the 12 commandments of gold bugs

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larryswedroe
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the 12 commandments of gold bugs

Post by larryswedroe »

I thought this was fabulous from Barry Ritholtz http://www.etf.com/sections/index-inves ... mmandments
had to share
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Louis Winthorpe III
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Re: the 12 commandments of gold bugs

Post by Louis Winthorpe III »

We've had some good threads on gold lately. I will go get some popcorn now (paid for with fiat currency).
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Re: the 12 commandments of gold bugs

Post by RadAudit »

Thanks for the post.

I'll reference this article every time a TV ad asks "what's in your safe?"
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Re: the 12 commandments of gold bugs

Post by nedsaid »

The Harry Browne Permanent Portfolio has a 25% weighting to gold. The other weights are 25% stocks, 25% cash, and 25% long term treasuries. My recollection is that this portfolio has a good track record and that gold has played an important role in the success of this portfolio. It really is a hedge against currencies and not so much inflation.

I have not owned gold for a long time. I owned gold and silver Maple Leafs and they were beautiful coins. Some time in the late 1980's, I sold them and put the proceeds into an IRA.

As a stand alone investment, I would not own gold. As a part of a "permanent" or "all weather" portfolio strategy, it might make sense. You would also have to have the discipline to rebalance your allocation to gold. So far, I have passed.
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Re: the 12 commandments of gold bugs

Post by Index Fan »

A small amount of gold can be seen as 'portfolio insurance'. Never put all your eggs in one basket.
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Re: the 12 commandments of gold bugs

Post by herpfinance »

Indeed. Historically, the returns for gold haven't been as great as stocks, but the correlation has been low, making them an attractive diversifier.

I don't hold any myself, though. I prefer Warren Buffet's line of thinking in terms of holding value producing assets :sharebeer
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Re: the 12 commandments of gold bugs

Post by ofcmetz »

Those 12 commandments were great. I've heard all of those in some form or another from the people I know that chose to put a significant portion of their wealth into gold. I would rather have land, gardens, source of water, weapons, and friends with weapons if the government falls and we reach the mad max scenario. As an investment, I need something that either represents ownership of a business, property, or a debt instrument that pays me interest. I think collecting gold because of it's beauty and finger feel value is fine, but I can't see it ever being a currency that is traded on the streets because society has fallen.
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Re: the 12 commandments of gold bugs

Post by nedsaid »

The good book says that wealth is worthless in the day of wrath. If society fell apart, a hoard of gold would probably not do you too much good. The staples of life like toilet paper, razor blades, food staples, bottled water would be a much better currency than gold in such a situation.
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Re: the 12 commandments of gold bugs

Post by Angst »

i do enjoy listening to ritholtz's interviews, and worth posting his bloomberg masters in business link here:
http://www.bloombergview.com/topics/masters-in-business

or if you're like me, you can peruse the mp3 downloads through the rss xml version:
http://www.bloomberg.com/feed/podcast/m ... siness.xml

larry and rick both have interviews there, amongst a wide variety of other people in finance, business, econ, etc.
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Re: the 12 commandments of gold bugs

Post by nisiprius »

One could, of course, produce burlesques of other investing belief systems, which would have grains of truth in them. See if you can recognize these.

The Five Points

1) There is no such thing as a free lunch.
2) We have the only free lunch in town.
3) The Leaning Tower is vertical, it's the earth that's tilted.
4) Cap-weighting is crap-weighting.
5) And now abideth these three: risk, return and correlation; but the greatest of these is correlation.

The XXXIX Articles

I) Low expense ratios.
II) Low expense ratios.
III) Low expense ratios.
...
XXXIX) Low expense ratios.
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: the 12 commandments of gold bugs

Post by Browser »

Now we need the 12 commandments of the Harry Browne Permanent Portfolio, since this is the last refuge of [gold-bugs]. Even though it's hard to make the case for gold per se, for some reason the PPers think that it has magical qualities when mixed with equal parts of stocks, cash, and long treasuries and stirred gently.

[offensive term (even more offensive term?) for gold bugs redited by admin alex]
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Re: the 12 commandments of gold bugs

Post by TMCD75 »

Gold and silver should be a part of people's portfolio who are 50 and younger. People in that group are likely to only receive a percentage of their promised or assumed social security check on a monthly basis. If you assume you'll receive 1500 a month for example, chances are it could be 20-30% lower than that figure. The Boomers of this country have financial instruments that are flush in cash for the time being, chiefly their pensions and SS. The Boomers will absolutely drain and exhaust these funds.

