A deeper look at gold. What's the "right" price?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

A deeper look at gold. What's the "right" price?

Post by larryswedroe »

http://www.etf.com/sections/index-inves ... nopaging=1

Interesting work by Erb and Harvey
Larry
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: A deeper look at gold. What's the "right" price?

Post by 209south »

Thanks, Larry - an interesting and thoughtful piece, as always. I am familiar with the prior Erb/Harvey work but hadn't realized they had done an update - I'll read that over the weekend. I happily carry 5% of my portfolio in gold bullion, effectively representing my 'cash' holdings, and I intend to build the position gradually over time as I view gold as a legacy, multi-generational asset - while obviously not 'necessary', I think gold is a very sensible asset for any investor whose portfolio is large enough that they are likely to leave a substantial legacy.

I would quibble modestly with one of your closing paragraphs...while it may have been true 2+ years ago, I don't believe the marginal cost of gold production is 'around $750 an ounce'...I think it's far higher currently, and the bankruptcies / mine closures / project deferrals in the sector are testimony to that. Having said that, the fact that 'all the gold that's ever been mined is basically available for sale today' is really a 'positive' in differentiating gold from any other commodity...unlike in copper, nickel, coal, iron ore etc., current year marginal production costs of gold are a relatively trivial part of the overall pricing equation, and will remain that way forever.
User avatar
nisiprius
Advisory Board
Posts: 52111
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: A deeper look at gold. What's the "right" price?

Post by nisiprius »

Summary:
In mid-July 2012, Merrill Lynch added its voice to the many that were predicting gold would hit $2,000 an ounce by the end of that year...

...one reason for investor interest in gold is the belief that it’s a great inflation hedge. Another is that it provides a hedge against currency risk. And a third is that gold can act as a haven of safety in bad times...

...In their June 2012 study, “The Golden Dilemma,” Claude Erb and Campbell Harvey... found that the change in the real price of gold seems to be largely independent of the change in currency values. In other words, gold is not a good hedge of currency risk.

As for gold serving as a safe haven, meaning that it’s stable during bear markets in stocks, Erb and Harvey found gold wasn’t quite the excellent hedge some might think....

In terms of gold’s value as an inflation hedge... on Jan. 21, 1980, the price of gold hit a then-record high of $850. On March 19, 2002, gold was trading at $293, below where it was 20 years earlier.... its loss in real purchasing power was about 85 percent... over the course of 22 years...

In August 2015, Erb and Harvey updated their paper.... The authors found that, over the period [starting in 1975], the average real price of gold is 3.46 times the U.S. Consumer Price Index. They found that the high real price of gold has been about 8.73, the low real price of gold has been about 1.47, and that the current real price of gold is about 4.63.... [and that] while there is a tendency to revert to the golden constant, the price of gold can vary greatly from the golden constant, and stay well above or below the constant for a long time.

They found that “below average real gold prices have been followed by above average 10-year real gold returns and above average real gold prices have been followed by below average 10-year real gold returns.” ... this “suggests that over the next 10 years real gold returns could be below average.”

...there doesn’t really seem to be a case that gold is likely to provide strong investment returns, even though it has already fallen about 40 percent from its peak nominal value (and even more in real terms)
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
nisiprius
Advisory Board
Posts: 52111
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: A deeper look at gold. What's the "right" price?

Post by nisiprius »

Larry, to be fair to gold advocates, at least some of them in this have been clear that the claim that gold is an "inflation hedge" does not mean constant real value, but rather that it has a true insurance-like hedging function. The claim is that gold actually is a poor investment most of the time, but that it will reliably spike just when it is needed; thus, they say, a modest allocation to gold can protect the entire rest of your portfolio against unexpected inflation.

The rationale is that the market clairvoyantly anticipated unexpected inflation and can be trusted to bit up the price of gold in advance of the actual occurrence.

Since they don't accept any history prior to 1971 as relevant, there are only two events to look at. The one in 1980 pretty well matched their claims. The one in 2012 doesn't, because it is a huge spike in the absence of inflation. The point is that if gold actually could be counted on reliably to make a huge spike just in advance of inflation, then it would be quite useful even if it did not track inflation or earn a good return in between.

Personally, if some insurance company wanted to sell me "unexpected inflation insurance," that was tied directly to some measure of CPI change, and the price were right, I would consider buying it; it would be up to them how to invest in order to pay claims, and if they were confident of gold's always behaving just as it did in 1980, they could decide to invest in gold--but I would want them, not me, to assume the risk of gold not behaving as expected.
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
HomerJ
Posts: 21247
Joined: Fri Jun 06, 2008 12:50 pm

Re: A deeper look at gold. What's the "right" price?

Post by HomerJ »

nisiprius wrote:Larry, to be fair to gold advocates, at least some of them have been clear that the claim that gold is an "inflation hedge" does not mean constant real value, but rather that it has a true insurance-like hedging function. The claim is that gold may be a lousy investment most of the time, but that it will reliably spike just when it is needed, and thus a modest allocation to gold can protect the entire rest of your portfolio against unexpected inflation.

The rationale is that the market clairvoyantly anticipated unexpected inflation and can be trusted to bit up the price of gold in advance of the actual occurrence.

Since they don't accept any history prior to 1971 as relevant, there are only two spikes to look at, only two data points. The one in 1980 pretty well matched their claims. The one in 2012 just doesn't, because it was a huge spike in the absence of inflation. The point is that if gold actually could be counted on reliably to make a huge spike just in advance of inflation, then it would be quite useful even if it did not track inflation or earn a good return in between.
Actually, you said it yourself...
The rationale is that the market clairvoyantly anticipated unexpected inflation and can be trusted to bit up the price of gold in advance of the actual occurrence.
Many people did EXPECT inflation in 2012. And then gold has dropped since that inflation has not materialized.. So the two data points we have do agree. Gold DOES spike when inflation hits (or if inflation is highly expected)... Gold would likely have stayed up if inflation had actually happened.

So I think gold does appear (so far, two data points is pretty weak) to be a good inflation hedge.
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: A deeper look at gold. What's the "right" price?

