What asset class is gold?

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corn18
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What asset class is gold?

Post by corn18 » Fri Jul 12, 2019 8:46 pm

I own physical gold that is 9% of my portfolio. I want a 60/40 portfolio. But where does gold go? Is it equity or bond? Or should it sit outside the 60/40 as its own entity? i.e. the 91% would be 60/40 and gold will be gold.

Over / under is 2 posts (before someone asks me why I own gold)
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ruralavalon
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Re: What asset class is gold?

Post by ruralavalon » Fri Jul 12, 2019 8:53 pm

corn18 wrote:
Fri Jul 12, 2019 8:46 pm
I own physical gold that is 9% of my portfolio. I want a 60/40 portfolio. But where does gold go? Is it equity or bond? Or should it sit outside the 60/40 as its own entity? i.e. the 91% would be 60/40 and gold will be gold.

Over / under is 2 posts (before someone asks me why I own gold)
Gold is a commodity, it is not a stock or a bond.
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arcticpineapplecorp.
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Re: What asset class is gold?

Post by arcticpineapplecorp. » Fri Jul 12, 2019 9:07 pm

"over/under" is a gambling term, right? Oh, yeah, you own gold. Nevermind.

Since gold doesn't pay interest or dividends and doesn't produce anything in and of itself (an ounce of gold now will still be an ounce of gold in a million years) it is not a stock or a bond, unlike companies that can increase in value over time by increasing profits and bonds which pay you interest until maturity.
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Watty
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Re: What asset class is gold?

Post by Watty » Fri Jul 12, 2019 9:10 pm

Not everything is a stock or a bond. You can easily list a dozen or more asset classes like residential real estate, commercial real estate, farm land, commodities, oil wells, collectables, cash, etc

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Re: What asset class is gold?

Post by StormShadow » Fri Jul 12, 2019 9:16 pm

corn18 wrote:
Fri Jul 12, 2019 8:46 pm
I own physical gold that is 9% of my portfolio. I want a 60/40 portfolio. But where does gold go? Is it equity or bond? Or should it sit outside the 60/40 as its own entity?
Where you would put cash.

The best way to look at gold in a portfolio is as a hedge against inflation.

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corn18
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Re: What asset class is gold?

Post by corn18 » Fri Jul 12, 2019 9:17 pm

Got it. I will hold it outside my 60/40 AA.
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market timer
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Re: What asset class is gold?

Post by market timer » Fri Jul 12, 2019 9:18 pm

Agree that commodities are their own asset class. Still, it helps to understand what drives performance. For example, I own gold and oil. Gold behaves very similar to long term inflation indexed bonds (see below). Gold benefits when real interest rates decline. Oil is more highly correlated with economic activity, so has a higher correlation with equities.

Image

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Re: What asset class is gold?

Post by willthrill81 » Fri Jul 12, 2019 9:21 pm

corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What asset class is gold?

Post by corn18 » Fri Jul 12, 2019 9:27 pm

willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
I wish I could say I had a rational reason for buying gold. In reality, it will be cool to look at. Is that a BH reason to buy gold? I do need to write down an exit strategy in my IPS. Although buying gold wasn't in my IPS, so a lot of [deleted - moderator oldcomputerguy] good that will do. My wife says I'm the dumbest smart person she has ever met.
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Re: What asset class is gold?

Post by willthrill81 » Fri Jul 12, 2019 9:30 pm

corn18 wrote:
Fri Jul 12, 2019 9:27 pm
willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
I wish I could say I had a rational reason for buying gold. In reality, it will be cool to look at. Is that a BH reason to buy gold? I do need to write down an exit strategy in my IPS. Although buying gold wasn't in my IPS, so a lot of [deleted - moderator oldcomputerguy] good that will do. My wife says I'm the dumbest smart person she has ever met.
If you want a potentially rational reason, take a look at what gold would have done for a portfolio, especially in the withdrawal phase, over the last nearly 50 years. You can do so easily at Portfolio Charts.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

NotTooDeepLearning
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Re: What asset class is gold?