Gold and silver could play a key role in the retirement of this age group, which comprises Gen X, Y and the Millennials. With debt predicted to soar and pensions and social security drying up, gold and silver could sky rocket. I'm proud to say that I bought a few gold coins and 88 ounces of silver bars and coins within the past two weeks! It feels and looks good!!
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Re: the 12 commandments of gold bugs

Post by Northern Flicker »

Contrary to claims otherwise, the US never truly had a gold standard for currency. It was abandoned whenever it was inconvenient or infeasible to maintain, e.g. twice during WWI, again starting in 1933 until Bretton Woods in 1944, and permanently in 1971.

The point is we had the gold standard when gold was not a constraint on money supply and the dollar value was holding up, but promptly abandoned it when we needed to do the types of things that being on the gold standard is designed to prevent, which is to say we didn't really have a gold standard.

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Re: the 12 commandments of gold bugs

Post by market timer »

Currently, a barrel of WTI (oil) costs $42. An ounce of gold costs $1116. Said another way, an ounce of gold buys 26.6 barrels of WTI.

Suppose you want to hedge your future energy costs (as measured by the price of WTI) in the year 2055. Which of these two investments, if held for 40 years, has the lowest variance in number of barrels of oil you can purchase in 2055: (1) an ounce of gold, (2) $1116 in short term T-bills rolled over periodically.

My point is that gold is a good store of value for wealth you intend to use to purchase commodities in the distant future. There may be no better store of value for matching these types of liabilities.
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Re: the 12 commandments of gold bugs

Post by Dale_G »

By changing a few words here and there, I could write a similar article about "small value bugs", "TIPS timing bugs" or "factor bugs".

Some people invest in real estate, beanie dolls, classic cars, baseball cards, modern art or fine watches. Only time will tell if investing in these assets (or gold) will pay off in the future.

Hopefully we will not see similar derisive articles 10 or 20 years down the line about "index bugs".

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Re: the 12 commandments of gold bugs

Post by lee1026 »

Suppose you want to hedge your future energy costs (as measured by the price of WTI) in the year 2055. Which of these two investments, if held for 40 years, has the lowest variance in number of barrels of oil you can purchase in 2055: (1) an ounce of gold, (2) $1116 in short term T-bills rolled over periodically.
If you really want to optimize for that, wouldn't you also want to take a position on WTI futures?
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Re: the 12 commandments of gold bugs

Post by Leeraar »

jalbert wrote:Contrary to claims otherwise, the US never truly had a gold standard for currency. It was abandoned whenever it was inconvenient or infeasible to maintain, e.g. twice during WWI, again starting in 1933 until Bretton Woods in 1944, and permanently in 1971.

The point is we had the gold standard when gold was not a constraint on money supply and the dollar value was holding up, but promptly abandoned it when we needed to do the types of things that being on the gold standard is designed to prevent, which is to say we didn't really have a gold standard.

-jalbert
This is basically correct. The "gold standard" was only enabled by the discovery of relatively massive amounts of gold in South Africa in the last part of the 1800s and the British conquest of that resource about 1902.

L.
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Re: the 12 commandments of gold bugs

Post by market timer »

lee1026 wrote:
Suppose you want to hedge your future energy costs (as measured by the price of WTI) in the year 2055. Which of these two investments, if held for 40 years, has the lowest variance in number of barrels of oil you can purchase in 2055: (1) an ounce of gold, (2) $1116 in short term T-bills rolled over periodically.
If you really want to optimize for that, wouldn't you also want to take a position on WTI futures?
Sure, you could buy Dec 2020 WTI futures for $64, a premium of about 50% over spot. After five years, you could roll to 2025, and so on, up until 2055. There is considerable uncertainty around contango/storage costs. It's not clear to me that this reduces variance relative to buying and holding gold for 40 years. There is certainly a point where it is better to lock in WTI directly if the goal is to minimize variance, e.g., maybe hold gold for 30 years, then use WTI futures for the last 10.

In any case, oil was just one example of all the commodities one consumes. Gold is not a bad proxy for this entire basket over the long run, likely better than T-bills.
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Re: the 12 commandments of gold bugs

Post by happyisland »

market timer wrote: In any case, oil was just one example of all the commodities one consumes. Gold is not a bad proxy for this entire basket over the long run, likely better than T-bills.
Isn't the high volatility of gold a problem for trying to use it to match future liabilities?

