Gold continues to fall

[baw703916]

What 'fundamentals' does gold have?

Its BtM is 1.0

[Lbill]

The thing that's really interesting about gold threads is that it seems to be the only investment that is discussed mostly by people who don't own it, never did, and never will. Why is that? Precious envy?

[Rodc]

The thing that's really interesting about gold threads is that it seems to be the only investment that is discussed mostly by people who don't own it, never did, and never will. Why is that? Precious envy?

Since most here to not seem do own gold would be pretty boring otherwise.

At any rate lots of people discuss football at the sports bar, around the water cooler at work on Monday morning, etc that have never played a real game of football, so nothing new.

Plus would it really make sense to only think and talk about investment X after you bought it? Or if only X bugs talked about X with no counterbalance?

[Lbill]

Plus would it really make sense to only think and talk about investment X after you bought it? Or if only X bugs talked about X with no counterbalance?

How many people who discuss stocks don't own any do you think?

[grayfox]

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". What's even more interesting is that gold is falling in the face of a growing number of economists and policymakers across the west proposing various deliberately inflationary schemes to try to revive economies or pay off mountains of debt with cheaper money.

Gold metal doesn't tarnish, but gold as an "investment" has definitely lost some of its shine.

Is gold up or down?

If I look at the GLD price chart on Google, I can click on different time periods.

1d +1.9%
5d -6.71%
1m -7.09%
3m -11.82%
6m +3.53%
YTD +11.9%
1Y +15.67%
5Y +154.58%
Since 2004 +246.65%

You can say gold trend is up or down, depending on your time period. But the title is continue to fall, so you are predicting that the 5d, 1m or 3m trend will continue, rather than the 1d, 6m, 1Y, 5Y or longer trend? Seems rather arbitrary and reflects more your personal beliefs and biases more than anything.

Here's another GLD chart with 20-day, 50-day and 200-day simple moving average.

http://stockcharts.com/h-sc/ui?s=GLD&p= ... 0711888939

Is the argument that the 200-day SMA has been broken and the trend has changed to a downtrend? Or does the 50-day have to cross the 200-day to indicate the change from up-trend to down-trend?

[jeffyscott]

If everyone thinks that everyone else thinks it is going down, it will, right?

http://ca.reuters.com/article/topNews/i ... 9L20111218

Gold prices will fall below $1,500 an ounce over the next three months and are unlikely to retest September's all-time highs until later 2012 at the earliest, according to a Reuters poll of 20 hedge fund managers, economists and traders.

[Lbill]

What we could be missing is that a major decline in the gold price (as well as commodities) is likely to be presaging significant economic weakness. There are plenty of indications that the crunch in Europe is combining with significant austerity measures, which Dennis Gartman thinks is reminiscent of what happened in the U.S. in the 1930s. In that case you sure don't want to be in stocks either, so anyone who hates gold better be re-thinking their relationship to equities also. A decline in the price of gold here is certainly NOT going to play out in favor of stocks, as it did in 1981. Then, gold fell out of bed because of serious tightening by the Fed which drove a stake through the heart of inflation. That was very good for stocks and for bonds. This time around it's an entirely different scenario in which the fates of gold and stocks are joined at the hip. Happy sailing, stockbugs!

[baw703916]

What we could be missing is that a major decline in the gold price (as well as commodities) is likely to be presaging significant economic weakness. There are plenty of indications that the crunch in Europe is combining with significant austerity measures, which Dennis Gartman thinks is reminiscent of what happened in the U.S. in the 1930s. In that case you sure don't want to be in stocks either, so anyone who hates gold better be re-thinking their relationship to equities also. A decline in the price of gold here is certainly NOT going to play out in favor of stocks, as it did in 1981. Then, gold fell out of bed because of serious tightening by the Fed which drove a stake through the heart of inflation. That was very good for stocks and for bonds. This time around it's an entirely different scenario in which the fates of gold and stocks are joined at the hip. Happy sailing, stockbugs!

Much as I hate prognostications, there does indeed seem to be a positive short-term correlation between gold and equities of late.

BTW, I did make a very small bet on gold: buying out of the money options on GLD in both directions. I have no idea if gold is going to go up or down, or any notion of what its intrinsic value should be. I'm guessing it will either keep going up, or go down precipitously. The one thing I'm pretty sure of is that it hasn't reached a permanently high plateau.

[TO39]

What 'fundamentals' does gold have?

I think one of the fundamentals that the gold buyers like is it's correlation with equities. It has no interest or income if that is what you meant, but does seem to t6rack inflation over very long periods.