Post by NotTooDeepLearning » Fri Jul 12, 2019 9:37 pm

Id say its more of a currency than a commodity.

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Re: What asset class is gold?

Post by StormShadow » Fri Jul 12, 2019 9:39 pm

corn18 wrote:
Fri Jul 12, 2019 9:27 pm
I wish I could say I had a rational reason for buying gold. In reality, it will be cool to look at.
Meh, there are worse things to toss your money at.

I bought a few bullion coins for this reason.

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Re: What asset class is gold?

Post by MotoTrojan » Fri Jul 12, 2019 9:51 pm

corn18 wrote:
Fri Jul 12, 2019 9:27 pm
willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
I wish I could say I had a rational reason for buying gold. In reality, it will be cool to look at. Is that a BH reason to buy gold? I do need to write down an exit strategy in my IPS. Although buying gold wasn't in my IPS, so a lot of [deleted - moderator oldcomputerguy] good that will do. My wife says I'm the dumbest smart person she has ever met.
If you’re buying it for portfolio efficiency and not the apocalypse you can just buy it via an ETF.

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Re: What asset class is gold?

Post by Jack FFR1846 » Fri Jul 12, 2019 10:06 pm

willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
Ok, but in Jan of 1972, it was $285 an ounce....and Jan of 1975, when it became LEGAL to own, it was $900. So re-running your numbers, it's risen about $500 (55% gain) since it became legal to own.

The S&P with dividends re-invested over the period from 75 to now returned over 4000%.
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Re: What asset class is gold?

Post by willthrill81 » Fri Jul 12, 2019 10:09 pm

Jack FFR1846 wrote:
Fri Jul 12, 2019 10:06 pm
willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
Ok, but in Jan of 1972, it was $285 an ounce....and Jan of 1975, when it became LEGAL to own, it was $900. So re-running your numbers, it's risen about $500 (55% gain) since it became legal to own.

The S&P with dividends re-invested over the period from 75 to now returned over 4000%.
Remember that safe withdrawal rates are not merely a function of returns or else we would recommend 100% stock portfolios for retirees. Historically, gold has 'zigged' enough while other assets 'zagged' to significantly improve safe withdrawal rates. Note that I did not say average withdrawal rates.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What asset class is gold?

Post by dmcmahon » Sat Jul 13, 2019 12:14 am

Watty wrote:
Fri Jul 12, 2019 9:10 pm
Not everything is a stock or a bond. You can easily list a dozen or more asset classes like residential real estate, commercial real estate, farm land, commodities, oil wells, collectables, cash, etc
I have a general class in my AA called “hard assets”.

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JoMoney
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Re: What asset class is gold?

Post by JoMoney » Sat Jul 13, 2019 12:54 am

It's a durable good.
corn18 wrote:
Fri Jul 12, 2019 9:27 pm
...
I wish I could say I had a rational reason for buying gold. In reality, it will be cool to look at. Is that a BH reason to buy gold? I do need to write down an exit strategy in my IPS. Although buying gold wasn't in my IPS, so a lot of [deleted - moderator oldcomputerguy] good that will do. My wife says I'm the dumbest smart person she has ever met.
Bogleheads buy all sorts of non-investments for all sorts of reasons. I'm sure there's some that own gold jewelry they enjoy looking at, but don't consider it part of their "portfolio".
I have some gold audio cables, and a dental crown... I don't have an "exit "strategy" for them.
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Re: What asset class is gold?

Post by ruralavalon » Sat Jul 13, 2019 7:36 am

NotTooDeepLearning wrote:
Fri Jul 12, 2019 9:37 pm
Id say its more of a currency than a commodity.
But you have to convert it into a currency before you can actually buy anything.

That's just the same as for other commodities like wheat, hogs, coffee, oil.
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Re: What asset class is gold?

