Where does Gold fit in passive investing

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
elitistuser
Posts: 16
Joined: Sun Nov 27, 2016 6:45 pm

Where does Gold fit in passive investing

Post by elitistuser » Thu Dec 08, 2016 3:52 am

Hi all, the purchase of gold seems like a hot topic whenever l read any investment news or forums.

In terms of passive investing where does gold fit in and does it have a place in our portfolios? It seems gold price is rather volatile but in my robo investment account they have also purchased a very small percentage from a etf tracking gold price as part of the portfolio.

Any views would be appreciated,
Les

fanmail
Posts: 282
Joined: Thu Sep 20, 2012 5:54 pm

Re: Where does Gold fit in passive investing

Post by fanmail » Thu Dec 08, 2016 4:14 am

Gold is a commodity, so it's speculative and supply/demand driven. It is treated by traders as a risk off tool. Crazy people think it is the only real money.

There is no longterm +EV, so it has no real place in passive investing in my opinion.

User avatar
siamond
Posts: 4239
Joined: Mon May 28, 2012 5:50 am

Re: Where does Gold fit in passive investing

Post by siamond » Thu Dec 08, 2016 5:19 am

Gold isn't a good investment per se, as the industry really doesn't use much of it. Some have compared it to a big shiny cube that sits there and only collect dust, although this is a tad over-simplistic (e.g. jewelry, use of very small quantities in smartphones, etc). Luminaries like John Bogle and Warren Buffet just don't see the point.

It *may* have a role in passive investing as part of an overall portfolio (say 5% to 10% gold in your AA), because of its historical negative correlation with other types of assets, notably stocks at large. When markets crash, gold usually soars. Whether this will remain true for decades to come isn't entirely clear to me, but there are strong believers. Trouble is we have limited history to look at, as the dollar and gold were directly pegged together until 1971. When it finally got untangled, gold soared, but that was a once-time event (which tends to skew most historical backtests). One last thing, some also see gold as an inflation hedge (not obvious to everybody either).

Personally, although I've hesitated many times, I elected to not do it. It seems to me that one needs a very strong belief in gold's benefits to be able to stay the course with it. If you have doubts, then better just forget about it.

elitistuser
Posts: 16
Joined: Sun Nov 27, 2016 6:45 pm

Re: Where does Gold fit in passive investing

Post by elitistuser » Thu Dec 08, 2016 5:48 am

Seems like Gold is a punt more than anything. Aim to buy low / sell high , is that a fair comment. No investment for the inexperienced then like me.


Les,

Jack FFR1846
Posts: 7982
Joined: Tue Dec 31, 2013 7:05 am

Re: Where does Gold fit in passive investing

Post by Jack FFR1846 » Thu Dec 08, 2016 7:16 am

elitistuser wrote:Seems like Gold is a punt more than anything. Aim to buy low / sell high , is that a fair comment. No investment for the inexperienced then like me.
Les,
Be careful if you speculate. Sure, if you're lucky enough to buy low and sell high, there's a chance to make a gain. But how and what do you buy? If you buy an ETF that follows gold somehow, is it really gold or is it stocks in gold miners or something else? If you buy physical gold (many gold bugs say to ONLY buy physical gold), look at the cost to buy (there's a spread) and the cost to sell (again, a spread) and then the tax on collectibles which can be an unwelcome surprise and of course the wonderful additions on your tax figuring. Not to mention storage, protection, insurance. Gold coins are cool.....you get some delivered and show the kids. The kids tell all their friends who tell older brothers who tell everyone and one day, you get home from work and the house is in shambles and the gold is gone.
Bogle: Smart Beta is stupid

User avatar
nisiprius
Advisory Board
Posts: 36891
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Where does Gold fit in passive investing

Post by nisiprius » Thu Dec 08, 2016 7:51 am

This is a frequently-debated question in this forum. Here are three common points of view.

Mine, which I think is most common, is that it does not fit. It is a wildly speculative commodity. It does not pay dividends. It does not create business value. It has an expected long-term real return of zero (i.e. it keeps up with inflation, but no more) but the real value has been subject to the wildest of fluctuations and there have been other assets yielding a small real return with much smaller fluctuations. It is purely speculative because the only reason for holding gold--obviously some think it is an excellent reason--is a version of the greater fool theory: "I don't know what intrinsic value it has, except that I expect that I can sell it to a willing buyer, and I expect there will always be willing buyers because they all think they will be able to find willing buyers."