[FredPeterson]

What we could be missing is that a major decline in the gold price (as well as commodities) is likely to be presaging significant economic weakness. There are plenty of indications that the crunch in Europe is combining with significant austerity measures, which Dennis Gartman thinks is reminiscent of what happened in the U.S. in the 1930s. In that case you sure don't want to be in stocks either, so anyone who hates gold better be re-thinking their relationship to equities also. A decline in the price of gold here is certainly NOT going to play out in favor of stocks, as it did in 1981. Then, gold fell out of bed because of serious tightening by the Fed which drove a stake through the heart of inflation. That was very good for stocks and for bonds. This time around it's an entirely different scenario in which the fates of gold and stocks are joined at the hip. Happy sailing, stockbugs!

I already tried that argument, but me not so smert to make grand argument like this.

well played.

[Wonk]

In a year it will be at a higher price than it is today--count on it.

I just made a note on my calendar to check on your prediction.

Just for the record, today, December 15, 2011, gold is at $1,570 per ounce.

I made a note on my calendar too. Assuming no crash in the last 2 hours of trading, it looks like the price of gold is indeed higher 1 year later. A modest 8%, but I'll take it, along with an ice-cold belgian beer if we ever happen to meet

[hazlitt777]

What 'fundamentals' does gold have?

It is a clever question. One I've seen before. Let me respond with a clever question:

What "fundamentals" does the dollar have?

Now I know the response is often, "This is not a fair comparison because you can invest dollars in bonds which pay interest." But then my question is, "If you can't tell me what the fundamentals of the dollar are, then are there any fundamentals to bonds, the principle of which are dollars and the interest of which are more dollars?"

The solution to this conundrum is to acknowledge that yes, gold and the dollar have fundamentals.

p.s. How is this actionable? What practical use does this have for investing? It is actionable in that if gold can have fundamentals just like the dollar and by extension bonds, then maybe it is worth discussing and thinking about gold as a potential financial asset which should make up a part of every portfolio.

[hazlitt777]

What we could be missing is that a major decline in the gold price (as well as commodities) is likely to be presaging significant economic weakness. There are plenty of indications that the crunch in Europe is combining with significant austerity measures, which Dennis Gartman thinks is reminiscent of what happened in the U.S. in the 1930s. In that case you sure don't want to be in stocks either, so anyone who hates gold better be re-thinking their relationship to equities also. A decline in the price of gold here is certainly NOT going to play out in favor of stocks, as it did in 1981. Then, gold fell out of bed because of serious tightening by the Fed which drove a stake through the heart of inflation. That was very good for stocks and for bonds. This time around it's an entirely different scenario in which the fates of gold and stocks are joined at the hip. Happy sailing, stockbugs!

You bring up a good point...the unusual, or at least perplexing correlation of stocks and gold. I believe this is because of monetary inflation which is being manifested, in addition to other places, in stocks and gold.

I don't mind it in as much as this is what gold traditionally should be doing. But it bothers me about stocks. I want my stocks to go up because their fundamentals...earning and business are doing better.

What to conclude. I think it entirely possible that if there is a shock to the system that people could panic into the dollar, long term a bad idea, and out of stocks and gold, causing temporarily gold and stocks to go down, shaking out the weak hands.

The solution...is the Bogle solution...take a position, rebalance and sit tight. In the short term the market is a casino. In the long term, it is a balance. (Can't remember the classic line...somebody help me here.)

The only thing I challenge the classic Bogelians on is their view of gold as a useless financial asset. It is one of the few blind spots. However, I am glad to see Mr. Bogle open now to seeing people, "if they really need to," investing 5% of their portfolio into gold. 10% would make me much happier for the well being of the average investor. But progress all the same in the dialogue.

[maddyken]

I'm not seeing any decline in the fear factor to justify the decline in gold.

[Dinero]

hazlitt777,

Try this:

"In the short run, the market is a voting machine but in the long run it is a weighing machine."

[Phineas J. Whoopee]

What 'fundamentals' does gold have?

It is a clever question. One I've seen before. Let me respond with a clever question:

What "fundamentals" does the dollar have?

Now I know the response is often, "This is not a fair comparison because you can invest dollars in bonds which pay interest." But then my question is, "If you can't tell me what the fundamentals of the dollar are, then are there any fundamentals to bonds, the principle of which are dollars and the interest of which are more dollars?"
...

Hi hazlitt777,

It's clever but meaningless, unless you're comparing ounces of gold in a safe to bundles of $100 bills in a safe.

I really don't mind your responding to every single post with "buy gold," but this one doesn't make sense.

PJW

[wesleymouch]

You are wrong on the price. Gold is trading circa $1696/ounce. I own it as part of the Permanent Portfolio strategy. Gold has gone up for the past 12 years and averaged about 17% per year return during this time period. Yet many continue to declare it a bubble particularly Rick Ferri. Gold is insurance and a currency hedge, nothing else. Given the current state of currency depreciation by many countries not to hold it is a risk

[hazlitt777]

What 'fundamentals' does gold have?

It is a clever question. One I've seen before. Let me respond with a clever question:

What "fundamentals" does the dollar have?