I just did a quick "gold vs t-bills" google, and checked out Vanguard's take: https://personal.vanguard.com/us/insigh ... old-052014
The biggest drawback to gold is its volatility, which since 1968 has exceeded that of stocks, at 20% versus 16%. Throughout history, the asset class has shown itself prone to boom-bust cycles. In the last half century, gold experienced a bear market that lasted nearly 21 years. The price of gold went from a high of $670 a troy ounce in mid-1980 to $258 by early 2001, losing nearly two-thirds of its value—even before accounting for inflation.
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Re: the 12 commandments of gold bugs

Post by zaboomafoozarg »

TMCD75 wrote:Gold and silver should be a part of people's portfolio who are 50 and younger. People in that group are likely to only receive a percentage of their promised or assumed social security check on a monthly basis. If you assume you'll receive 1500 a month for example, chances are it could be 20-30% lower than that figure.
I would rather replace that potentially-missing part of Social Security with something that pays dividends/interest like stocks/bonds, instead of something that just sits in a safe.

I do buy a little ancient gold and silver because it's fun though.
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Re: the 12 commandments of gold bugs

Post by nisiprius »

The problem with objectively judging gold exists in other asset classes as well: it is continuity of data. The history of any asset is always punctuated by significant moments in history when a sensible person might say that "things changed." For stocks, one such point would be the creation of the SEC.

Advocates for gold like to make a rule that data before 1971 can't be considered, because before that "the price of gold was regulated." Well, the government makes lots of regulations and they affect lots of assets, and if you only consider periods of time during which regulations were stable you will never get a data series for any asset that's longer than a few decades. In order for the long-term view to be valid, you have to assume that government regulations, unique historic events, world wars, etc. average out like everything else.

Anyway, if 1971 was a watershed, then we have less than fifty years of data.

And the texture of gold performance is that that 50-year record only really includes two data points: 1980, when gold performed precisely as gold advocates say it should, spiking magnificently just at the time it was needed; and 2000-2012, when it completely failed to behave as expected.

This is an important point. It often escapes notice because it was a good failure, a magnificent failure, a lucrative failure for gold owners. It misbehaved by spiking dramatically in the total absence of inflation. You can't get around this, and it puts the lie to gold as inflation protection, a stable store of value, or an insurance policy.

It's as if someone said "Typically, car insurance tends to pay when you have an accident. And then out of the blue, your auto insurance sent you a check for $5,000 with a note saying "We are sort of worried about accidents and think you might have an accident soon, so here's some money. However, you'd best bank it because when you do have the accident we might not pay for it then."

There are two data points, and the conservative interpretation is that "gold spikes when it feels like it, at random times, just like any other commodity, based on unpredictable crowd psychology; it is a speculative investment like any other speculative investment, and not useful unless you think you really think that you are able to outpsych the crowd."

Gold advocates need to be clear about what they are claiming. Are they claiming that gold is sometimes lucrative, or they claiming that gold is usually reliable? Because there are lots of commodity investments that are sometimes lucrative but always unreliable. My impression is that gold advocates are claiming that gold is reliable, in a way that is qualitatively different from other speculative and sometimes-lucrative commodities.
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Re: the 12 commandments of gold bugs

Post by bberris »

The gold bugs are an anti-social bunch, literally. Any failure of society is an event for them to cheer. They hope for failure and think we deserve it for "spending too much" as if money was an end in itself.

And these specious arguments about "too much debt" pushing up the price of gold? Why? What mechanism could be at work? Do people and governments pay debts in gold?
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Re: the 12 commandments of gold bugs

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happyisland wrote:
market timer wrote: In any case, oil was just one example of all the commodities one consumes. Gold is not a bad proxy for this entire basket over the long run, likely better than T-bills.
Isn't the high volatility of gold a problem for trying to use it to match future liabilities?
For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels. I expect in 40 years, an ounce of gold will buy roughly 15 barrels of oil. I would not be surprised if T-bills fail to keep pace with the price of commodities like oil. It seems to me the long term uncertainty, as measured in energy costs for example, is much higher with paper assets. I often wonder what people will be doing in 40 years to pay the income taxes that give the dollar its value, as work is increasingly automated.
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Re: the 12 commandments of gold bugs

Post by market timer »

bberris wrote:And these specious arguments about "too much debt" pushing up the price of gold? Why? What mechanism could be at work? Do people and governments pay debts in gold?
You could explain the mechanism using something like the Fiscal Theory of the Price Level: https://en.wikipedia.org/wiki/Fiscal_th ... rice_level
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Re: the 12 commandments of gold bugs