Post by market timer »

A few comments:
1. Extraction =/= Production (we need a supernova for that)
2. Real interest rates matter. Gold is less attractive when long term government bonds offer 3+% real yields (higher opportunity cost), which they did over most of the time period the "Golden Constant" was measured. Long term real yields are now about 1%.
3. We agree on a couple things: Gold tracks inflation in the long run, and talking heads know nothing.
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: A deeper look at gold. What's the "right" price?

Post by rca1824 »

Curious about using gold in portfolio.

If you look at 1972-2014 gold improved returns and lowered risk. Diversification is a free lunch, right?

But that period includes the huge run-up in gold in early 2000s. That might not necessarily repeat.

So if you look at 1980-2000, gold was terrible. Adding any amount of gold only lowered Sharpe ratio.

Do you really want to hold an asset that has 20+ year stretches of adding no benefit to a portfolio?

At least with bonds, even they drag down your returns, they reduce volatility more so that at least Sharpe is increasing. The diversification benefit is therefore highly consistent. I cannot find a single 10-year period in history when 100% in stocks or bonds maximized Sharpe. There is always benefit to holding both in some proportion.

The benefit of gold in a portfolio seems nothing more than a statistical anomaly.

All its price movements are speculative, there is no fundamental earnings like with stocks and bonds.

Image
Image
Image
Image
Last edited by rca1824 on Wed Aug 19, 2015 8:55 am, edited 2 times in total.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: A deeper look at gold. What's the "right" price?

Post by John3754 »

nisiprius wrote:Larry, to be fair to gold advocates, at least some of them in this have been clear that the claim that gold is an "inflation hedge" does not mean constant real value, but rather that it has a true insurance-like hedging function. The claim is that gold actually is a poor investment most of the time, but that it will reliably spike just when it is needed; thus, they say, a modest allocation to gold can protect the entire rest of your portfolio against unexpected inflation.

The rationale is that the market clairvoyantly anticipated unexpected inflation and can be trusted to bit up the price of gold in advance of the actual occurrence.

Since they don't accept any history prior to 1971 as relevant, there are only two events to look at. The one in 1980 pretty well matched their claims. The one in 2012 doesn't, because it is a huge spike in the absence of inflation. The point is that if gold actually could be counted on reliably to make a huge spike just in advance of inflation, then it would be quite useful even if it did not track inflation or earn a good return in between.

Personally, if some insurance company wanted to sell me "unexpected inflation insurance," that was tied directly to some measure of CPI change, and the price were right, I would consider buying it; it would be up to them how to invest in order to pay claims, and if they were confident of gold's always behaving just as it did in 1980, they could decide to invest in gold--but I would want them, not me, to assume the risk of gold not behaving as expected.
This seems like poor logic to me, the fact that gold spiked and inflation then didn't materialize doesn't mean that gold won't spike when inflation DOES materialize. I'm not saying it will or it won't, but I am saying that your logic doesn't hold up.

I claim that getting drunk and then driving will cause you to crash your car, your analysis is like saying "I crashed my car when I was sober therefore getting drunk doesn't cause you to crash your car."
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

Gold has proven to be a good insurance policy against short term bad stuff happening to stocks and bonds. It has also proven to be effective at lowering portfolio volatility and drawdowns over both the short and long term. Unfortunately, it has proven to be an effective reducer of absolute portfolio returns over the long run. Short term investors might be more interested in holding gold for insurance purposes; however, long term investors would have far less interest. BTW, the same is true for commodity CCFs.
We don't know where we are, or where we're going -- but we're making good time.
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: A deeper look at gold. What's the "right" price?

Post by rca1824 »

Browser wrote:Gold has proven to be a good insurance policy against short term bad stuff happening to stocks and bonds. It has also proven to be effective at lowering portfolio volatility and drawdowns over both the short and long term. Unfortunately, it has proven to be an effective reducer of absolute portfolio returns over the long run. Short term investors might be more interested in holding gold for insurance purposes; however, long term investors would have far less interest. BTW, the same is true for commodity CCFs.
Proven?

Annual real returns, TSM & Gold < 0, 1972-2014

Code: Select all

        TSM    Gold   TBM
1981  -11.75 -38.37 -2.41
1990  -11.58  -7.51  2.69
1994   -2.77  -5.09 -5.19
2000  -13.50  -8.91  7.74
2001  -12.33  -1.09  6.77

Annual real returns, TSM < 0 & Gold > 0

Code: Select all

         TSM   Gold   TBM
1973  -24.81  57.52 -5.08
1974  -35.32  53.12 -4.94
1977  -10.38  14.48 -3.47
1978   -1.58  25.18 -6.99
1987   -2.80  16.56 -1.60
2002  -22.80  22.06  5.74
2008  -37.10   4.87  4.96
2011   -1.94   6.42  4.47
In the 13 years of negative TSM returns, gold was positive in only 8. In my opinion that is not great insurance, it's actually only slightly better than luck (6-7) Though bonds were positive in only 6, I suspect mostly because of inflation. TIPS (not shown) were positive in 8, though in a different 8 than gold. Would be interesting if there was data on short-term TIPS, since as long as the real yield is positive they have guaranteed real yields so they would be the best portfolio insurance.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
User avatar
unclescrooge
Posts: 6264
Joined: Thu Jun 07, 2012 7:00 pm

Re: A deeper look at gold. What's the "right" price?

Post by unclescrooge »

John3754 wrote: I claim that getting drunk and then driving will cause you to crash your car, your analysis is like saying "I crashed my car when I was sober therefore getting drunk doesn't cause you to crash your car."
I disagree with your example. Crashing while sober would indicate that driving drunk doesn't cause you to crash your car.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

rca1824 wrote:
Browser wrote:Gold has proven to be a good insurance policy against short term bad stuff happening to stocks and bonds. It has also proven to be effective at lowering portfolio volatility and drawdowns over both the short and long term. Unfortunately, it has proven to be an effective reducer of absolute portfolio returns over the long run. Short term investors might be more interested in holding gold for insurance purposes; however, long term investors would have far less interest. BTW, the same is true for commodity CCFs.
Proven?