Now I know the response is often, "This is not a fair comparison because you can invest dollars in bonds which pay interest." But then my question is, "If you can't tell me what the fundamentals of the dollar are, then are there any fundamentals to bonds, the principle of which are dollars and the interest of which are more dollars?"
...

Hi hazlitt777,

It's clever but meaningless, unless you're comparing ounces of gold in a safe to bundles of $100 bills in a safe.

I really don't mind your responding to every single post with "buy gold," but this one doesn't make sense.

PJW

Think about it a little. I think what I wrote and you quoted does make sense. Give it some time sitting with a beer on a quiet night by yourself.

And as far as saying "buy gold" in every post. Well, yes and no. If you mean I am saying "buy gold, more and more every day" no. But if you mean I am saying, "Take a position in gold right now. And rebalance. Please!" Then I am guilty. I am a renegade Boglehead fighting for a place at the table, out to broaden the Boglehead tent.

[hazlitt777]

hazlitt777,

Try this:

"In the short run, the market is a voting machine but in the long run it is a weighing machine."

Thanks! It was a great line...but I couldn't remember it exactly.

[Phineas J. Whoopee]

What 'fundamentals' does gold have?

It is a clever question. One I've seen before. Let me respond with a clever question:

What "fundamentals" does the dollar have?

Now I know the response is often, "This is not a fair comparison because you can invest dollars in bonds which pay interest." But then my question is, "If you can't tell me what the fundamentals of the dollar are, then are there any fundamentals to bonds, the principle of which are dollars and the interest of which are more dollars?"
...

Hi hazlitt777,

It's clever but meaningless, unless you're comparing ounces of gold in a safe to bundles of $100 bills in a safe.

I really don't mind your responding to every single post with "buy gold," but this one doesn't make sense.

PJW

Think about it a little. I think what I wrote and you quoted does make sense. Give it some time sitting with a beer on a quiet night by yourself.

Done.

It makes no sense to compare a dollar-denominated bond to gold which just sits there. Either you have to compare gold which just sits there to cash which just sits there, as I said, or you have to compare a dollar-denominated bond which returns dollars to a gold-denominated bond which returns gold. Otherwise you're comparing apples to lunar regolith.

Interestingly enough, if you compared what I first suggested, gold to bundles of bills, your argument would sound more convincing. Perhaps you'd like to consider revising it.

And as far as saying "buy gold" in every post. Well, yes and no. If you mean I am saying "buy gold, more and more every day" no.

Not in the least. I've never read any such thing from you.

But if you mean I am saying, "Take a position in gold right now. And rebalance. Please!" Then I am guilty. I am a renegade Boglehead fighting for a place at the table, out to broaden the Boglehead tent.

Understood, and I exaggerated when I said "every single post." It's only to the posts to which you choose to respond. My apologies for the misrepresentation (which you did not complain about).

PJW

[Jerilynn]

And as far as saying "buy gold" in every post. But if you mean I am saying, "Take a position in gold right now. And rebalance. Please!" Then I am guilty.

Ok, so if you had a position in Gold 5 years ago and are rebalancing, you would be SELLING gold right now, correct?

[Clive]

And as far as saying "buy gold" in every post. But if you mean I am saying, "Take a position in gold right now. And rebalance. Please!" Then I am guilty.

Ok, so if you had a position in Gold 5 years ago and are rebalancing, you would be SELLING gold right now, correct?

The Permanent Portfolio starts with 25% in gold, but reduces that down to 15% holdings (or less) if the price relatively rises 40%, and then down to 5% (or less) holdings if the price relatively rises another 40%, feeding the proceeds into other (potentially declining) assets. i.e by the time the price had relatively doubled, the 25% initial amount invested in gold might have been reduced down to less than 5%.

Weimar Germany gold rose from 170 Marks in January 1919 to 1340 Marks in January 1920, 4000 Marks in January 1922. The Permanent Portfolio might have been holding less than 5% of its original 25% gold purchase amount by 1922, and perhaps significantly less as the price (rebalancing) continued further up to 87,000,000,000,000 Marks by the end of 1923. Far worse than someone who had just bought and held 5% (or less) of gold initially, or someone who had held a little exposure to some foreign currencies/assets.

When the prior trend continues rebalancing is not a good thing, when the prior trend reverses having rebalanced was a good thing. The choice of timing of rebalancing (or not) makes a substantial difference to overall results. For the Permanent Portfolio since 1972 for instance opting not to have rebalanced would have had lower reward and significantly higher risk (worse Sharpe/Sortino ratio). Generally however if you want gold to act as a degree of crisis insurance the better choice is not to rebalance.

[Joe S.]

The irony is that in a few years, most of the folks on this board who scoff at holding gold as an investment will be saying "well, maybe 5% allocation is ok." Gold is down 20% from a few months ago. Big deal. Secular bull markets don't derail this easily. In a year it will be at a higher price than it is today--count on it.