Post by Browser »

Is it a good thing to own something that keeps pace with the price of commodities when the price of commodities is relentlessly down and then down some more? Just own commodities if you want to keep pace with the price of commodities, yes?
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Re: the 12 commandments of gold bugs

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Browser wrote:Is it a good thing to own something that keeps pace with the price of commodities when the price of commodities is relentlessly down and then down some more? Just own commodities if you want to keep pace with the price of commodities, yes?
Yes, if you believe in liability matching. As for owning gold vs. other commodities, gold has the advantage of being among the cheapest to store (per unit of value).
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Re: the 12 commandments of gold bugs

Post by nisiprius »

market timer wrote:...For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels. I expect in 40 years, an ounce of gold will buy roughly 15 barrels of oil...
What's your source for that?

I tried using

http://www.eia.gov/beta/api/qb.cfm?sdid ... 00000__3.A for oil. "U.S. Crude Oil First Purchase Price, Annual," whatever that means.
http://www.measuringworth.com/datasets/gold/result.php for gold. New York market price.

It looks to me like a range of 7 to 37, i.e. 22 ± 15.

Image

So the amount of oil that can be purchased for the price of an ounce of gold has had greater than fourfold fluctuations. And they are pretty darn sudden, with the usual teasers of decades of seeming stability followed by sudden big changes.

I'll agree that the long term trend is sorta-kinda-flattish, but so what? Most durable, useful things do tend to sorta-kinda hold real value over time and thus maintain a sorta-kinda stable relationship to each other. Really, "sorta-kinda-stable real value" is the rule, and currency and nominal bonds are the exceptions.
Last edited by nisiprius on Sun Aug 16, 2015 10:52 am, edited 1 time in total.
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Re: the 12 commandments of gold bugs

Post by nisiprius »

P.S. I think it was Lbill, who hasn't posted in a while, who objected--properly in my opinion--to the phrase "gold bugs." Let's try not to use that phrase, and certainly let's not riff off of it.
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Re: the 12 commandments of gold bugs

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nisiprius wrote:
market timer wrote:...For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels. I expect in 40 years, an ounce of gold will buy roughly 15 barrels of oil...
What's your source for that?

I tried using

http://www.eia.gov/beta/api/qb.cfm?sdid ... 00000__3.A for oil,
http://www.measuringworth.com/datasets/gold/result.php for gold. New York market price.
Thanks for putting this chart together.

I wasn't planning to go into this nuance, but since you put together a nice chart here goes: The spot price of crude is more volatile than the longer dated futures. This has to do with the highly variable cost of storage and ability to throttle back production in the long run. If I were really concerned with liability matching energy costs in 40 years, I'd probably do as I said earlier, hold gold for 30 years, then buy long dated crude futures with the gold. Note that today, the gold/oil price ratio using spot prices is well outside the 10-20x range I offered, at 26.6x. However, if you go out five years (Dec 2020 gold futures / Dec 2020 WTI futures), the ratio is closer to normal, at 19x. Really, you should be comparing long dated gold futures vs. long dated crude futures in your chart to remove the short run volatility associated with crude storage costs.
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Re: the 12 commandments of gold bugs

Post by Louis Winthorpe III »

market timer wrote:I often wonder what people will be doing in 40 years to pay the income taxes that give the dollar its value, as work is increasingly automated.
When I was a child, my family would drive up to my grandparents cottage on summer weekends and holidays. Among other things, my grandparents had decades-old Readers' Digests and Time magazines laying around. It was fun to read things written so long ago. One of my favorites was an article predicting that within 30 years (and this was probably referring to the 1980s or the 1990s), the average workday would be 2 hours per day thanks to automation and technological advancements.
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Re: the 12 commandments of gold bugs

Post by market timer »

Louis Winthorpe III wrote:
market timer wrote:I often wonder what people will be doing in 40 years to pay the income taxes that give the dollar its value, as work is increasingly automated.
When I was a child, my family would drive up to my grandparents cottage on summer weekends and holidays. Among other things, my grandparents had decades-old Readers' Digests and Time magazines laying around. It was fun to read things written so long ago. One of my favorites was an article predicting that within 30 years (and this was probably referring to the 1980s or the 1990s), the average workday would be 2 hours per day thanks to automation and technological advancements.
This is probably the reality today for most corporate jobs, but they require an additional 7 hours per day of face time.
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Re: the 12 commandments of gold bugs