Annual real returns, TSM & Gold < 0, 1972-2014

Code: Select all

        TSM    Gold   TBM
1981  -11.75 -38.37 -2.41
1990  -11.58  -7.51  2.69
1994   -2.77  -5.09 -5.19
2000  -13.50  -8.91  7.74
2001  -12.33  -1.09  6.77

Annual real returns, TSM < 0 & Gold > 0

Code: Select all

         TSM   Gold   TBM
1973  -24.81  57.52 -5.08
1974  -35.32  53.12 -4.94
1977  -10.38  14.48 -3.47
1978   -1.58  25.18 -6.99
1987   -2.80  16.56 -1.60
2002  -22.80  22.06  5.74
2008  -37.10   4.87  4.96
2011   -1.94   6.42  4.47
In the 13 years of negative TSM returns, gold was positive in only 8. In my opinion that is not great insurance, it's actually only slightly better than luck (6-7) Though bonds were positive in only 6, I suspect mostly because of inflation. TIPS (not shown) were positive in 8, though in a different 8 than gold. Would be interesting if there was data on short-term TIPS, since as long as the real yield is positive they have guaranteed real yields so they would be the best portfolio insurance.
Well, it was still better than no insurance, right? It's more instructive to look at periods longer than one year and not at annual calendar returns. You will note that there are stretches of a few years when holding gold was pretty good insurance, such as that little stretch from 1972-1981 and again from 2001-2012. But when you go out longer than a decade (and most often much less) gold is a boat anchor on returns.
We don't know where we are, or where we're going -- but we're making good time.
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: A deeper look at gold. What's the "right" price?

Post by rca1824 »

Browser wrote:
rca1824 wrote:
Browser wrote:Gold has proven to be a good insurance policy against short term bad stuff happening to stocks and bonds. It has also proven to be effective at lowering portfolio volatility and drawdowns over both the short and long term. Unfortunately, it has proven to be an effective reducer of absolute portfolio returns over the long run. Short term investors might be more interested in holding gold for insurance purposes; however, long term investors would have far less interest. BTW, the same is true for commodity CCFs.
Proven?

Annual real returns, TSM & Gold < 0, 1972-2014

Code: Select all

        TSM    Gold   TBM
1981  -11.75 -38.37 -2.41
1990  -11.58  -7.51  2.69
1994   -2.77  -5.09 -5.19
2000  -13.50  -8.91  7.74
2001  -12.33  -1.09  6.77

Annual real returns, TSM < 0 & Gold > 0

Code: Select all

         TSM   Gold   TBM
1973  -24.81  57.52 -5.08
1974  -35.32  53.12 -4.94
1977  -10.38  14.48 -3.47
1978   -1.58  25.18 -6.99
1987   -2.80  16.56 -1.60
2002  -22.80  22.06  5.74
2008  -37.10   4.87  4.96
2011   -1.94   6.42  4.47
In the 13 years of negative TSM returns, gold was positive in only 8. In my opinion that is not great insurance, it's actually only slightly better than luck (6-7) Though bonds were positive in only 6, I suspect mostly because of inflation. TIPS (not shown) were positive in 8, though in a different 8 than gold. Would be interesting if there was data on short-term TIPS, since as long as the real yield is positive they have guaranteed real yields so they would be the best portfolio insurance.
Well, it was still better than no insurance, right? It's more instructive to look at periods longer than one year and not at annual calendar returns. You will note that there are stretches of a few years when holding gold was pretty good insurance, such as that little stretch from 1972-1981 and again from 2001-2012. But when you go out longer than a decade (and most often much less) gold is a boat anchor on returns.
I could bet on Roulette and the return would be positive 47% of the time and be uncorrelated with stocks. So in 13 years, the Roulette Wheel would be positive in 6 of them. Does that make it insurance? No it's just adding volatility.

Yes, the correlation between gold and stocks has been such that adding a small slice of gold increased risk-adjusted returns from 1972-2014. But that is mostly due to two huge price upswings in the 70s and 2000s. From 1981-2000 gold did nothing, except in 1987.

So what optimal holding period are you discussing? You said annual is too short but more than a decade is too long. 5 years?
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
Tanelorn
Posts: 2365
Joined: Thu May 01, 2014 9:35 pm

Re: A deeper look at gold. What's the "right" price?

Post by Tanelorn »

rca1824 wrote:
Browser wrote:Gold has proven to be a good insurance policy against short term bad stuff happening to stocks and bonds. It has also proven to be effective at lowering portfolio volatility and drawdowns over both the short and long term. Unfortunately, it has proven to be an effective reducer of absolute portfolio returns over the long run. Short term investors might be more interested in holding gold for insurance purposes; however, long term investors would have far less interest. BTW, the same is true for commodity CCFs.
Proven?

Annual real returns, TSM & Gold < 0, 1972-2014

Code: Select all

        TSM    Gold   TBM
1981  -11.75 -38.37 -2.41
1990  -11.58  -7.51  2.69
1994   -2.77  -5.09 -5.19
2000  -13.50  -8.91  7.74
2001  -12.33  -1.09  6.77

Annual real returns, TSM < 0 & Gold > 0

Code: Select all

         TSM   Gold   TBM
1973  -24.81  57.52 -5.08
1974  -35.32  53.12 -4.94
1977  -10.38  14.48 -3.47
1978   -1.58  25.18 -6.99
1987   -2.80  16.56 -1.60
2002  -22.80  22.06  5.74
2008  -37.10   4.87  4.96
2011   -1.94   6.42  4.47
In the 13 years of negative TSM returns, gold was positive in only 8. In my opinion that is not great insurance, it's actually only slightly better than luck (6-7) Though bonds were positive in only 6, I suspect mostly because of inflation. TIPS (not shown) were positive in 8, though in a different 8 than gold. Would be interesting if there was data on short-term TIPS, since as long as the real yield is positive they have guaranteed real yields so they would be the best portfolio insurance.
Those periods are a very good argument for gold over bonds as a diversifier - you want to look at the magnitude of the moves, not just the signs. If you add up all the annual returns (both sets of years), you have:

TSM -189%
GLD +139%
TBM +2.7%

Gold won big while stocks tanked, and during the same period, bonds were basically flat. The correlation with stock returns for gold is -41%, while for bonds it's only -14%.
John3754
Posts: 1289
Joined: Tue Mar 19, 2013 8:56 pm

Re: A deeper look at gold. What's the "right" price?