Most of the people on this website do not believe that the secular bull market concept is of any value in predicting markets. So making any argument and referring to the secular bull market concept is going to fail. If you can provide data showing that the secular bull market concept has an predictive value, then we will be interested.

You know better than to say "my astrologer says gold is going up," because you know we don't believe in astrology. However you use the secular bull market argument, when most of us think the secular bull market concept is no better than astrology. I think you need to read more of the Wiki and better understand what we believe and don't assume we believe in concepts like secular bull markets.

[Joe S.]

The Permanent Portfolio starts with 25% in gold, but reduces that down to 15% holdings (or less) if the price relatively rises 40%, and then down to 5% (or less) holdings if the price relatively rises another 40%, feeding the proceeds into other (potentially declining) assets. i.e by the time the price had relatively doubled, the 25% initial amount invested in gold might have been reduced down to less than 5%...

It would be helpful if you would tell me where you are getting your information from. Most Permanent Portfolios I have seen keep the percentage of gold at 25% no matter what. It's permanently at 25%.

[Clive]

25% of an increasingly smaller number.

If you initially invest in gold, but then repeatedly sell some as the price of gold rises then you hold less than had you not sold any. Reducing the weighting by 10% as-and-when the weighting had risen to 35% repeatedly into a strongly rising trend and when the other assets are in decline is a bit like being burdened with the heavy load of starting out with 250 grenades on the long journey towards a battle, but exchanging some for water that's pored into a leaking water-bottle along the way. By the time you get to the battle scene you may have fewer grenades than someone else who started out with (but kept) perhaps just 10 grenades, or another who started out with no grenades but decided to buy some from you a few miles before having reached the battle scene. In the heat of the battle when each grenade is worth its weight in gold you'll likely have regrets at having previously sold grenades at such relatively low prices during the journey.

Gold is a crisis insurance. Buying relatively heavy amounts of insurance generally, but then reducing the amount of cover the closer you get to a major crisis in anticipation of the crisis being averted is hardly good policy. Better perhaps to start out with relatively low or even no initial cover, but then add more cover as the prospect of the crisis being encountered increases.

[Joe S.]

The Permanent Portfolio starts with 25% in gold, but reduces that down to 15% holdings (or less) if the price relatively rises 40%, and then down to 5% (or less) holdings if the price relatively rises another 40%, feeding the proceeds into other (potentially declining) assets. i.e by the time the price had relatively doubled, the 25% initial amount invested in gold might have been reduced down to less than 5%...

It would be helpful if you would tell me where you are getting your information from. Most Permanent Portfolios I have seen keep the percentage of gold at 25% no matter what. It's permanently at 25%.

25% of an increasingly smaller number.

If you initially invest in gold, but then repeatedly sell some as the price of gold rises then you hold less than had you not sold any...

I didn't follow you before, but now I think I do, although your terminology is somewhat confusing. However I think your math may be off some. Your initial investment in gold drops much less than you suggest.

Let's take this example:

Gold is selling for $250 an ounce. You put $1000 into the permanent portfolio. You put $250 in gold so you buy 1 ounce. The day after you buy, gold skyrockets to $1250 an ounce. Everything else stays the same. You now have $2,000 in your portfolio, $1250 in gold. You want to rebalance to $500 in gold, so you sell 3/5 of an ounce of gold. So even though gold has gone up relatively by 400%, you still have 2/5 of your original ounce of gold, or 40%.

[mptfan]

In a year it will be at a higher price than it is today--count on it.

I just made a note on my calendar to check on your prediction.

Just for the record, today, December 15, 2011, gold is at $1,570 per ounce.

Thank you. I do hope you follow up.

I did follow up.... it is one year later, and gold is trading at $1,696 per ounce. You were right.

[nisiprius]

Gold is a crisis insurance.

Definition of INSURANCE

1a : the business of insuring persons or property
b : coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril
c : the sum for which something is insured

2: a means of guaranteeing protection or safety <the contract is your insurance against price changes>

Gold is obviously not insurance in the first sense, as there is no insurer.
Gold is obviously not insurance in the second sense, as there is no guarantor. When you buy gold, the dealer does not give you a certificate promising to make up the difference if it loses real value. Is it even possible to buy insurance against your gold losing real value?

I completely understand that a guarantee may not actually be worth anything because the guarantor may default, break the contract, etc. All that is ever guaranteed is the weight and purity; there are no financial guarantees about the value of your gold in a crisis situation or at any time.

[STC]

Gold is a pretty yellow rock that only has value because people believe it has value. Will that faith falter or strengthen? I don't know. But until gold starts producing tooth brushes and cash flows, I'm out!

[FredPeterson]

Having witnessed the silver boom and bust in the early 1980s, I just can't see buying gold.

