.01. Or 0.014%. The spread you just talked about with Gold is 128.57 TIMES that of VTI. So, yes.. the barriers to entry are orders of magnitude higher. Not to mention you quote a PER Oz price. I can buy 1 share or 10,000 shares of VTI and my price doesn't change. $0 transaction cost and $0.01 spread. What if you wanted to buy 10oz? $299 in trading cost for a $17k investment?! Try to be factual please.

What are the exit costs of gold?

And the expense ratio for Vanguard Total Stock, Admiral Shares, is just .06%, so still less than the theoretical on gold being discussed, *and* on top of the spread issue: when you cash out it's at the cap gains rate, which is about half of the collectable tax rate on gold (not to mention if you have to rebalance in the interim). I'm not anti-gold by any means, but to have a serious discussion we need to be realistic about the cost differences.

And even that assumes
- an American investor (there are nationalities in which certain forms of gold are not taxed)
- owning physical gold (gold could certainly be owned via an ETF)
- purchased in the USA (there are places where the bid/ask spread is cheaper)
- in a taxable setup (although a bit of a headache I believe one could still establish physical gold in a tax deferred arrangement)
- in a tax bracket greater than 15% (gold isn't always taxed at 28%, it is just the highest it can be taxed at)
- with no tax loss harvesting (one can offset other capital losses against gold capital gains)
- and finally that in lieu of owning gold the individual would have owned solely Vanguard Total Stock Admiral Shares in its place

So, to be truly fair, I think the only serious discussion would have to take into account one's individual scenario and what they would otherwise own in lieu of gold. Certainly the advantages/disadvantages of owning gold aren't going to be the same for all people.

[hazlitt777]

Noobvestor,

You can currently buy bullion bars from reputable mints for $29.99/oz over spot. That is a one time bid/ask spread of 1.8%. Averaged over 20 years, this becomes an expense ratio of 0.09%.

Stocks have trading fees, a bid/ask spread, and annual expense ratios. So the idea that Gold has a much higher barrier to entry than Stocks is I think, false.

The bid/ask spread on VTI (total stock market) is $0.01. Or 0.014%. The spread you just talked about with Gold is 128.57 TIMES that of VTI. So, yes.. the barriers to entry are orders of magnitude higher. Not to mention you quote a PER Oz price. I can buy 1 share or 10,000 shares of VTI and my price doesn't change. $0 transaction cost and $0.01 spread. What if you wanted to buy 10oz? $299 in trading cost for a $17k investment?! Try to be factual please.

What are the exit costs of gold?

And the expense ratio for Vanguard Total Stock, Admiral Shares, is just .06%, so still less than the theoretical on gold being discussed, *and* on top of the spread issue: when you cash out it's at the cap gains rate, which is about half of the collectable tax rate on gold (not to mention if you have to rebalance in the interim). I'm not anti-gold by any means, but to have a serious discussion we need to be realistic about the cost differences.

Fair enough. Let me take a crack at it. The current and seemingly typical 3% spread on gold bullion is part of the nature of the gold market, inherent in the cost of doing business with a physical asset. It is a real draw back in comparison to paper financial assets.

The 28% collectible tax rate however is not inherent to the gold market. That was imposed upon it from without. I don't see the justice of this rate, high in comparison to other asset classes, but discussion of such an issue is beyond the purpose of this forum.

I will say this though. If such a rate is imposed upon gold, perhaps it is because of somebody's desire to discourage one from holding it in ones portfolio. That just gets me curious and encourages me to hold it. If the big central banks are holding it, I definitely will too, because perhaps there are more benefits beyond those that initially meet the eye.

[STC]

Hard week for gold... Bubble starting to burst?

[wesleymouch]

If you can't value gold ,which is an argument against holding it, then how can you tell it is overpriced?

[steve r]

If you can't value gold ,which is an argument against holding it, then how can you tell it is overpriced?

Humans have been placing a value on gold for all of recorded history. True, you can not put a value on gold using financial formulas but to say you can put no value on it at all is inaccurate.

The fact that it has value outside of financial formulas adds to its diversification benefit (IN MODERATION).

[wshang]

What 'fundamentals' does gold have?