Post by StandingRock » Sat Jul 13, 2019 7:45 am

dmcmahon wrote:
Sat Jul 13, 2019 12:14 am
Watty wrote:
Fri Jul 12, 2019 9:10 pm
Not everything is a stock or a bond. You can easily list a dozen or more asset classes like residential real estate, commercial real estate, farm land, commodities, oil wells, collectables, cash, etc
I have a general class in my AA called “hard assets”.
I would put it under "Precious Metals".



I don't see any reason why there wouldn't be some kind of market for gold and silver in the future, I don't know how it would effect a portfolio. Put some up and forget about it if you want.

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Re: What asset class is gold?

Post by DaftInvestor » Sat Jul 13, 2019 7:50 am

I wouldn't include it in your AA nor IPS since its really a speculation versus an investment.
If your speculations workss out - great - but don't include it in your plans.

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Re: What asset class is gold?

Post by Quaestner » Sat Jul 13, 2019 3:14 pm

Given it's size in your portfolio, and your preference for gold, I think you should consider the gold as part of your asset allocation. As gold is not a stock or a bond, your asset allocation can't be 60/40. How about: 54.6/36.4/9? Then 60 % of your non-gold assets would be stocks, 40% bonds. (Or make it easy: 55/36/9).

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Re: What asset class is gold?

Post by Monster99 » Sat Jul 13, 2019 3:21 pm

I classify it as "other". Not stock or bond...

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Re: What asset class is gold?

Post by ruralavalon » Sat Jul 13, 2019 5:34 pm

Perhaps this will help. Gold is a commodity. Commodities are not stocks or bonds.
Investopedia wrote: A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
Investopedia, What is a commodity?
Investopedia wrote:"Actuals refers to the homogeneous commodities that are the basis for a futures trade. Actuals can be any commodity, but some commonly traded ones include crude oil, heating oil, RBOB gasoline, natural gas, sugar no. 11, gold, copper, silver, platinum, wheat, corn and soy.
Investopedia, "Actuals".

For more information about commodities see the movie Trading Places, with Eddie Murphy, Dan Ackroyd, Jamie Lee Curtis, Ralph Bellamy, and Don Ameche. It is an excellent comedy.
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Re: What asset class is gold?

Post by nisiprius » Sat Jul 13, 2019 7:24 pm

Gold is a commodity, and it behaves like one.

Here is are the "real" (inflation-adjusted) total growth of four assets. One of them is Treasury bills. One of them is gold. The two others are salt and cobalt, unquestionably "commodities."

Classify them according to behavior. See if you can pick out which is Treasury bills, which is gold, and which are the two unquestioned commodities. Then tell me whether, in your opinion, gold behaved more like salt and cobalt, or more like Treasury bills.

(By the way, I let Excel use its default colors, I didn't play any games like making cobalt blue or anything like that.)

Data source for commodities

Image

For the answer, drag your mouse
from here
vvvvvvvvvv
Blue: gold.
Red: salt.
Grey: cobalt.
Yellow: Treasury bills.

^^^^^^^^^
to here (or do a "select all")
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petulant
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Re: What asset class is gold?

Post by petulant » Sat Jul 13, 2019 9:49 pm

I guessed each color correctly!

Also, yes, gold is a commodity but its value is slightly different from others due to its non-perishable nature, high density of value (almost 100 times as much value in an ounce as, say, silver), and historic use as a store of value rather than solely as an input in other products.

ronno2018
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Re: What asset class is gold?

Post by ronno2018 » Sat Jul 13, 2019 10:03 pm

I like the Personal Capital definition -- "Alternatives -- We define alternative assets as hard assets such as real estate (through real estate investment trusts, or REITs) and commodities like gold and energy. Alternative assets are primarily recommended for diversification benefits and as a hedge against inflation. REITs generate income and have high expected total return."

Their moderate asset allocation investor profile suggest you have 9.9% in alternatives.

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Re: What asset class is gold?

Post by Park » Sat Jul 13, 2019 11:46 pm

https://en.wikipedia.org/wiki/Gold

"The world consumption of new gold produced is about 50% in jewelry, 40% in investments, and 10% in industry."