Know how to make a small fortune in silver? Start with a large fortune. The Hunt brothers of Dallas lost 90% or more of their wealth due to their greed.

"If a Texan thinks that there's a chance, chances will be taken." David Allen Coe

You do realize that what happened with silver has nothing to do with what is happening to gold right now, right? Silver went parabolic because of the Hunt Brothers and nothing more.

[tadamsmar]

Gold is a crisis insurance.

Definition of INSURANCE

1a : the business of insuring persons or property
b : coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril
c : the sum for which something is insured

2: a means of guaranteeing protection or safety <the contract is your insurance against price changes>

Gold is obviously not insurance in the first sense, as there is no insurer.
Gold is obviously not insurance in the second sense, as there is no guarantor. When you buy gold, the dealer does not give you a certificate promising to make up the difference if it loses real value. Is it even possible to buy insurance against your gold losing real value?

I completely understand that a guarantee may not actually be worth anything because the guarantor may default, break the contract, etc. All that is ever guaranteed is the weight and purity; there are no financial guarantees about the value of your gold in a crisis situation or at any time.

You have convinced me that It's pure surrealism to say "Gold is crisis insurance". Better to employ simile: "Gold is like crisis insurance". Or metaphor: "All the world's a hazard, gold man's insurance, his guarantor the other man who will want more when the crisis arrives.

[athrone]

As an idea for an actionable investing plan, how about this:

100% Total Stock Market vs. 80% Total Stock Market 20% Gold

Over the last 20 years (1991-2011)

100% TSM: 9.02% return / -37.04% worst year
80% TSM 20% Gold: 9.01% return / -28.64% worst year.

Strategy: The 80% stock market portion invests in productive assets which provide real returns. The 20% gold portion acts as a wealth reserve to store these real gains over long time frames. Gold is essentially an easy way to hold a large basket of foreign currencies which maintains it's purchasing power tax-free (no interest). Dividends from the stock portion can be saved into Gold, increasing it's quantity in weight / value over time while the shares pace inflation via capital appreciation. The portfolio provides a high safety margin against major political / equity / currency risk by providing mobility / anonymity in the form of the high value per weight Gold bullion which is held outside of the financial system.

[STC]

As an idea for an actionable investing plan, how about this:

100% Total Stock Market vs. 80% Total Stock Market 20% Gold

Over the last 20 years (1991-2011)

100% TSM: 9.02% return / -37.04% worst year
80% TSM 20% Gold: 9.01% return / -28.64% worst year.

Strategy: The 80% stock market portion invests in productive assets which provide real returns. The 20% gold portion acts as a wealth reserve to store these real gains over long time frames. Gold is essentially an easy way to hold a large basket of foreign currencies which maintains it's purchasing power tax-free (no interest). Dividends from the stock portion can be saved into Gold, increasing it's quantity in weight / value over time while the shares pace inflation via capital appreciation. The portfolio provides a high safety margin against major political / equity / currency risk by providing mobility / anonymity in the form of the high value per weight Gold bullion which is held outside of the financial system.

Someone has been reading gold-bug marketing material. And with a lot of recency bias to boot!

Why don't you redo your analysis but replace gold with extended duration treasuries.

[steve r]

Using Simba data found on Bogleheads

1972-2011

100 TSM returned 9.68 / Sharp .32
80 TSM / 20 5 year treas. 9.65 / .36
80 TSM / 20 GOLD 10.5 / .42
60 / 20 / 20 - 10.27 / .48

The US left the gold standard in 1971. Investors around the world had options of ownership. But lets say it to a few years for effecient markets to reach equilibrium price. Not sure why it would take so long, but ...

1974 - 2011

100 TSM 10.36 / .36
80 / 20 gold 10.49 / .41
80 / 20 5 year 10.22 / .41
60 / 20 / 20 10.17 / .47

So, stay diversified. How you do it is up to you. Hard though to argue recency bias. It does strike me as plausible that some of golds diversification benefits have lost its luster with increased correlation as gold has become easier to hold ...

[hazlitt777]

And as far as saying "buy gold" in every post. But if you mean I am saying, "Take a position in gold right now. And rebalance. Please!" Then I am guilty.

Ok, so if you had a position in Gold 5 years ago and are rebalancing, you would be SELLING gold right now, correct?

No, I'm still working and this year have been buying more bonds and cash than stocks and gold to keep on my target allocation.

[athrone]

Why don't you redo your analysis but replace gold with extended duration treasuries.

1. Treasuries from which country?
2. Default risk
3. Inflation risk
4. MF Global risk
5. Taxes on interest
6. Geographical Diversification

[STC]

Why don't you redo your analysis but replace gold with extended duration treasuries.