Post by John3754 »

Nirav wrote:
John3754 wrote: I claim that getting drunk and then driving will cause you to crash your car, your analysis is like saying "I crashed my car when I was sober therefore getting drunk doesn't cause you to crash your car."
I disagree with your example. Crashing while sober would indicate that driving drunk doesn't cause you to crash your car.
No it doesn't. Crashing while sober indicates that driving while drunk isn't the ONLY reason for crashing your car, it doesn't mean that driving drunk doesn't cause you to crash your car.

Likewise, gold spiking when inflation doesn't materialize indicates that inflation isn't the ONLY reason for gold spiking, it doesn't mean that materialized inflation doesn't cause gold to spike.
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: A deeper look at gold. What's the "right" price?

Post by rca1824 »

Tanelorn wrote:
rca1824 wrote:
Browser wrote:Gold has proven to be a good insurance policy against short term bad stuff happening to stocks and bonds. It has also proven to be effective at lowering portfolio volatility and drawdowns over both the short and long term. Unfortunately, it has proven to be an effective reducer of absolute portfolio returns over the long run. Short term investors might be more interested in holding gold for insurance purposes; however, long term investors would have far less interest. BTW, the same is true for commodity CCFs.
Proven?

Annual real returns, TSM & Gold < 0, 1972-2014

Code: Select all

        TSM    Gold   TBM
1981  -11.75 -38.37 -2.41
1990  -11.58  -7.51  2.69
1994   -2.77  -5.09 -5.19
2000  -13.50  -8.91  7.74
2001  -12.33  -1.09  6.77

Annual real returns, TSM < 0 & Gold > 0

Code: Select all

         TSM   Gold   TBM
1973  -24.81  57.52 -5.08
1974  -35.32  53.12 -4.94
1977  -10.38  14.48 -3.47
1978   -1.58  25.18 -6.99
1987   -2.80  16.56 -1.60
2002  -22.80  22.06  5.74
2008  -37.10   4.87  4.96
2011   -1.94   6.42  4.47
In the 13 years of negative TSM returns, gold was positive in only 8. In my opinion that is not great insurance, it's actually only slightly better than luck (6-7) Though bonds were positive in only 6, I suspect mostly because of inflation. TIPS (not shown) were positive in 8, though in a different 8 than gold. Would be interesting if there was data on short-term TIPS, since as long as the real yield is positive they have guaranteed real yields so they would be the best portfolio insurance.
Those periods are a very good argument for gold over bonds as a diversifier - you want to look at the magnitude of the moves, not just the signs. If you add up all the annual returns (both sets of years), you have:

TSM -189%
GLD +139%
TBM +2.7%

Gold won big while stocks tanked, and during the same period, bonds were basically flat. The correlation with stock returns for gold is -41%, while for bonds it's only -14%.
When you average them, yes, the correlation is -41%. But the correlation is inconsistent for each year. In 5 of those 13 years it was positive. In the other 8 it was even stronger than -41%. So there's a lot of noise in the correlation. If you can't count on it being negative every time time, how is it good insurance? Maybe it's better than nothing, you're right. Or maybe it's better to just reduce your equity allocation if you want to reduce volatility. Combinations of equities and bonds have had consistently higher risk adjusted returns than combinations of equities and gold.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: A deeper look at gold. What's the "right" price?

Post by 209south »

Good discussion, but for obvious reasons 'US-biased'. Clearly the last century has been wonderful for domestic US investors, both in equities and in bonds...perhaps that will continue but perhaps it won't. So my question - for anyone able to generate the data - is 'has gold been a good diversifier / portfolio holding for investors in other parts of the world?' Assuming mean reversion, that data might be useful as US investors look out over future decades.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

So what optimal holding period are you discussing? You said annual is too short but more than a decade is too long. 5 years?
I'm not advocating holding gold for any length of time. Just pointing out that it hasn't done much for you over long time periods longer than a decade at the most, so long-term buy and hold investors probably have no business holding gold. It has helped during some short periods when unexpected "bad stuff" rocked the stock and bond markets, so it did act as insurance during those times if you happened to be owning it. If that's a big deal to you, then maybe owning some gold as financial disaster insurance might let you sleep better. Or, you might only have short term investment objectives and you want to provide at least some protection (no absolute guarantee) for your portfolio during that time period from getting sideswiped by a black swan. Realizing that most insurance policies that are bought will never pay out -- and you hope that's what will happen. Other than some possible black swan insurance, I can't see the value of owning gold; especially if you have long term (> 15 year) investment objectives.
We don't know where we are, or where we're going -- but we're making good time.
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: A deeper look at gold. What's the "right" price?

Post by 209south »

Browser, per my earlier point, I believe your view is biased by a 'historic US' perspective...I suspect gold has been an outstanding diversifier for generations of investors in (say) Russia, Brazil, Argentina and many parts of western Europe...there is no guarantee that the US will outperform in the next decade or century...
TMCD75
Posts: 257
Joined: Mon Jan 26, 2015 3:36 pm

Re: A deeper look at gold. What's the "right" price?

Post by TMCD75 »

I'm turning into a precious metal person as of late and silver is probably a better option. Silver has a bigger upside than gold because it's currently sitting on a third of its all time high. I like silver for generation X, generation Y and of course, the Millennials. When people of these generations go to retire, silver has a great possibility of helping them out.

If SS is cut way down in the next 15-20 years, silver AND gold will go up. I bought 20 oz of Buffalo silver rounds this morning, they're gorgeous! My pm position is small though, not even 2% of my 750k networth, although I'm in the process of upping that a little bit.
User avatar
Rick Ferri
Posts: 9703
Joined: Mon Feb 26, 2007 10:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: A deeper look at gold. What's the "right" price?

Post by Rick Ferri »

The right price for gold is around $500 per ounce, give or take $100. This is the inflation-adjusted value going back about 3,000 years. Many times in history, gold has tripled in value, only to fall back to it's inflation-adjusted price over the next decade or so.