Since 60% of gold is used, you can make a case that it's a commodity.


The case is made that gold is a form of currency. To go back to the very basics,

https://www.cliffsnotes.com/study-guide ... s-of-money

"Money serves as a medium of exchange, as a store of value, and as a unit of account."

I think it's debatable whether gold is a better form of currency than more conventional currencies. If it was better, why have gold based currencies been abandoned? Should it be classified as somewhat like a cryptocurrency?


Finally, I have heard those who argue that it's a form of disaster insurance. But I wonder if canned food and halozone tablets are a better alternative.


From what I can see, jewelry plays an important role in gold's worth, as do investments. Will it continue to play an important role in jewelry? It very likely will. But there are no guarantees: at one time, fur coats were popular. And governments, central banks and individuals will very likely continue to store gold, as they have done for recorded history.


But overall, my impression is that gold is valuable because people think it is valuable. If people stopped thinking gold was valuable, only the 10% used in industry would be needed.


Anyone with gold holdings is taking the very small risk that people will decide that gold isn't valuable. If that happened, it would be very bad for gold owners.

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Re: What asset class is gold?

Post by Tdubs » Sun Jul 14, 2019 12:00 am

willthrill81 wrote:
Fri Jul 12, 2019 9:30 pm
corn18 wrote:
Fri Jul 12, 2019 9:27 pm
willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
I wish I could say I had a rational reason for buying gold. In reality, it will be cool to look at. Is that a BH reason to buy gold? I do need to write down an exit strategy in my IPS. Although buying gold wasn't in my IPS, so a lot of [deleted - moderator oldcomputerguy] good that will do. My wife says I'm the dumbest smart person she has ever met.
If you want a potentially rational reason, take a look at what gold would have done for a portfolio, especially in the withdrawal phase, over the last nearly 50 years. You can do so easily at Portfolio Charts.
In fact there are three portfolios with substantial gold in portfolio charts that have among the highest sustainable withdrawal rates

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Re: What asset class is gold?

Post by bhsince87 » Sun Jul 14, 2019 12:11 am

The IRS considers it a "collectible".

So it's like Beanie Babies, baseball cards, stuff from the Franklin Mint, etc.

That class has special capital gains rules, and they can be brutal.
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Re: What asset class is gold?

Post by Thesaints » Sun Jul 14, 2019 1:41 am

Watty wrote:
Fri Jul 12, 2019 9:10 pm
Not everything is a stock or a bond. You can easily list a dozen or more asset classes like residential real estate, commercial real estate, farm land, commodities, oil wells, collectables, cash, etc
They are all "stock-like"

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Re: What asset class is gold?

Post by nisiprius » Sun Jul 14, 2019 6:42 am

Actually, I don't see that it matters much, unless we want to argue ideology. You have stocks, bonds, cash, and "other," and apart from reminding yourself what percentage of your portfolio is "other," there isn't really that much you can do with it.

The plain fact of the matter is that traditional analyses, for whatever reason, have focussed on stocks aka equities, bonds aka fixed income, and cash aka short-term reserves. You will find innumerable articles on this three-way split, and innumerable calculator and Monte Carlo tools based on it. And there is very little guidance on what to do with anything else.

That might stem partly from the fact that securities (stocks and bonds) were what brokerages sold (until very recently, with the creation of "innovative" new "alternative" funds and ETFs.) It also might stem partly from what's been studied and tabulated, and available data. For example, a lot of it is founded on data from the Center for Research on Securities Prices, CRSP, which... does what its name suggests. Of late, everyone with an alternative to sell has genned up some kind of index they can show you--there's at least one for collectible fine art--but you won't find much about them outside the web pages of dealers trying to sell them to you, and there are reasons to take them with a grain of salt.

In any case, a lot of us do end up with "stocks, bonds, cash, and 'other.'" And there isn't much to do about that "other," anyway. If it's a low allocation to something tame, it won't move the needle much, it is more or less lost in the noise, and we can sort of ignore it while vaguely hoping that it's giving us some "edge."