1. Treasuries from which country?
2. Default risk
3. Inflation risk
4. MF Global risk
5. Taxes on interest
6. Geographical Diversification

The point is to illustrate how silly it is to use recency bias to drive your AA. In the last decade, you should have avoided stocks all together and been long duration treasuries and gold. Go back 30 years and you should have done REITs and long duration treasuries. Go back 5 years, and you should have been all equities. So which of these periods should you base you AA on?

The answer is none. They are as pointless a data point as your claim on the 20y returns of gold.

[hazlitt777]

STC and athrone,

Let's be as polite as possible. I don't want to see this thread terminated because we are being uncivil.

Thank you:>)

[athrone]

In the last decade, you should have avoided stocks all together and been long duration treasuries and gold. Go back 30 years and you should have done REITs and long duration treasuries. Go back 5 years, and you should have been all equities. So which of these periods should you base you AA on?

STC,

From the Strategy section I included, I described the reason for holding Gold in that sample portfolio is not it's recent returns, but rather it's function as a currency which maintains purchasing power without (taxable) interest or sovereign risk. In that portfolio, the equities generate returns while the Gold stores the proceeds as savings.

If you want to hold savings you have to choose a currency. If you choose a single currency (whether it is zero duration cash or 20 year duration treasuries) then you subject yourself to the default/inflation risk of that country. The way around this is to hold a currency basket (e.g. 10% allocation of 10 different currencies for example). This is not easy to implement, so one solution is to hold Gold bullion instead.

This is not a new concept. Many Bogleheads reduce risk by allocating a percent of their portfolio to "safe" assets such as cash/bonds. This helps reduce volatility. A popular way to do this is by holding U.S. bonds (corporate or government). If you think about it, cash is really a zero-duration bond which makes bonds not unlike long-duration cash. So currency, bonds, and cash are all really a similar asset class.

You could hold 80% Stocks and a 20% currency basket of 10-20 different currencies as an alternative to the portfolio I described. The performance would probably be very similar to holding Gold if you kept an intermediate duration on your bonds. However, in terms of ease of implementation, taxes, and other things such as anonymity and portability Gold bullion provides an attractive alternative.

In summary, it is wise to diversify not only your equities allocation, but your currency (bond) allocation as well. The Three Fund portfolio recommended on this forum suggests holding both foreign (total international) and domestic (total US) stocks to diversify the equity portion.

What I am suggesting is that Gold can be an acceptable approximation / replacement to a currency basket. Again, the purpose of a currency basket is to diversify your currency (bond) allocation between foreign and domestic assets. The U.S. dollar may seem safe at the moment, but any currency has risk (at the very least, long periods of negative real rates).

[STC]

In the last decade, you should have avoided stocks all together and been long duration treasuries and gold. Go back 30 years and you should have done REITs and long duration treasuries. Go back 5 years, and you should have been all equities. So which of these periods should you base you AA on?

STC,

From the Strategy section I included, I described the reason for holding Gold in that sample portfolio is not it's recent returns, but rather it's function as a currency which maintains purchasing power without (taxable) interest or sovereign risk. In that portfolio, the equities generate returns while the Gold stores the proceeds as savings.

If you want to hold savings you have to choose a currency. If you choose a single currency (whether it is zero duration cash or 20 year duration treasuries) then you subject yourself to the default/inflation risk of that country. The way around this is to hold a currency basket (e.g. 10% allocation of 10 different currencies for example). This is not easy to implement, so one solution is to hold Gold bullion instead.

This is not a new concept. Many Bogleheads reduce risk by allocating a percent of their portfolio to "safe" assets such as cash/bonds. This helps reduce volatility. A popular way to do this is by holding U.S. bonds (corporate or government). If you think about it, cash is really a zero-duration bond which makes bonds not unlike long-duration cash. So currency, bonds, and cash are all really a similar asset class.

You could hold 80% Stocks and a 20% currency basket of 10-20 different currencies as an alternative to the portfolio I described. The performance would probably be very similar to holding Gold if you kept an intermediate duration on your bonds. However, in terms of ease of implementation, taxes, and other things such as anonymity and portability Gold bullion provides an attractive alternative.

In summary, it is wise to diversify not only your equities allocation, but your currency (bond) allocation as well. The Three Fund portfolio recommended on this forum suggests holding both foreign (total international) and domestic (total US) stocks to diversify the equity portion.

What I am suggesting is that Gold can be an acceptable approximation / replacement to a currency basket. Again, the purpose of a currency basket is to diversify your currency (bond) allocation between foreign and domestic assets. The U.S. dollar may seem safe at the moment, but any currency has risk (at the very least, long periods of negative real rates).

Gold is not cash. Compare the standard deviation of tbills to Gold. From there, the argument you made falls apart.

You also have to consider the currency of your expenses... Which clearly is not gold. So volatility of your cash portion of your portfolio relative to the currency of your expected expenses matters.

