Bogle "5% Gold"

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welderwannabe
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Re: Bogle "5% Gold"

Post by welderwannabe » Sat Jul 20, 2019 6:03 pm

oldzey wrote:
Sat Jul 20, 2019 6:00 pm
Any time I'm tempted to buy an ounce or two of gold, I refer to the following chart:

Image
What I see there is gold doing exactly what it is supposed to do. Be a store of wealth that matches of inflation.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Forester
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Re: Bogle "5% Gold"

Post by Forester » Sat Jul 20, 2019 7:48 pm

oldzey wrote:
Sat Jul 20, 2019 6:00 pm
Any time I'm tempted to buy an ounce or two of gold, I refer to the following chart:

Image
1970s gold vs stocks. 2000s gold vs stocks. Gold was terrible in the 1980s & 1990s but it didn't really matter.

Trav
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Re: Bogle "5% Gold"

Post by Trav » Fri Aug 09, 2019 5:49 pm

Why are you not leaving?

How are you able to handle 1,000%+ hyperinflation?

Gold actually seems like the perfect tool to combat hyperinflation? Or to get out? Well, assuming you have some place to go.
[/quote]

I have since left and I am now living and working in London. I was able to handle the hyperinflation because I was paid in dollars directly to my bank account in the US. Though, it was increasingly hard each year I was working there.

Some people may be liquidating gold along with other heirlooms to pay for trips out. However, crime is so rampant that anybody who had any amount of gold would be a target. Plus, there is the problem raised by a previous poster of how much is a given unit of gold worth. Then ensuring purity and avoiding fraud, which is rampant as well, would be similarly problematic. I fail to see how gold can be a better option than informal dollarization at the street level. Though gold as a commodity being pawned off like electronics and heirlooms does make sense as well.

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Re: Bogle "5% Gold"

Post by MoneyMarathon » Fri Aug 09, 2019 5:55 pm

willthrill81 wrote:
Thu Jan 17, 2019 4:05 pm
Since 1980 (returns from 1972-1980 seem unlikely to occur again in 'normal' times for various reasons)
If 1972-1980 performance is unusual, then a start date in 1980 is also unusual, because it's buying at the peak of an unusual bull market. That's like calculating expected stock returns from 1929, because the 20s were unusually good. The precipitous drop from 1980 had a contributing factor -- the crazy run up in the 1970s.

We have a lot of data on stocks since 1929, of course, so we wouldn't reach a totally iffy conclusion by starting there. But, over a shorter 40 year period, it still would be lower than a good estimate of "average" or "expected" stock returns.

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Re: Bogle "5% Gold"

Post by wolf359 » Fri Aug 09, 2019 6:27 pm

robertmcd wrote:
Fri Jan 18, 2019 3:00 pm
z3r0c00l wrote:
Fri Jan 18, 2019 9:46 am
grayfox wrote:
Fri Jan 18, 2019 9:30 am
Were you stopped and searched at the border crossing for valuables, e.g. U.S. Dollars, Euros, Gold, diamonds. Was cash and valuables confiscated at the border? :?:

I'm wondering if people could get their gold out of the country.
Sure, if you leave a portion of the roll behind in bribes.
Or just stick that roll of 1 oz gold coins up somewhere they won't find it :shock:
I realize that you're joking, but I'm sure those full body scanners will find it very easily.

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Re: Bogle "5% Gold"

Post by boglerdude » Fri Aug 09, 2019 9:17 pm

Who actually needs gold to conduct business, only central banks? Maybe that puts a floor on its value. But Canada sold all its gold. We'll see what happens

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Re: Bogle "5% Gold"

Post by willthrill81 » Sat Aug 10, 2019 12:16 am

MoneyMarathon wrote:
Fri Aug 09, 2019 5:55 pm
willthrill81 wrote:
Thu Jan 17, 2019 4:05 pm
Since 1980 (returns from 1972-1980 seem unlikely to occur again in 'normal' times for various reasons)
If 1972-1980 performance is unusual, then a start date in 1980 is also unusual, because it's buying at the peak of an unusual bull market. That's like calculating expected stock returns from 1929, because the 20s were unusually good. The precipitous drop from 1980 had a contributing factor -- the crazy run up in the 1970s.

We have a lot of data on stocks since 1929, of course, so we wouldn't reach a totally iffy conclusion by starting there. But, over a shorter 40 year period, it still would be lower than a good estimate of "average" or "expected" stock returns.
That's a fair point. Below is a chart of gold's performance over rolling 3 and 5 year periods beginning in 1972.