Rick Ferri
Last edited by Rick Ferri on Wed Aug 19, 2015 1:30 pm, edited 3 times in total.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: A deeper look at gold. What's the "right" price?

Post by Grt2bOutdoors »

TMCD75 wrote:I'm turning into a precious metal person as of late and silver is probably a better option. Silver has a bigger upside than gold because it's currently sitting on a third of its all time high. I like silver for generation X, generation Y and of course, the Millennials. When people of these generations go to retire, silver has a great possibility of helping them out.

If SS is cut way down in the next 15-20 years, silver AND gold will go up. I bought 20 oz of Buffalo silver rounds this morning, they're gorgeous! My pm position is small though, not even 2% of my 750k networth, although I'm in the process of upping that a little bit.
Yes, their dentist will have a great need for silver amalgam fillings or for their dentures. :mrgreen:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: A deeper look at gold. What's the "right" price?

Post by Grt2bOutdoors »

Rick Ferri wrote:The right price for gold is about $600 per ounce. This is the inflation-adjusted value going back about 3,000 years. Many times in history, gold has tripled in value, only to fall back to it's inflation-adjusted price over the next decade or so.

Rick Ferri
That's what I thought, I will wait, I've always wanted to buy one to hold in my hands from time to time. In the meantime, I'll admire my shares in VTSAX instead. :)
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
Rick Ferri
Posts: 9703
Joined: Mon Feb 26, 2007 10:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: A deeper look at gold. What's the "right" price?

Post by Rick Ferri »

Yeah. Let it hit $500, then wait another 10 years and your timing will be good.

Rick

PS. People are now predicting oil will go down to $15-$20 per barrel - so we must be near a bottom at $40.
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
RadAudit
Posts: 4384
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: A deeper look at gold. What's the "right" price?

Post by RadAudit »

Rick -
I sail with a "gold bug" from time to time on Wednesday nights. He's been waiting for some un-specified trigger / signal before investing in gold prior to its inevitable meteoric rise to new heights. Thanks for offering an opinion on the right price to purchase gold to give one the best chance for a good inflation adjusted return.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
User avatar
nisiprius
Advisory Board
Posts: 52111
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: A deeper look at gold. What's the "right" price?

Post by nisiprius »

HomerJ wrote:...Actually, you said it yourself...
The rationale is that the market clairvoyantly anticipated unexpected inflation and can be trusted to bit up the price of gold in advance of the actual occurrence.
Many people did EXPECT inflation in 2012.
Did they?

Cleveland Fed
Image
And then gold has dropped since that inflation has not materialized.. So the two data points we have do agree. Gold DOES spike when inflation hits (or if inflation is highly expected)... Gold would likely have stayed up if inflation had actually happened.

So I think gold does appear (so far, two data points is pretty weak) to be a good inflation hedge.
One would have to look carefully to see exactly what claims gold advocates are making.

I'm not interested in investing good money in an opinion poll about inflation.

If gold spikes in advance of inflation, that's interesting.

If gold spikes in response to market predictions about inflation and market predictions about inflation are completely unreliable, that's not interesting.

If gold spikes in response to market predictions about inflation, and people who buy gold think something different about inflation than participants in other financial markets, and people who buy gold make predictions that are less reliable than the rest of the market, than that's even less interesting.
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.
Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: A deeper look at gold. What's the "right" price?

Post by Johno »

HomerJ wrote: Many people did EXPECT inflation in 2012. And then gold has dropped since that inflation has not materialized.. So the two data points we have do agree. Gold DOES spike when inflation hits (or if inflation is highly expected)... Gold would likely have stayed up if inflation had actually happened.

So I think gold does appear (so far, two data points is pretty weak) to be a good inflation hedge.
As was posted with graph, the most direct measure of inflation expectations, comparison of nominal treasury and TIPS yields, didn't indicate significantly rising inflation expectations either in 2012 or along all of gold's meteoric rise in the 2000's. Unfortunately the TIPS v nominal yield measure of inflation expectations didn't exist in the 70's to see how it would have compared to gold's signal then.

I suppose one might try to explain gold's v TIP spread performance in terms of very extreme outcomes. It seems very likely gold would do well in very bad scenario's for the value or even the very integrity of the USD. IOW perhaps TIPS v treasuries is affected more by the 'meat' of the distribution of future expected outcomes of dollar purchasing power loss, but gold is more is affected by market expectation of extremes, and its investors more willing to ignore poor performance otherwise. So perhaps we can say the run up of the 2000's was due to a broad perception the financial world is in uncharted territory generally, as opposed to a broad perception of imminent high inflation (which is pretty clearly not the case).

But another explanation of the divergence in those measures, big gold rally when nominal-TIPS tended to decline, might simply be that gold is a relatively small market in a commodity very hard to objectively value. People buying more gold probably expected more inflation (or expected enough others to expect it, etc), but it doesn't mean 'the market' as a whole did. It might just not take that many people newly enamored with gold to move the market a lot.

And that might make $1133 a still worrisomely high entry level given the failure of inflation to take off, also current trade weighted dollar value which was replicated in late '90's when gold was under $300. I think it's reasonable to expect gold to perform well in high inflation, but the right entry level is hard to determine, even compared to stocks/bonds with all their uncertainties.
garlandwhizzer
Posts: 3562
Joined: Fri Aug 06, 2010 3:42 pm

Re: A deeper look at gold. What's the "right" price?

Post by garlandwhizzer »

Rick thinks that gold is worth about $500/oz., less than half of what it sells for now. Larry's post suggests it objective price based on past history and inflation is about 825/oz. but that an overshoot to the downside might take it much lower than that. The gold bugs have been so discredited by the collapse in gold prices that they no longer find themselves invited to appear on financial media. In past years and months the gold bugs were media darlings appearing on financial media singing a happy tune and writing widely circulated optimistic forecasts. That sentiment peaked when gold was selling for $1700+/oz., but the optimism has disappeared as gold has progressively lost one third or more of its value even as both stocks and bonds have appreciated. Now it seems that everyone, experts and novices alike, hate precious metals and gold in particular as well as PME as an asset. Everyone seems to agree that its long term expected return is zero and that it leaves much to be desired even as a hedge to inflation or world crisis.