Post by lee1026 »

Sure, you could buy Dec 2020 WTI futures for $64, a premium of about 50% over spot. After five years, you could roll to 2025, and so on, up until 2055. There is considerable uncertainty around contango/storage costs. It's not clear to me that this reduces variance relative to buying and holding gold for 40 years. There is certainly a point where it is better to lock in WTI directly if the goal is to minimize variance, e.g., maybe hold gold for 30 years, then use WTI futures for the last 10.
While short dated WTI futures is in very deep contango, very long dated WTI futures are pretty much flat. For example, WTI for 2019 is almost the same as WTI for 2020. Eyeballing the Dec 2015 and Dec 2016 prices during 2011, they seemed pretty similar. It doesn't seem particularly expensive to roll from 4 years out to 5 years out each year, and the variance seems minimal, at least compared to the big swings in the gold and oil price.
In any case, oil was just one example of all the commodities one consumes. Gold is not a bad proxy for this entire basket over the long run, likely better than T-bills.
I am not convinced most people directly consumes commodities - consumer spending, as measured by CPI (or billion prices project, etc), seems to be largely independent of commodity prices. Wheat prices can soar and crash, but at least in the United States, bread still cost the same amount at the store afterwards. Gasoline is about the only thing that a typical consumer buys that is closely related to commodity pricing.

If you are a producer that needs to hedge against a variety of different commodities, most major commodities have future markets for you to hedge them directly.

For hedging against CPI increase, the thing that have the least variance is probably TIPS.
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Re: the 12 commandments of gold bugs

Post by market timer »

lee1026 wrote:
Sure, you could buy Dec 2020 WTI futures for $64, a premium of about 50% over spot. After five years, you could roll to 2025, and so on, up until 2055. There is considerable uncertainty around contango/storage costs. It's not clear to me that this reduces variance relative to buying and holding gold for 40 years. There is certainly a point where it is better to lock in WTI directly if the goal is to minimize variance, e.g., maybe hold gold for 30 years, then use WTI futures for the last 10.
While short dated WTI futures is in very deep contango, very long dated WTI futures are pretty much flat. For example, WTI for 2019 is almost the same as WTI for 2020. Eyeballing the Dec 2015 and Dec 2016 prices during 2011, they seemed pretty similar. It doesn't seem particularly expensive to roll from 4 years out to 5 years out each year, and the variance seems minimal, at least compared to the big swings in the gold and oil price.
That's an interesting strategy to consider. As a pure crude hedge, I think it is better than buying something like USO. The one concern would be transaction costs, which might add another 2%/year due to the bid/ask spread.
I am not convinced most people directly consumes commodities - consumer spending, as measured by CPI (or billion prices project, etc), seems to be largely independent of commodity prices. Wheat prices can soar and crash, but at least in the United States, bread still cost the same amount at the store afterwards. Gasoline is about the only thing that a typical consumer buys that is closely related to commodity pricing.

If you are a producer that needs to hedge against a variety of different commodities, most major commodities have future markets for you to hedge them directly.

For hedging against CPI increase, the thing that have the least variance is probably TIPS.
Buying TIPS is like buying future labor and commodities. I'm a big fan of owning TIPS in retirement.

When you are young, you have the ability to work more than is necessary to support yourself. You have a surplus of labor. So, maybe it makes more sense to tilt to the commodities part of the CPI basket when young. That's what I'm doing.

I don't agree with your premise that CPI is largely independent of commodity prices. Energy prices have a significant, measurable impact on CPI. Not sure about wheat vs. bread, however.
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Re: the 12 commandments of gold bugs

Post by nisiprius »

market timer wrote:
nisiprius wrote:
market timer wrote:...For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels. I expect in 40 years, an ounce of gold will buy roughly 15 barrels of oil...
What's your source for that? [Chart showing that during the last century an ounce of gold bought anywhere from 7 to 37 barrels of oil
I wasn't planning to go into this nuance, but since you put together a nice chart here goes: The spot price of crude is more volatile than the longer dated futures.... Really, you should be comparing long dated gold futures vs. long dated crude futures in your chart to remove the short run volatility associated with crude storage costs.
Well, you said "For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels." You didn't say "for the past century, an ounce of long-dated gold futures has generally bought 15 barrels of long-dated oil futures +/- 5 barrels."
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Re: the 12 commandments of gold bugs