From a purely investing point of view on the numbers, there are some people in the forum who invest in versions of the Harry Browne "Permanent Portfolio." In some ways this is very like the Bogleheads investment philosophy but the asset classes are different--a long-term buy-and-hold commitment to 25% each in stocks, gold, long-term bonds, and cash. Taylor Larimore has spoken favorably of the book, The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy, by Craig Rowland and J. M. Lawson, and William J. Bernstein has a sympathetic essay about it, Wild About Harry (I have to set my browser explicitly to ISO-Latin-1 encoding to get rid of "funny characters" on that page).

As far as I know the only convenient way to invest directly in gold--through a brokerage just like mutual funds and ETFs--is via an exchanged-traded thing called SPDR Gold Shares, ticker GLD.. I have to emphasize that it is not an ETF and you do not get the protections of either the Commodity Exchange Act of 1936 or the Investment Company Act of 1940.

A separate group of ideas involves the concept of gold as the only true intrinsic source of financial value and gold as a safety net in financial collapses. That really has nothing to do with investing and can't be discussed under forum policy.

Two cautions. First, as with other investments but perhaps a bit more so with gold, fact-check any statement you hear about how gold has performed in the past or what gold "tends to" do.

Second, do not ever confuse investment tied to gold metal with investment tied to "precious metals equities," i.e. gold-mining companies (e.g. Vanguard Gold and Precious Metals, VGPMX). Precious metals equity is not even a full "sector," it's a narrow and undiversified niche. Like other concentrated investments, it has ometimes hit the jackpot. But, notice in particular how, during 2008-2009, if you expected things connected to gold to protect you in a crisis, VGPMX (blue) emphatically did not, in fact it crashed much worse than stocks in general, falling 69% when Total Stock (orange) fell "only" 52%, while GLD (green) connected directly to gold itself, arguably did hold up.

Source
Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
topper1296
Posts: 583
Joined: Fri Apr 03, 2009 10:50 pm
Location: Nashville TN

Re: Where does Gold fit in passive investing

Post by topper1296 » Thu Dec 08, 2016 8:41 am

My personal view is that gold is a bad investment in that is has no earnings, no cash flows and no dividends, however I think it has some value as "portfolio insurance" due to its historical negative correlation to stocks. I see no issues if an investor wants to put 5-10% in there.

I know I have struggled on if I want to invest in it or not. I can buy a gold ETF for free, so I have added a little to my portfolio. My goal is to get to 5%.

User avatar
stemikger
Posts: 4916
Joined: Thu Apr 08, 2010 5:02 am

Re: Where does Gold fit in passive investing

Post by stemikger » Thu Dec 08, 2016 9:21 am

I agree with Jack. Hear him say it.

https://www.youtube.com/watch?v=KlhT07G8zGs
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

dziuniek
Posts: 491
Joined: Mon Jul 23, 2012 2:54 pm
Location: Corrupticut

Re: Where does Gold fit in passive investing

Post by dziuniek » Thu Dec 08, 2016 9:26 am

In a watch.

User avatar
Index Fan
Posts: 2555
Joined: Wed Mar 07, 2007 12:13 pm
Location: The great Midwest

Re: Where does Gold fit in passive investing

Post by Index Fan » Thu Dec 08, 2016 9:48 am

I see a small amount of gold as an insurance policy on one's traditional portfolio. The same as being prepared for a disaster with extra food and whatnot.
"Optimum est pati quod emendare non possis." | -Seneca

elitistuser
Posts: 16
Joined: Sun Nov 27, 2016 6:45 pm

Re: Where does Gold fit in passive investing

Post by elitistuser » Thu Dec 08, 2016 10:05 am

l love the youtube video :)

sco
Posts: 808
Joined: Thu Sep 24, 2015 2:28 pm

Re: Where does Gold fit in passive investing

Post by sco » Fri Dec 09, 2016 12:49 am

I treat is exactly like I would like my other commodity (frozen orange juice)....

Although Winthorpe and Valentine made their money, it just looks like betting to me...