If it is something highly volatile and we are holding such a large allocation to it that it could make a big different to the portfolio as a whole, it's going to be so extraordinarily "bursty" that performance is going to be dominated by rare, spectacular jackpots, and performance even over very long periods of time is going to depend simply on whether or not that time period included a single jackpot or not. A sane person could decide to take that gamble, but there's no way to get sensible statistics or crank it into a retirement plan.

A question that I just realized I've never asked, and don't know the answer to is this: do you get gold when when invest in, say, the PIMCO Commodity RealReturn Strategy Fund, PCRIX, one of the older and one-often-lauded examples of a "commodity" (actually CCF, collateralized commodity futures) fund? It speaks to the degree of separation between fans of gold and fans of "commodities" that I can't recall hearing this question ever being asked in the forum. (The answer is "16.52% precious metals," so, yes).

Even without gold, the question of "other" often arises. For example, a very large holding in an individual stock no longer has the same characteristics as "the stock market." And if gold is the only commodity you invest in, it isn't going to have the same characteristics as PCRIX or a broad, diverse basket of "commodities."

I personally always had a problem knowing what to do with TIAA Traditional, which has bond-like growth and volatility characteristics, but is almost illiquid and can't be freely rebalanced with other assets. And TIAA Real Estate was even worse. I just put it in its own category of "real estate" and then didn't know what to do with it.

So, it's up to you. You're on your own with "other." A sane person could say "stocks, bonds, cash, and commodities." Or "stocks, bonds, cash, gold, and other commodities."
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.

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Re: What asset class is gold?

Post by Trader Joe » Sun Jul 14, 2019 6:55 am

corn18 wrote:
Fri Jul 12, 2019 8:46 pm
I own physical gold that is 9% of my portfolio. I want a 60/40 portfolio. But where does gold go? Is it equity or bond? Or should it sit outside the 60/40 as its own entity? i.e. the 91% would be 60/40 and gold will be gold.

Over / under is 2 posts (before someone asks me why I own gold)
Gold is a commodity. Neither a stock nor a bond. I am happy to see that you are investing in physical gold and not paper. With the help of forum members I am going to do this soon as well. Best of luck.

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Re: What asset class is gold?

Post by Park » Sun Jul 14, 2019 8:34 am

bhsince87 wrote:
Sun Jul 14, 2019 12:11 am
The IRS considers it a "collectible".

So it's like Beanie Babies, baseball cards, stuff from the Franklin Mint, etc.

That class has special capital gains rules, and they can be brutal.
40% of new gold production goes into investment. One can make the case that that 40% should be classified as collectible.

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Re: What asset class is gold?

Post by nisiprius » Sun Jul 14, 2019 8:37 am

P.S. Looking for old examples of the traditional (i.e. pre-2000, because that's about when a lively interest in "alternatives" started to grow), I found this one, from 1971:Conversion of Farm Assets for Retirement Purposes

Image

As expected, the only categories considered are "nonfarm equities," bonds, and "savings."

Elsewhere in the report, of course, the various kinds of assets a farmer owns are dissected in some detail.
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Re: What asset class is gold?

Post by Kenkat » Sun Jul 14, 2019 8:54 am

dmcmahon wrote:
Sat Jul 13, 2019 12:14 am
Watty wrote:
Fri Jul 12, 2019 9:10 pm
Not everything is a stock or a bond. You can easily list a dozen or more asset classes like residential real estate, commercial real estate, farm land, commodities, oil wells, collectables, cash, etc
I have a general class in my AA called “hard assets”.
This is what I do as well.

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Re: What asset class is gold?

Post by Thesaints » Mon Jul 15, 2019 12:36 am

dmcmahon wrote:
Sat Jul 13, 2019 12:14 am
I have a general class in my AA called “hard assets”.
"hard" in what sense ? Their value in dollars ain't so, for instance. Even their value in constant dollars (i.e. ex-inflation) is not fixed, and actually is rather volatile.

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Re: What asset class is gold?