Post by market timer »

nisiprius wrote:
market timer wrote:
nisiprius wrote:
market timer wrote:...For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels. I expect in 40 years, an ounce of gold will buy roughly 15 barrels of oil...
What's your source for that? [Chart showing that during the last century an ounce of gold bought anywhere from 7 to 37 barrels of oil
I wasn't planning to go into this nuance, but since you put together a nice chart here goes: The spot price of crude is more volatile than the longer dated futures.... Really, you should be comparing long dated gold futures vs. long dated crude futures in your chart to remove the short run volatility associated with crude storage costs.
Well, you said "For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels." You didn't say "for the past century, an ounce of long-dated gold futures has generally bought 15 barrels of long-dated oil futures +/- 5 barrels."
That's a totally fair point, also futures didn't exist for much of this period. Appreciate the chart.
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Re: the 12 commandments of gold bugs

Post by Beliavsky »

larryswedroe wrote:I thought this was fabulous from Barry Ritholtz http://www.etf.com/sections/index-inves ... mmandments
I have a few % of my wealth in gold and am not a "gold bug". But if you think that over long periods of time that gold prices will keep up with inflation (for a zero real return), why not hold some gold when cash is giving you a negative real return? The gains on gold are not taxed until you sell (but are taxed at the rate for collectibles, not the long-term capital gains rate).

For most of human history, currencies have been backed by something. There are many examples of currencies that have been inflated to worthlessness. I think some diversification beyond the US dollar is rational.
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Re: the 12 commandments of gold bugs

Post by Beliavsky »

lee1026 wrote:I am not convinced most people directly consumes commodities - consumer spending, as measured by CPI (or billion prices project, etc), seems to be largely independent of commodity prices. Wheat prices can soar and crash, but at least in the United States, bread still cost the same amount at the store afterwards. Gasoline is about the only thing that a typical consumer buys that is closely related to commodity pricing.
Bills for heating oil, natural gas, and electricity should not be forgotten.
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Re: the 12 commandments of gold bugs

Post by Beliavsky »

nisiprius wrote:The problem with objectively judging gold exists in other asset classes as well: it is continuity of data. The history of any asset is always punctuated by significant moments in history when a sensible person might say that "things changed." For stocks, one such point would be the creation of the SEC.

Advocates for gold like to make a rule that data before 1971 can't be considered, because before that "the price of gold was regulated." Well, the government makes lots of regulations and they affect lots of assets, and if you only consider periods of time during which regulations were stable you will never get a data series for any asset that's longer than a few decades.
From 1933 to 1971 it was effectively illegal for U.S. citizens to invest in gold:

https://en.wikipedia.org/wiki/Executive_Order_6102
Executive Order 6102 is a United States presidential executive order signed on April 5, 1933, by President Franklin D. Roosevelt "forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States". The effect of the order, in conjunction with the statute under which it was issued, was to criminalize the possession of monetary gold by any individual, partnership, association or corporation.
It is pointless to talk about the returns from investing in gold during a period where it was illegal to do so.
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Re: the 12 commandments of gold bugs

Post by happyisland »

Beliavsky wrote: I think some diversification beyond the US dollar is rational.
On its own this statement seems very reasonable to me. What I don't understand is the logical leap from "inflation might happen, and cash might lose a lot of value" to "I should buy gold to prevent my wealth from evaporating." Why gold?
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Re: the 12 commandments of gold bugs

Post by Valuethinker »

market timer wrote:
happyisland wrote:
market timer wrote: In any case, oil was just one example of all the commodities one consumes. Gold is not a bad proxy for this entire basket over the long run, likely better than T-bills.
Isn't the high volatility of gold a problem for trying to use it to match future liabilities?
For the past century, an ounce of gold has generally bought 15 barrels of oil +/- 5 barrels. I expect in 40 years, an ounce of gold will buy roughly 15 barrels of oil. I would not be surprised if T-bills fail to keep pace with the price of commodities like oil. It seems to me the long term uncertainty, as measured in energy costs for example, is much higher with paper assets. I often wonder what people will be doing in 40 years to pay the income taxes that give the dollar its value, as work is increasingly automated.
I am going to reply to that one privately.

Just in public, we can't assume oil will have the same utility to society then, as it does now.
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Re: the 12 commandments of gold bugs

Post by Valuethinker »

Beliavsky wrote:
nisiprius wrote:The problem with objectively judging gold exists in other asset classes as well: it is continuity of data. The history of any asset is always punctuated by significant moments in history when a sensible person might say that "things changed." For stocks, one such point would be the creation of the SEC.