User avatar
sperry8
Posts: 1631
Joined: Sat Mar 29, 2008 9:25 pm
Location: Miami FL

Re: Where does Gold fit in passive investing

Post by sperry8 » Fri Dec 09, 2016 1:08 am

Interesting article on Gold today by Nadig: http://www.etf.com/sections/blog/heres- ... nopaging=1
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

User avatar
Watty
Posts: 14397
Joined: Wed Oct 10, 2007 3:55 pm

Re: Where does Gold fit in passive investing

Post by Watty » Fri Dec 09, 2016 1:21 am

sco wrote:I treat is exactly like I would like my other commodity (frozen orange juice)....
+1

With normal index funds you have a lot of exposure to oil companies, and a few other commodity related companies, so that if there is some sort of melt down and commodities soar then you will have some commodity exposure.

Years ago I dabbled in trying to pick stocks and one of the lessons I quickly learned was to try to avoid "sexy" companies because your judgement will be clouded and they will likely be over priced. To me gold is the ultimate "sexy" investment.

I forget which investment guru it was but years ago someone one was writing about the advantages of "unsexy" companies because people were not attracted to them and you could get them at a great price. He joked about how his ideal company would be the one that makes the cameras that are used to inspect sewer lines since the annual report would be full of pictures of the inside of sewer lines. He even looked into it and found that the company that make those cameras(at least back then) was a division of a huge company so there was no good way to directly invest in it.

basspond
Posts: 1085
Joined: Wed Nov 27, 2013 4:01 am

Re: Where does Gold fit in passive investing

Post by basspond » Fri Dec 09, 2016 7:36 am

sco wrote:I treat is exactly like I would like my other commodity (frozen orange juice)....

Although Winthorpe and Valentine made their money, it just looks like betting to me...
Agree. Like most commodities it also has a shelf life. I don't own gold or oil but my portfolio includes mining and oil companies.

qwertyjazz
Posts: 1079
Joined: Tue Feb 23, 2016 4:24 am

Re: Where does Gold fit in passive investing

Post by qwertyjazz » Fri Dec 09, 2016 7:51 am

sco wrote:I treat is exactly like I would like my other commodity (frozen orange juice)....

Although Winthorpe and Valentine made their money, it just looks like betting to me...
Gold is better than a Rochefocauld watch


https://m.youtube.com/watch?v=jLo7tHDHgOc
G.E. Box "All models are wrong, but some are useful."

Wagnerjb
Posts: 7203
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Where does Gold fit in passive investing

Post by Wagnerjb » Fri Dec 09, 2016 11:17 am

fanmail wrote:There is no longterm +EV, so it has no real place in passive investing in my opinion.
The fact that gold has a zero long-term return is also my reason for not including it in my portfolio. I couldn't care less whether it is low- or negatively correlated with stocks. I am not willing to pay that price for the potential of improved diversification.

Best wishes.
Andy

gerntz
Posts: 466
Joined: Fri May 06, 2011 3:37 pm

Re: Where does Gold fit in passive investing

Post by gerntz » Fri Dec 09, 2016 12:11 pm

I hold gold ETF's to the tune of 6-7% of assets. I see them as a cash reserve as easily accessible as a CD. It can only be devalued by those that don't see it as having value & not by governments. That alone is a significant reason to hold for me.

I don't get the commodity view of gold at all. It by & large doesn't get consumed. Strange thought to me.

As for no intrinsic value, it looks good to a whole lot of people. Beauty is worth something imo. I mean, why shine a car? That has no intrinsic value. Why buy a painting or sculpture? There is some really gorgeous jewelry made of gold. Why not make it of lead instead? It's a lot cheaper metal of no intrinsic value. Lead is also lighter weight to carry around on your neck or wrist. I'll trade anyone a pound of lead for a pound of gold, no questions asked. Any takers?

Gropes & Ray
Posts: 1067
Joined: Wed Jul 16, 2014 7:28 am

Re: Where does Gold fit in passive investing

Post by Gropes & Ray » Fri Dec 09, 2016 2:58 pm

My wife keeps a small investment in physical gold. It's typically stored on her neck, ears or fingers. It's a long term investment. I expect that our children will inherit it. It's much less than 1% of our net worth and falling fast.

Post Reply