Historically whenever the entire market comes to complete agreement on any asset class, they are usually wrong. When sentiment about any asset class reaches extreme levels, as it does with gold now as one expert after another piles on with lower and lower estimates of its true value, that may be the time for contrarians to step away from the herd and take an independent look at it.

I agree that the long term expected return of physical gold is zero, but personally I do not see gold as long term holding. I do think that precious metals equity at some point in the not too distant may provide an entry point a trading vehicle, something to buy when there is blood in its streets and sell when calm is restored. Precious metals equity has tanked to unprecedented degree in recent years. Seven years ago Vanguard's Precious Metals Equity Fund sold for $40/share. Now it sells for $7.51, a drop of more than 80% in price. Its volatility makes VWO look like Treasuries. VGPMX is currently selling for book value and may well drop below book value in the near future.

What drives gold stocks and the price of gold is not fundamentals but sentiment pure and simple. Now sentiment is in the advanced stages of depression, close to suicide on gold and PME. But the strange thing about sentiment is that historically it works both ways, down and up, not just down. Also historically it takes very wide swings in very short periods of time, from universal tech euphoria in March 2000 to tech doom and gloom 12 months later. Historically VGPMX alternates between massive price collapses like the last 7 years and massive outperformance like the 5 years prior to that when its price went from 10 to 40 outpacing everything. Has that pattern been repealed such that now it just collapses and stays down forever? I don't know the answer to that question but I don't believe anyone else does either. Although I don't own any gold or PME now, I am keeping an eye on it precisely because it is so widely despised and that is reflected in its current price.

I do not believe that the dour forecasts for gold are destiny no matter how distinguished the source from which they come. There is only one thing we know for sure about the future. Things change over time. PME and/or gold may offer opportunity as a trading or diversification vehicle at some point in my opinion.

Garland Whizzer
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: A deeper look at gold. What's the "right" price?

Post by 209south »

I thought this was a bogleheads forum, but then I read that "Rick Ferri thinks gold is worth about $500/oz"...and "Larry's post suggests...about $825"...both far off current market levels...I respect both Rick and Larry very much, but I believe more in capital market efficiency than in the prognostications of any particular observer...seems many on here should be aggressively shorting GLD to capitalize on the obvious mis-pricing!! Oh, and please let me know what Rick, Larry and others think the appropriate level of the Euro should be, or AAPL, or 30-year TIPs, so I can be sure to position myself accordingly :confused

Earth to the forum...the bullion market is large and well-traded...I see no reason to suspect the rules of efficient markets have been suspended in this pocket of the investing universe.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 10:55 pm

Re: A deeper look at gold. What's the "right" price?

Post by lack_ey »

209south wrote:I thought this was a bogleheads forum, but then I read that "Rick Ferri thinks gold is worth about $500/oz"...and "Larry's post suggests...about $825"...both far off current market levels...I respect both Rick and Larry very much, but I believe more in capital market efficiency than in the prognostications of any particular observer...seems many on here should be aggressively shorting GLD to capitalize on the obvious mis-pricing!! Oh, and please let me know what Rick, Larry and others think the appropriate level of the Euro should be, or AAPL, or 30-year TIPs, so I can be sure to position myself accordingly :confused

Earth to the forum...the bullion market is large and well-traded...I see no reason to suspect the rules of efficient markets have been suspended in this pocket of the investing universe.
The less similar the markets and more barriers, and particularly with different participants in said markets, perhaps the less we can expect relative asset pricing to be reliable and efficient in the sense I'm interpreting from your statement. And the gold market has a number of participants that are not necessarily price sensitive, though I don't really know much about it and could be somewhat convinced that largely rational traders on the margins are the ones driving the price action.

So I am not as confident that the current price is right. However, I couldn't tell you if the current price should be higher or lower.

The numbers given by Rick and Larry are just based on historical averages, and I interpret theme more as suggestions than forecasts. Historical averages are always a bad way to do predictions, but here they might be as good as any (i.e. bad but maybe not terrible).
grog
Posts: 622
Joined: Sat Jul 20, 2013 1:09 pm

Re: A deeper look at gold. What's the "right" price?

Post by grog »

TMCD75 wrote:I'm turning into a precious metal person as of late and silver is probably a better option. Silver has a bigger upside than gold because it's currently sitting on a third of its all time high. I like silver for generation X, generation Y and of course, the Millennials. When people of these generations go to retire, silver has a great possibility of helping them out.

If SS is cut way down in the next 15-20 years, silver AND gold will go up. I bought 20 oz of Buffalo silver rounds this morning, they're gorgeous! My pm position is small though, not even 2% of my 750k networth, although I'm in the process of upping that a little bit.
At one point the gold/silver price ratio was legally fixed at 15 to 1, but the more recent market ratio has been more like 60 to 1. Most of the rationales for holding gold are based on its being a monetary metal, a global hard currency. Silver hasn't been as popular as an investment and something like 40% of the demand is now industrial (which doesn't seem ideal to say the least). If it's just 2% it doesn't hurt anything, but I would question a large allocation to silver.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

209south wrote:I thought this was a bogleheads forum, but then I read that "Rick Ferri thinks gold is worth about $500/oz"...and "Larry's post suggests...about $825"...both far off current market levels...I respect both Rick and Larry very much, but I believe more in capital market efficiency than in the prognostications of any particular observer...seems many on here should be aggressively shorting GLD to capitalize on the obvious mis-pricing!! Oh, and please let me know what Rick, Larry and others think the appropriate level of the Euro should be, or AAPL, or 30-year TIPs, so I can be sure to position myself accordingly :confused

Earth to the forum...the bullion market is large and well-traded...I see no reason to suspect the rules of efficient markets have been suspended in this pocket of the investing universe.
Very good point. When people engage in this sort of speculation about the "right price" for stocks they get reamed, but I guess it's OK in the case of gold. I guess that's because gold isn't a "real investment" and the only people who buy gold are "gold bugs" and not real investors. :?
We don't know where we are, or where we're going -- but we're making good time.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