The fact is that gold is a pretty yellow rock who's value is determined by supply and demand. Demand is a function of "rationalizations" for owning gold. The problem with the greater fool theorem is that at some point, you end up being the greatest fool. Over many centuries gold has roughly followed inflation with volatility. Recently it went parabolic. Reversion to the mean suggests that this is unsustainable. The greater fool theorem starts to hit when this "safe store of value" shows signs of not playing up to its billing.

[athrone]

Compare the standard deviation of tbills to Gold. From there, the argument you made falls apart.

If you are looking at the price of Gold in dollars, how can you tell which is volatile: Gold or the Dollar? Yes, in nominal terms if you look at the price of Gold in dollars, 5 year tbills will have a lower standard deviation. Also remember 5 year tbills only represent a single currency not a currency basket.

However, it is not the nominal value of your account that matters, but rather what you can buy with it (purchasing power). In 1980 you could buy a barrel of oil with ~2g of Gold. Today, you can buy the same barrel of oil for ~2g of Gold. That is what is meant by storing savings for the long term.

The portfolio uses an 80% allocation in productive assets to provide real returns, and a 20% allocation in Gold to store purchasing power over long time frames. The reasoning is the same as holding Bonds, it's just a different way to get there. As they say "there is more than one road to Dublin."

[Jerilynn]

And as far as saying "buy gold" in every post. But if you mean I am saying, "Take a position in gold right now. And rebalance. Please!" Then I am guilty.

Ok, so if you had a position in Gold 5 years ago and are rebalancing, you would be SELLING gold right now, correct?

No, I'm still working and this year have been buying more bonds and cash than stocks and gold to keep on my target allocation.

Makes sense. I just wanted to be certain that there are times when someone should sell gold. (rebalancing for example)

[STC]

Compare the standard deviation of tbills to Gold. From there, the argument you made falls apart.

If you are looking at the price of Gold in dollars, how can you tell which is volatile: Gold or the Dollar? Yes, in nominal terms if you look at the price of Gold in dollars, 5 year tbills will have a lower standard deviation. Also remember 5 year tbills only represent a single currency not a currency basket.

However, it is not the nominal value of your account that matters, but rather what you can buy with it (purchasing power). In 1980 you could buy a barrel of oil with ~2g of Gold. Today, you can buy the same barrel of oil for ~2g of Gold. That is what is meant by storing savings for the long term.

The portfolio uses an 80% allocation in productive assets to provide real returns, and a 20% allocation in Gold to store purchasing power over long time frames. The reasoning is the same as holding Bonds, it's just a different way to get there. As they say "there is more than one road to Dublin."

And if the world were flat and the center of the universe this makes sense. But unfortunately, relativity exists. Gold relative to the currency of your expenses matters. Unless you think that you will be able to buy eggs and pay your mortgage in gold?!

The other part of your argument is inflation. It is not the role of cash to manage inflation. Expected inflation is priced in. Unexpected inflation is best managed through TIPS and iBonds.

[athrone]

Gold relative to the currency of your expenses matters.

The other part of your argument is inflation. It is not the role of cash to manage inflation. Expected inflation is priced in.

STC,

What you are saying about the value of Gold with respect to one's expenses is true. Unfortunately, all asset classes have periods of declining value. I think that is an unavoidable reality about the world we live in -- there is no such thing as a truly safe asset, not even cash under your mattress. The best you can do is diversify as much as logistically possible, and as much as makes sense for your personal situation.

One idea behind the strategy I gave is a currency allocation (such as Gold) can help get you through a equity crisis. It is better to live off your savings during a bear market than sell your productive assets while they are undervalued. Likewise, when Gold is in a bear market and your productive assets are pumping out real gains, you are locking in savings at a good price for the future when times might not be as bright.

With respect to inflation, one risk with cash is if the interest rates you are paid to hold that currency are lower than the rate of inflation it experiences (negative real rates). This results in real losses which defeats the purpose of long-term savings (maintain purchasing power). Unfortunately this is the current condition of the U.S. currency market today.

-athrone

[Phineas J. Whoopee]

As an idea for an actionable investing plan, how about this:

100% Total Stock Market vs. 80% Total Stock Market 20% Gold

Over the last 20 years (1991-2011)

100% TSM: 9.02% return / -37.04% worst year
80% TSM 20% Gold: 9.01% return / -28.64% worst year.

Strategy: The 80% stock market portion invests in productive assets which provide real returns. The 20% gold portion acts as a wealth reserve to store these real gains over long time frames. Gold is essentially an easy way to hold a large basket of foreign currencies which maintains it's purchasing power tax-free (no interest). Dividends from the stock portion can be saved into Gold, increasing it's quantity in weight / value over time while the shares pace inflation via capital appreciation. The portfolio provides a high safety margin against major political / equity / currency risk by providing mobility / anonymity in the form of the high value per weight Gold bullion which is held outside of the financial system.

Wow. Even if you gave me a link to a broker from whom I could buy at 1991 prices it wouldn't be worth pulling the trigger.