Post by averagedude » Mon Jul 15, 2019 5:05 am

willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
Gold had a big run from 1972 to 1980. Actually during this period, it was a ten bagger. Since 1980, gold has had a negative real return. Are the safe withdrawal rates better with gold in your portfilio, if you backtest from 1980 instead of 1972. I highly doubt it.

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willthrill81
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Re: What asset class is gold?

Post by willthrill81 » Mon Jul 15, 2019 8:33 am

averagedude wrote:
Mon Jul 15, 2019 5:05 am
willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been alotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
Gold had a big run from 1972 to 1980. Actually during this period, it was a ten bagger. Since 1980, gold has had a negative real return. Are the safe withdrawal rates better with gold in your portfilio, if you backtest from 1980 instead of 1972. I highly doubt it.
I used Portfolio Charts to calculate the SWR over the entire period. De-selecting years is not an option.

I have no doubt that the average withdrawal rate over this period would have been higher without an allocation to gold, just as it would be if you excluded bonds altogether. But the ability to gold to help withdrawal rates during the poor times, which drive safe withdrawal rates, was not limited to the 1970s. Year 2000 retirees who allocated 20% of their portfolio to gold, whether that 20% would have otherwise been in stocks or bonds, saw significant improvement in their portfolio performance (i.e. higher balance, less volatility, lower max. drawdown).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Park
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Re: What asset class is gold?

Post by Park » Mon Jul 15, 2019 10:08 am

Park wrote:
Sat Jul 13, 2019 11:46 pm
https://en.wikipedia.org/wiki/Gold

"The world consumption of new gold produced is about 50% in jewelry, 40% in investments, and 10% in industry."...my impression is that gold is valuable because people think it is valuable. If people stopped thinking gold was valuable, only the 10% used in industry would be needed
The amount of gold, relative to production, is high. If people stopped thinking gold was valuable, there wouldn't be much need for production. So if people stopped thinking gold was valuable, it would not only be bad for gold owners, but very bad for gold mining stock owners. A part of my portfolio is in gold mining stocks :oops: . I think I have some work to do on my IPS.

Ownership of gold or gold mining stocks is all about sentiment. It's about behavioral finance. And that's coming from a gold mining stock owner.

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siamond
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Re: What asset class is gold?

Post by siamond » Mon Jul 15, 2019 12:52 pm

averagedude wrote:
Mon Jul 15, 2019 5:05 am
willthrill81 wrote:
Fri Jul 12, 2019 9:21 pm
corn18 wrote:
Fri Jul 12, 2019 9:17 pm
Got it. I will hold it outside my 60/40 AA.
Since 1972, a 60/40 U.S. portfolio had a safe withdrawal rate of 4.5%. Had 50% of the fixed income been allotted to gold (i.e. a 60/20/20 AA), the SWR was 5.4%. Just sayin'.
Gold had a big run from 1972 to 1980. Actually during this period, it was a ten bagger. Since 1980, gold has had a negative real return. Are the safe withdrawal rates better with gold in your portfolio, if you backtest from 1980 instead of 1972. I highly doubt it.
Comparing a classical 60/40 portfolio to a 60/20/20 as defined by willthrill81, yes, the former definitely won the SWR comparison for the 1980+ time interval. By nearly a full point. Such a test is very easy to run with the Simba backtesting spreadsheet.

On one hand, averagedude has a very important point about gold, the early/mid-70s was just a one-time event (US/Gold unpegging triggered a rush to buy gold, compounded by the oil inflationary crisis). I am usually VERY skeptical about any 'this time is different' argument, but here the case is really clear, those were extremely singular circumstances. This is actually my main gripe with the (otherwise truly excellent) PortfolioCharts Web site, the push towards portfolios including gold in the AA is very misleading in my humble opinion.

On the other hand, willthrill81 is quite right pointing out that testing SWR post 1980 is not terribly meaningful, as we do not have a full 30-years period starting right before a deep crisis in the 1980-2018 time interval and any 30-years period would start in the go-go years of the 80s/90s.