The real problem with gold is that it has "stock-like volatility and cash-like returns", at least over the long run. From 1975-2014 (1975 was the first year that US citizens could legally own gold after the dollar-gold peg was lifted), gold has returned 4.2% annually while money market cash has returned 4.9%. $1,000 invested in gold in 1975 was worth $5,172 at the end of 2014 -- 40 years later. It was worth $6,895 if placed in a money market account. If you had put the $1,000 into the US total stock market it would have grown to $101,433, which is an annualized return of 12.2%. The annual volatility of gold was 25.9% while for stocks it was 16.9%, and the largest drawdown for gold was 57% and for stocks it was 37.1%. So, gold has proven to be a very tough asset to hold for the long run for most investors. Which is why Harry Browne came up with the idea of the Permanent Portfolio. He was originally a pretty big goldbug, but recognizing how tough it was to hold gold over the long term, he began recommending that one reduce gold holdings to 25% of one's portfolio and hold the other 75% in stocks and bonds.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
market timer
Posts: 6535
Joined: Tue Aug 21, 2007 1:42 am

Re: A deeper look at gold. What's the "right" price?

Post by market timer »

Browser wrote:Which is why Harry Browne came up with the idea of the Permanent Portfolio. He was originally a pretty big goldbug, but recognizing how tough it was to hold gold over the long term, he began recommending that one reduce gold holdings to 25% of one's portfolio and hold the other 75% in stocks and bonds.
Today is a nice day to have 25% in gold.
Clive
Posts: 1950
Joined: Sat Jun 13, 2009 5:49 am

Re: A deeper look at gold. What's the "right" price?

Post by Clive »

Browser wrote:The real problem with gold is that it has "stock-like volatility and cash-like returns", at least over the long run. From 1975-2014 (1975 was the first year that US citizens could legally own gold after the dollar-gold peg was lifted), gold has returned 4.2% annually while money market cash has returned 4.9%. $1,000 invested in gold in 1975 was worth $5,172 at the end of 2014 -- 40 years later. It was worth $6,895 if placed in a money market account. If you had put the $1,000 into the US total stock market it would have grown to $101,433, which is an annualized return of 12.2%. The annual volatility of gold was 25.9% while for stocks it was 16.9%, and the largest drawdown for gold was 57% and for stocks it was 37.1%. So, gold has proven to be a very tough asset to hold for the long run for most investors. Which is why Harry Browne came up with the idea of the Permanent Portfolio. He was originally a pretty big goldbug, but recognizing how tough it was to hold gold over the long term, he began recommending that one reduce gold holdings to 25% of one's portfolio and hold the other 75% in stocks and bonds.
Younger generations wont recall periods of very high interest rates, inflation and taxation. Interest rates north of 15%, 30% taxation and even if gross interest is keeping up with inflation taxation risk knocks that back significantly. During such times being able to defer/avoid taxes is beneficial if you're accumulating (reinvesting interest). Similar to dividends. If you're being paid dividends just to be reinvesting those dividends if/when dividend yields and dividend taxation are high then that's a overhead avoided by non-dividend stocks (perhaps stock buy-backs instead).

The high volatility of gold can be beneficial, especially when inverse to stocks. If stocks are down -30%, gold up +30% then the stock purchase power of gold is up +87%. Being able to swap gold for stock at such discounts means that the subsequent gains from stock tends to compensate for the cost of gold (lag) during the 'keep powder dry' years. Typically you'll also be able to replenish gold reserves (dry powder) at a later date, when the gold purchase power of stock has risen a lot (stocks up, gold down).

Stocks combined with gold is more of a bond type holding. The Permanent Portfolio with equal amounts in stocks, gold, long dated treasury, short dated treasury is collectively a bond type holding. A Permanent Portfolio with XIV (short volatility ETP) instead of stock, as XIV is somewhat like a 4x or 5x long stock holding is similar to a 100% long stock i.e. 25% in 4x stock, 75% in bonds. https://www.portfoliovisualizer.com/bac ... ount=10000
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: A deeper look at gold. What's the "right" price?

Post by rca1824 »

Clive wrote:
Browser wrote:The real problem with gold is that it has "stock-like volatility and cash-like returns", at least over the long run. From 1975-2014 (1975 was the first year that US citizens could legally own gold after the dollar-gold peg was lifted), gold has returned 4.2% annually while money market cash has returned 4.9%. $1,000 invested in gold in 1975 was worth $5,172 at the end of 2014 -- 40 years later. It was worth $6,895 if placed in a money market account. If you had put the $1,000 into the US total stock market it would have grown to $101,433, which is an annualized return of 12.2%. The annual volatility of gold was 25.9% while for stocks it was 16.9%, and the largest drawdown for gold was 57% and for stocks it was 37.1%. So, gold has proven to be a very tough asset to hold for the long run for most investors. Which is why Harry Browne came up with the idea of the Permanent Portfolio. He was originally a pretty big goldbug, but recognizing how tough it was to hold gold over the long term, he began recommending that one reduce gold holdings to 25% of one's portfolio and hold the other 75% in stocks and bonds.
Younger generations wont recall periods of very high interest rates, inflation and taxation. Interest rates north of 15%, 30% taxation and even if gross interest is keeping up with inflation taxation risk knocks that back significantly. During such times being able to defer/avoid taxes is beneficial if you're accumulating (reinvesting interest). Similar to dividends. If you're being paid dividends just to be reinvesting those dividends if/when dividend yields and dividend taxation are high then that's a overhead avoided by non-dividend stocks (perhaps stock buy-backs instead).

The high volatility of gold can be beneficial, especially when inverse to stocks. If stocks are down -30%, gold up +30% then the stock purchase power of gold is up +87%. Being able to swap gold for stock at such discounts means that the subsequent gains from stock tends to compensate for the cost of gold (lag) during the 'keep powder dry' years. Typically you'll also be able to replenish gold reserves (dry powder) at a later date, when the gold purchase power of stock has risen a lot (stocks up, gold down).