Advocates for gold like to make a rule that data before 1971 can't be considered, because before that "the price of gold was regulated." Well, the government makes lots of regulations and they affect lots of assets, and if you only consider periods of time during which regulations were stable you will never get a data series for any asset that's longer than a few decades.
From 1933 to 1971 it was effectively illegal for U.S. citizens to invest in gold:

https://en.wikipedia.org/wiki/Executive_Order_6102
Executive Order 6102 is a United States presidential executive order signed on April 5, 1933, by President Franklin D. Roosevelt "forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States". The effect of the order, in conjunction with the statute under which it was issued, was to criminalize the possession of monetary gold by any individual, partnership, association or corporation.
It is pointless to talk about the returns from investing in gold during a period where it was illegal to do so.
People outside the USA held gold, so you could use that data.
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Re: the 12 commandments of gold bugs

Post by Beliavsky »

happyisland wrote:
Beliavsky wrote: I think some diversification beyond the US dollar is rational.
On its own this statement seems very reasonable to me. What I don't understand is the logical leap from "inflation might happen, and cash might lose a lot of value" to "I should buy gold to prevent my wealth from evaporating." Why gold?
Because gold has often been used as money in the past, and because it has low storage costs as a fraction of its value.
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Re: the 12 commandments of gold bugs

Post by Valuethinker »

Beliavsky wrote:
lee1026 wrote:I am not convinced most people directly consumes commodities - consumer spending, as measured by CPI (or billion prices project, etc), seems to be largely independent of commodity prices. Wheat prices can soar and crash, but at least in the United States, bread still cost the same amount at the store afterwards. Gasoline is about the only thing that a typical consumer buys that is closely related to commodity pricing.
Bills for heating oil, natural gas, and electricity should not be forgotten.
Although as percentages of income, they have been falling for a long time. 1973 was a huge blip, and so was 1980, but generally they have been on a downward trend relative to income.

(transportation fuel, ie gasoline, has been a stable c. 4% of US household income for a long time. Periodically it swings up towards 6% (as it did in summer 2008), and sometimes (like now) it dips down below. When it swings up to around 6%, the US tends to have a recession-- that's clear from all the postwar data. The linkage channels appear to be consumer demand for light vehicles, which is quite sensitive to fuel prices, and also general household spending (being diverted to transport when gas prices are high). It's not proven that high gas prices cause recessions, but James Hamilton (econbrowser.com) has shown they were a feature of every postwar recession.

Higher gas mileage seems to be absorbed into having more cars and/or driving more, although in the last few years that pattern may have broken, there is serious talk of "peak car" although I remain cautiously sceptical).

On the other utilities you have 2 factors:

- houses have been getting more efficient. eg standards on electricity consumption on fridges and ACs have had a significant impact. Conversely, houses have been getting bigger and having more electronic devices (a set top box wasn't a worry 30 years ago, now it can draw 150 watts)

- incomes have tended to rise faster than utility prices
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Re: the 12 commandments of gold bugs

Post by nisiprius »

In regard to a back-and-forth about how many barrels of oil you could buy with an ounce of gold during the last century,
market timer wrote:...also futures didn't exist for much of this period...
Oddly enough, that point had occurred to me and I was going to say something about it--but when I spent a few minutes Googling I couldn't confirm it. I definitely saw 1915-era references to prices for agricultural oils, cottonseed or whatever, "for future delivery," and I thought I did find something that sounded as if it might be talking about petroleum.
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Re: the 12 commandments of gold bugs

Post by nisiprius »

Beliavsky wrote:...From 1933 to 1971 it was effectively illegal for U.S. citizens to invest in gold... It is pointless to talk about the returns from investing in gold during a period where it was illegal to do so.
Not at all. In the first place, over any period of time when the dollar was officially pegged to gold, it didn't matter that you couldn't actually hold the gold because holding dollars was the same. If you like, during that period of time holding dollars was similar to holding shares in the GLD ETF today. You got the gold price even though you were merely holding a piece of paper that was tied to gold.

In the second place, objectively the world is what it is, the price of gold is what it is, and government actions are part of the investing environment for all investors. You can't say that it's meaningless to look at bond returns because they are so heavily influenced by Fed actions. If you own gold, your personal investing risk includes the risk of government action--that the government will make and change the rules about gold--28% capital gains instead of 15% etc. What is probably more important is that governments can and frequently do impose all kinds of controls on bringing valuable things across national borders--guns or liquor, currency or precious metals, physically or electronically--and have been doing so for centuries.