Personally, I did hesitate for a while, but I ruled out having any gold in my portfolio. As a side note, the gold believers probably should hold it as an ETF (e.g. IAU or GLD) instead of physical bullions if they want to truly take advantage of negative correlation (if & when it occurs) through rebalancing. The flexible ability to rebalance IS an implicit assumption behind the PortfolioCharts results. Now if the point is to hide something valuable under your mattress just in case banks and investment companies get so disrupted that one just can't sell shares any more, then ok, it's another story. Sounds a bit paranoid to me, but... never say never... :shock:

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corn18
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Re: What asset class is gold?

Post by corn18 » Mon Jul 15, 2019 3:28 pm

As an update from OP: I lost my willpower and cancelled the order with APMEX. Cost me $35 to cancel.
Don't do something, just stand there!

columbia
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Re: What asset class is gold?

Post by columbia » Mon Jul 15, 2019 7:28 pm

nisiprius wrote:
Sun Jul 14, 2019 6:42 am
Actually, I don't see that it matters much, unless we want to argue ideology. You have stocks, bonds, cash, and "other," and apart from reminding yourself what percentage of your portfolio is "other," there isn't really that much you can do with it.

The plain fact of the matter is that traditional analyses, for whatever reason, have focussed on stocks aka equities, bonds aka fixed income, and cash aka short-term reserves. You will find innumerable articles on this three-way split, and innumerable calculator and Monte Carlo tools based on it. And there is very little guidance on what to do with anything else.

That might stem partly from the fact that securities (stocks and bonds) were what brokerages sold (until very recently, with the creation of "innovative" new "alternative" funds and ETFs.) It also might stem partly from what's been studied and tabulated, and available data. For example, a lot of it is founded on data from the Center for Research on Securities Prices, CRSP, which... does what its name suggests. Of late, everyone with an alternative to sell has genned up some kind of index they can show you--there's at least one for collectible fine art--but you won't find much about them outside the web pages of dealers trying to sell them to you, and there are reasons to take them with a grain of salt.

In any case, a lot of us do end up with "stocks, bonds, cash, and 'other.'" And there isn't much to do about that "other," anyway. If it's a low allocation to something tame, it won't move the needle much, it is more or less lost in the noise, and we can sort of ignore it while vaguely hoping that it's giving us some "edge."

If it is something highly volatile and we are holding such a large allocation to it that it could make a big different to the portfolio as a whole, it's going to be so extraordinarily "bursty" that performance is going to be dominated by rare, spectacular jackpots, and performance even over very long periods of time is going to depend simply on whether or not that time period included a single jackpot or not. A sane person could decide to take that gamble, but there's no way to get sensible statistics or crank it into a retirement plan.

A question that I just realized I've never asked, and don't know the answer to is this: do you get gold when when invest in, say, the PIMCO Commodity RealReturn Strategy Fund, PCRIX, one of the older and one-often-lauded examples of a "commodity" (actually CCF, collateralized commodity futures) fund? It speaks to the degree of separation between fans of gold and fans of "commodities" that I can't recall hearing this question ever being asked in the forum. (The answer is "16.52% precious metals," so, yes).

Even without gold, the question of "other" often arises. For example, a very large holding in an individual stock no longer has the same characteristics as "the stock market." And if gold is the only commodity you invest in, it isn't going to have the same characteristics as PCRIX or a broad, diverse basket of "commodities."

I personally always had a problem knowing what to do with TIAA Traditional, which has bond-like growth and volatility characteristics, but is almost illiquid and can't be freely rebalanced with other assets. And TIAA Real Estate was even worse. I just put it in its own category of "real estate" and then didn't know what to do with it.

So, it's up to you. You're on your own with "other." A sane person could say "stocks, bonds, cash, and commodities." Or "stocks, bonds, cash, gold, and other commodities."

I include TIAA Traditional in my bond category. Largely because I would be - nominally - holding a lot less in equities, if I set TIAA aside and ran the stock/bond split with the remaining assets.

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