Stocks combined with gold is more of a bond type holding. The Permanent Portfolio with equal amounts in stocks, gold, long dated treasury, short dated treasury is collectively a bond type holding. A Permanent Portfolio with XIV (short volatility ETP) instead of stock, as XIV is somewhat like a 4x or 5x long stock holding is similar to a 100% long stock i.e. 25% in 4x stock, 75% in bonds. https://www.portfoliovisualizer.com/bac ... ount=10000

I see the argument in favor of gold for diversification, but how do we know it's not just a fluke? From 1980-2000, gold was a huge drag -- the investor would have been better off diversifying with cash in a checking account. If you can observe an entire 20 year period where the benefits of gold were nonexistent, how do you count on it when you need it? Sometimes both stocks AND gold fall. Cash is a safer ballast.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
Clive
Posts: 1950
Joined: Sat Jun 13, 2009 5:49 am

Re: A deeper look at gold. What's the "right" price?

Post by Clive »

rca1824 wrote:I see the argument in favor of gold for diversification, but how do we know it's not just a fluke? From 1980-2000, gold was a huge drag -- the investor would have been better off diversifying with cash in a checking account. If you can observe an entire 20 year period where the benefits of gold were nonexistent, how do you count on it when you need it? Sometimes both stocks AND gold fall. Cash is a safer ballast.
1920 UK and stocks dropped around -20% whilst gold gained around +20%

The other factor is that even though prior to 1968 the price of gold was fixed in nominal terms it was highly volatile in real (inflation adjusted) terms. Comparisons should be made using inflation adjusted stock and gold values over time. Generally the times when gold did well was when investors were fearful (gold up/stocks down). During other times the reverse tends to hold, investors dump gold in order to invest in stocks. In paying no interest taxes on gold can be deferred until when sold (capital gain/losses only) which under taxation risk events can mitigate such risks.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

Well, there's always the unending debate about viewing assets in isolation vs. the total portfolio. In isolation, gold is a terrible asset as shown by the fact you could have gotten the same or better return from a savings account. My position is that I (and most humans I know) simply cannot take their eyes off of individual asset returns and focus on the forest instead of the trees, so I don't think I or most humans should mess around with an asset like gold because we're going to fret and fuss and I'll end up chasing it's performance by buying and selling at all the wrong times. Admit your human-ness and act accordingly.

My second position is that I believe that a prudent investor should heed Paul Merriman's advice:
Don’t buy funds in asset classes with low expected returns or high levels of risk relative to their expected returns.
That would include things like gold and commodities.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: A deeper look at gold. What's the "right" price?

Post by nedsaid »

If I had to guess at the "right" price of gold, $500 - $825 sounds about right to me. But what do I know? In fact I recall that Rick Ferri once opined that the "right" price is about $800 per ounce. He must have changed his view.

But this is why I have not bit on Precious Metals funds. My line of thinking is why buy the stocks if the price of the underlying metal still seems to be quite a ways ahead of intrinsic value. If the price of Gold plummeted from here, an eyebrow would shoot up and I would actually think pretty darned hard about Precious Metals funds.
A fool and his money are good for business.
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: A deeper look at gold. What's the "right" price?

Post by 209south »

nedsaid, with respect, what is the 'intrinsic value' of TSLA, AAPL, the Euro or the Yen...how would one possibly determine same...basic question is 'do people believe bullion markets are efficient, and 'it not', why are they not aggressively arbitraging the market?
rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: A deeper look at gold. What's the "right" price?

Post by rca1824 »

nedsaid wrote:If the price of Gold plummeted from here, an eyebrow would shoot up and I would actually think pretty darned hard about Precious Metals funds.
Trying to catch a falling knife?
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: A deeper look at gold. What's the "right" price?

Post by nedsaid »

209south wrote:nedsaid, with respect, what is the 'intrinsic value' of TSLA, AAPL, the Euro or the Yen...how would one possibly determine same...basic question is 'do people believe bullion markets are efficient, and 'it not', why are they not aggressively arbitraging the market?
An obscure fellow who runs an obscure little insurance company seems to believe in the concept of intrinsic value. I think his name is Buffett.
A fool and his money are good for business.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

Unless you think you could hold gold, gold miners, commodities, and all that stuff for the long pull (at least 15 years, probably 20+) I don't see why a Boglehead long term buy and hold investor would even consider these kinds of assets. We should be able to agree that setting an appropriate asset allocation and staying the course with that allocation (except for systematic pre-planned adjustments such as age-based fixed-income allocation, etc.) for the long term is sort of a cornerstone tenet of BH investing. I would be in favor of having everyone who doesn't raise their hand when asked if they plan stay the course for the next couple decades or so with their gold or commodity allocation immediately leave the thread and move to the bar. I'll stand for the first round. :beer
We don't know where we are, or where we're going -- but we're making good time.
209south
Posts: 528
Joined: Mon Jan 28, 2013 9:58 pm

Re: A deeper look at gold. What's the "right" price?

Post by 209south »

Haha - Browser, I am all-in with my 5% bullion allocation for (I certainly hope!) 20+ years...nedsaid, we all admire Buffett but throwing his name into this thread adds no value...what's his perspective on the intrinsic value of the assets I mentioned? If Buffett says 'own the S&P 500 and nothing else' would you ignore small caps? international? He's an American icon whose business bears no resemblance to the portfolio optimization we are all pursuing.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: A deeper look at gold. What's the "right" price?

Post by Browser »

209south wrote:Haha - Browser, I am all-in with my 5% bullion allocation for (I certainly hope!) 20+ years...nedsaid, we all admire Buffett but throwing his name into this thread adds no value...what's his perspective on the intrinsic value of the assets I mentioned? If Buffett says 'own the S&P 500 and nothing else' would you ignore small caps? international? He's an American icon whose business bears no resemblance to the portfolio optimization we are all pursuing.
If the last 40 years tells you anything about what your 5% bullion will accomplish over the next 20 years, the good news is that it won't hurt you. The bad news is that it won't help you either. A 5% allocation to anything is a KYS investment (kissing your sister). 8-)
We don't know where we are, or where we're going -- but we're making good time.
TradingPlaces
Posts: 1245
Joined: Sun Nov 09, 2014 12:19 pm
Location: 30.286029, -97.530011

Re: A deeper look at gold. What's the "right" price?

Post by TradingPlaces »

Good article, thanks!

I continue to maintain the position that if gold drops to $350, I will buy some.
Post Reply