PJW

[STC]

Gold relative to the currency of your expenses matters.

The other part of your argument is inflation. It is not the role of cash to manage inflation. Expected inflation is priced in.

STC,

What you are saying about the value of Gold with respect to one's expenses is true. Unfortunately, all asset classes have periods of declining value. I think that is an unavoidable reality about the world we live in -- there is no such thing as a truly safe asset, not even cash under your mattress. The best you can do is diversify as much as logistically possible, and as much as makes sense for your personal situation.

One idea behind the strategy I gave is a currency allocation (such as Gold) can help get you through a equity crisis. It is better to live off your savings during a bear market than sell your productive assets while they are undervalued. Likewise, when Gold is in a bear market and your productive assets are pumping out real gains, you are locking in savings at a good price for the future when times might not be as bright.

With respect to inflation, one risk with cash is if the interest rates you are paid to hold that currency are lower than the rate of inflation it experiences (negative real rates). This results in real losses which defeats the purpose of long-term savings (maintain purchasing power). Unfortunately this is the current condition of the U.S. currency market today.

-athrone

Which argument are you making. You now seem to agree that gold isn't cash, and now seem to be shifting your argument to say it is a hedge against equity declines. If that is now your new argument I would point you to the correlations between gold and equities. The can, have, and will again move in the same direction - even in times of high systemic stress. A better option for this hedge would be treasuries, which have the non-correlation, flight to safety, and low volatility that defines a successful equity hedge. And they pay cash flows and don't rely on the greater fool for returns!!

On your other point... Yes bonds can pay less then inflation. But with standard deviations in the low single digits, they are far more safe then gold - who's volatility is equity-like and who's performance has strayed parabolicly from its several hindered year performance record

[athrone]

You now seem to agree that gold isn't cash

I don't recall claiming that Gold is cash. My argument was that it is an easier alternative to holding a currency basket of intermediate/long term sovereign bonds.

[Phineas J. Whoopee]

You now seem to agree that gold isn't cash

I don't recall claiming that Gold is cash. My argument was that it is an easier alternative to holding a currency basket of intermediate/long term sovereign bonds.

Allow me to refresh your memory:

If you want to hold savings you have to choose a currency. If you choose a single currency (whether it is zero duration cash or 20 year duration treasuries) then you subject yourself to the default/inflation risk of that country. The way around this is to hold a currency basket (e.g. 10% allocation of 10 different currencies for example). This is not easy to implement, so one solution is to hold Gold bullion instead.

Or, to edit it down, "If you want to hold savings you have to choose a currency. ...one solution is to hold Gold [sic] bullion instead."

Unless you wish to argue that currency is not the same as cash, you made the explicit claim that gold is cash.

PJW

[Clive]

Many Bogleheads reduce risk by allocating a percent of their portfolio to "safe" assets such as cash/bonds. This helps reduce volatility. A popular way to do this is by holding U.S. bonds (corporate or government). If you think about it, cash is really a zero-duration bond which makes bonds not unlike long-duration cash. So currency, bonds, and cash are all really a similar asset class.

You could hold 80% Stocks and a 20% currency basket of 10-20 different currencies as an alternative to the portfolio I described. The performance would probably be very similar to holding Gold if you kept an intermediate duration on your bonds. However, in terms of ease of implementation, taxes, and other things such as anonymity and portability Gold bullion provides an attractive alternative.

In summary, it is wise to diversify not only your equities allocation, but your currency (bond) allocation as well. The Three Fund portfolio recommended on this forum suggests holding both foreign (total international) and domestic (total US) stocks to diversify the equity portion.

A UK based investors asset allocation of a third in UK stocks (FT All-Share/Actuaries), a third US stocks (S&P500) and a third UK bonds (cash deposit/20 year gilt (treasury) barbell) 1900 to 1999 :



A third 'foreign' (S&P500) appears to have been adequate enough without having to also split the third bonds into domestic and foreign holdings. For instance the 1976 GB Pound crisis (collapse) and IMF bailout was more or less fully recovered from in real terms by the early 1980's.

[athrone]

...If you choose a single currency (whether it is zero duration cash or 20 year duration treasuries) then you subject yourself to the default/inflation risk of that country. The way around this is to hold a currency basket (e.g. 10% allocation of 10 different currencies for example). This is not easy to implement, so one solution is to hold Gold bullion instead.

This is not a new concept. Many Bogleheads reduce risk by allocating a percent of their portfolio to "safe" assets such as cash/bonds. This helps reduce volatility. A popular way to do this is by holding U.S. bonds (corporate or government). If you think about it, cash is really a zero-duration bond which makes bonds not unlike long-duration cash. So currency, bonds, and cash are all really a similar asset class.

Gold is not the same thing as cash, but it can serve the same role as a basket of currencies held as short-to-long term sovereign bonds.