I don't remember which Greek king recalled every 1-drachma gold coin, forced citizens to turn them in, and had them all re-engraved as 2 drachmas. Just like Roosevelt changing the price of gold from $20.67 to $35. (By the way: that occurred in 1934 and it did not cause the CPI to double, showing that the dollar was at least as good a measuring stick for value as gold. The dollar suddenly contained half the amount of gold that it did before, yet the dollar bought about the same of everything else as before. If gold were the true intrinsic standard of value, it ought to have bought half as much.[corrected]

Stuff like that happens. It's all part of the risk of investing. You don't get to ignore it just because you think it shouldn't happen.
Last edited by nisiprius on Mon Aug 17, 2015 8:20 pm, edited 2 times in total.
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Re: the 12 commandments of gold bugs

Post by fidobogo »

Two more commandments, from the physical gold salesmen and astroturfing...

13. When the price of gold goes down a lot, gold is on sale, and all the reason to keep buying more.

14. Given today's lower price, you didn't lose money on gold you already bought at higher prices, because you're not selling now. And anyway, gold will be so valuable at a later date, that the extra you paid before is insignificant.

Same with physical silver.
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Re: the 12 commandments of gold bugs

Post by lee1026 »

nisiprius wrote:
Beliavsky wrote:...From 1933 to 1971 it was effectively illegal for U.S. citizens to invest in gold... It is pointless to talk about the returns from investing in gold during a period where it was illegal to do so.
Not at all. In the first place, over any period of time when the dollar was officially pegged to gold, it didn't matter that you couldn't actually hold the gold because holding dollars was the same. If you like, during that period of time holding dollars was similar to holding shares in the GLD ETF today. You got the gold price even though you were merely holding a piece of paper that was tied to gold.
While that is true for 1933-1971, note the gold prices started to go up in 1971, but gold ownership for Americans was not legally in the clear until 1974. Missing out on those 3 years would be been unpleasant to any backtest of any portfolio that holds gold.
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Re: the 12 commandments of gold bugs

Post by psteinx »

nisiprius wrote:
Beliavsky wrote:...From 1933 to 1971 it was effectively illegal for U.S. citizens to invest in gold... It is pointless to talk about the returns from investing in gold during a period where it was illegal to do so.
Not at all. In the first place, over any period of time when the dollar was officially pegged to gold, it didn't matter that you couldn't actually hold the gold because holding dollars was the same. If you like, during that period of time holding dollars was similar to holding shares in the GLD ETF today. You got the gold price even though you were merely holding a piece of paper that was tied to gold.
I think this is incorrect.

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

FDR required people to turn in most large quantities of private gold, for $20.67 per ounce.

Then, the dollar was devalued to $35/gold ounce

I'm less clear on when gold investment was fully re-legalized for US citizens (and at what price gold was trading at by then).

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

There are at least two dates mentioned in the wikipedia article - 1964 for "gold certificates", and 1975 for what appears to be regular old gold itself.
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Re: the 12 commandments of gold bugs

Post by happyisland »

nisiprius wrote:Just like Roosevelt changing the price of gold from $20.67 to $35. (By the way: that occurred in 1934 and it did not cause the CPI to double, showing that the dollar was at least as good a measuring stick for value as gold. Gold suddenly bought half as much as before, the dollar bought about the same as before. If gold were the true intrinsic standard of value it should have been the other way around).
Wow. That is mind-blowing!
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Re: the 12 commandments of gold bugs

Post by psteinx »

nisiprius wrote:Just like Roosevelt changing the price of gold from $20.67 to $35. (By the way: that occurred in 1934 and it did not cause the CPI to double, showing that the dollar was at least as good a measuring stick for value as gold. Gold suddenly bought half as much as before, the dollar bought about the same as before. If gold were the true intrinsic standard of value it should have been the other way around).
Actually, you've got it backwards.

Assuming you had an ounce of gold that you could keep and exchange at government rates (despite the restrictions of that era), then AFTER the price change, you could now buy $35 worth of stuff. Assuming dollar-denominated pricing changed little to not at all overnight due to the devaluation, you could buy ALMOST twice as much stuff with a given amount of gold* as just before the change, rather than half as much, as you state.

*Again, subject to restrictions on private ownership on gold.
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