The Coming of the Barbarians: THE OPENING OF JAPAN TO THE WEST 1853-1870
by PAT BARR
E. P. Dutton & Co., Inc.: New York 1967

Yokohama was ready for business. But, at first, business did not prosper. The Japanese, ex-temporising with their usual skill, had made solid-looking silver coins which were to be exchanged, weight for weight, with put theirs in gold. Four pretty itzibu — equivalent to about six shillings — would buy a whole cobang of gold— and a cobang of gold ~vas worth about eighteen shillings and fourpence outside Japan. Realising that they were on to a very good thing, the merchants ceased to bother about such cumbersome items as tea and silk and bought as much gold as they could lay their hands on and exported it as fast as they could find a ship to take it away. For a few glittering months there was a miniature gold rush as the foreigners poured Japanese gold out of the country and turned up neat little profits of two hundred per cent on every cobang sold in the Chinese markets. Every foreigner wanted itzibu to convert into gold; the customs men sitting behind their scales in the Custom House on the jetty were bribed and besieged by clamouring merchants; at least two American officers who happened to call in on their way to San Francisco resigned their commissions on the spot, chartered ships and started export firms; and the Japanese, bewildered to find all their gold being sent to China, began to understand that the pegging of an artificially high value on their silver had not been such a good idea after all. The mad bonanza was, inevitably, a short one, and Alcock was instrumental in finally persuading the Japanese government to adjust the relative value of their gold and silver to the established world prices.

Gold always has a fundamental value, one which gets arbitraged by the invisible hand.

[hazlitt777]

OT post deleted by admin alex

[STC]

Hard week for gold... Bubble starting to burst?

This thread should be called, "Gold continues to rise." It has risen 12 years in a row. In 2012 it was up 7%.

A bubble starting to burst? Not in my opinion....[deleted]

I know you love your recency bias... Perhaps some perspective:

[wshang]

http://i49.tinypic.com/a2j5x.jpg

From the chart, one can make a strong argument to hold gold over cash.

[neurosphere]

From the chart, one can make a strong argument to hold gold over cash.

Only if you define "cash" as physical dollars and coins left in your home or perhaps in a no-interest checking account. But if you define "cash" as ultra-short term bonds, savings bonds, short-term CDs, etc, than it's a different comparison.

When anyone on this board lists "cash" as part of their asset allocation, I don't think that refers only to the balance of their checking account and the amount in their wallet.

[STC]

http://i49.tinypic.com/a2j5x.jpg

From the chart, one can make a strong argument to hold gold over cash.

The chart makes a number of points re gold:

1: gold follows inflation
2: periodic spikes in the value of gold have historically been followed by 3-5 decades of performance that trails inflation (negative real return)
3: over a period of > 60 years, gold appeared to be a safe store of value

[STC]

http://i49.tinypic.com/a2j5x.jpg

From the chart, one can make a strong argument to hold gold over cash.

Also, if you view tbills as cash, which is a good argument, then look at the "bills" line... Not the dollar line.

Anyway, good luck to the gold bugs! I wouldn't touch the stuff!

[Joe S.]

Hard week for gold... Bubble starting to burst?

This thread should be called, "Gold continues to rise." It has risen 12 years in a row. In 2012 it was up 7%.

A bubble starting to burst? Not in my opinion..

I know you love your recency bias... Perhaps some perspective:

http://i49.tinypic.com/a2j5x.jpg[/img]

I may point out, STC, you started this exchange saying it has been a hard week for gold. That sounds like recency bias as well.

This chart is interesting. It shows the real price of gold in 2010 British Pounds going back to 1265AD.

Also this one. It shows the real price of gold in 1998 Dollars, going back to 1344AD.


Unfortunately, I don't know how they calculated the real price of gold, so I don't know how accurate these charts are. However even in they are off some, the long term real return of gold per year appears to be very close to 0%.
http://blogs.reuters.com/rolfe-winkler/ ... ld-higher/
http://www.zerohedge.com/news/charting- ... -back-1265

[STC]

Great charts. Hi lights the history of equity-like volatility with inflation tracking returns. Thanks for sharing!

[hazlitt777]

If you can't value gold ,which is an argument against holding it, then how can you tell it is overpriced?

You can value gold as easily as you can value the dollar, in fact, more easily, since gold is an actual commodity that has been used for centuries.

Gold in my opinion, should be a part of every well diversified portfolio for many reasons:

It was money for 1000s of years, it is still held by central banks as a first tier asset, it is easily traded, it is homogenous, stable/noncorruptible, takes up very little space per unit value, provides a unique form of financial protection unlike any other financial asset...just a few thoughts off the top of my head.

However, one shouldn't try to market time purchases, should rebalance, buy as economically as possible...in general applying the same boglehead principles we do to other major financial assets.

[hazlitt777]

http://i49.tinypic.com/a2j5x.jpg

From the chart, one can make a strong argument to hold gold over cash.

I would never own all of one, rather a little of both. Diversification will always be the name of the game, especially in these volatile markets.

I haven't made a close study of it, but it seems to me the DJIA was volatile this year, so was gold, and I have a suspicion that bonds and cash could become very volatile in the next three years. So I stay diversified between all four. I wish I had a magic formula to say how everyone should go about diversifying...the most attractive I've found is the Permanent portfolio, but that isn't a formula that is acceptable to everyone. I would hope though that the thought of broad diversification between all major financial assets would be.