Image

So gold's rolling returns were pretty solid until about 1983 and were very poor for the next ~20 years. Returns were excellent from 2002-2013 but poor from them on until recently.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle "5% Gold"

Post by sabtastic » Sat Aug 10, 2019 10:31 am

We should not be thinking about "returns" for gold. Gold is a way to preserve wealth, not grow wealth over time. Gold just sits there, it is the dollar losing value that gives gold a "return". As I said earlier in the thread, ideally a currency would standardize on gold in order to limit the artificial expansion by central banking, which is the source of the dollar's loss in value. Gold's performance in relation to the dollar can be interpreted as the "anti-dollar" or even more accurately, as a measure of faith in central banks. In the late 80s and 90s gold performed poorly because most investors had faith in the policies of Volcker and Greenspan. Recent performance needs no additional explanation.

Look at that chart posted above. Would you rather hold equities, bonds, bills, gold or dollars over time? While gold will never be worth nothing, it also will never keep up with equities, especially a diversified index fund.

On an individual basis, it doesn't make much sense to own gold, unless your alternative is to hold the same amount of cash in a drawer for a long period of time.

On a macro level, as a society, it does make a LOT of sense to standardize currencies on gold. An explanation of why this is beneficial was written in 1966 by Alan Greenspan himself called "Gold and Economic Freedom". It can be found free on the internet and it is well worth a read.

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Re: Bogle "5% Gold"

Post by willthrill81 » Sat Aug 10, 2019 3:12 pm

sabtastic wrote:
Sat Aug 10, 2019 10:31 am
We should not be thinking about "returns" for gold. Gold is a way to preserve wealth, not grow wealth over time. Gold just sits there, it is the dollar losing value that gives gold a "return". As I said earlier in the thread, ideally a currency would standardize on gold in order to limit the artificial expansion by central banking, which is the source of the dollar's loss in value. Gold's performance in relation to the dollar can be interpreted as the "anti-dollar" or even more accurately, as a measure of faith in central banks. In the late 80s and 90s gold performed poorly because most investors had faith in the policies of Volcker and Greenspan. Recent performance needs no additional explanation.

Look at that chart posted above. Would you rather hold equities, bonds, bills, gold or dollars over time? While gold will never be worth nothing, it also will never keep up with equities, especially a diversified index fund.

On an individual basis, it doesn't make much sense to own gold, unless your alternative is to hold the same amount of cash in a drawer for a long period of time.

On a macro level, as a society, it does make a LOT of sense to standardize currencies on gold. An explanation of why this is beneficial was written in 1966 by Alan Greenspan himself called "Gold and Economic Freedom". It can be found free on the internet and it is well worth a read.
In his most recent podcast episode, David Stein of the Money for the Rest Us quoted someone who basically said what you have: gold's price is largely inversely related to faith in the central banks. I believe that this is the primary driver of gold's short-term volatility. Over the long-term, inflation is almost certainly another substantial driver of gold's price.

To the extent that (1) the above is true and (2) faith in the central banks appears to be inversely related to stock's performance, theory would state that gold could be a good diversifying asset in a portfolio with significant stock exposure. Data from 1972 indicates that a relatively small (i.e. 10-20%) allocation to gold instead of just ITT in an otherwise stock heavy portfolio improved risk adjusted returns. But LTT have been a slightly better diversifier than ITT, gold, or a combination of the two, although the future could look very different. YMMV.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle "5% Gold"

Post by sabtastic » Thu Aug 15, 2019 8:42 am

willthrill81 wrote:
Sat Aug 10, 2019 3:12 pm

In his most recent podcast episode, David Stein of the Money for the Rest Us quoted someone who basically said what you have: gold's price is largely inversely related to faith in the central banks. I believe that this is the primary driver of gold's short-term volatility. Over the long-term, inflation is almost certainly another substantial driver of gold's price.

To the extent that (1) the above is true and (2) faith in the central banks appears to be inversely related to stock's performance, theory would state that gold could be a good diversifying asset in a portfolio with significant stock exposure. indicates that a relatively small (i.e. 10-20%) allocation to gold instead of just ITT in an otherwise stock heavy portfolio improved risk adjusted returns. But LTT have been a slightly better diversifier than ITT, gold, or a combination of the two, although the future could look very different. YMMV.
In hindsight, you are correct. Of course, other diversifying asset classes like REITs, emerging markets, SCV, international etc would work too. I'm taking some liberty with definitions here, but gold trust ETFs could be considered a negative yielding bond and I can't blame someone for holding gold if the alternative is overpriced fiat currency. The inability to lend out your gold and obtain interest is one of the primary drawbacks of holding it. With that eliminated the other drawbacks (volatility, counter party risk) are easier to swallow, especially in the current interest rate environment.

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Re: Bogle "5% Gold"

Post by willthrill81 » Thu Aug 15, 2019 9:58 am

sabtastic wrote:
Thu Aug 15, 2019 8:42 am
willthrill81 wrote:
Sat Aug 10, 2019 3:12 pm

In his most recent podcast episode, David Stein of the Money for the Rest Us quoted someone who basically said what you have: gold's price is largely inversely related to faith in the central banks. I believe that this is the primary driver of gold's short-term volatility. Over the long-term, inflation is almost certainly another substantial driver of gold's price.

To the extent that (1) the above is true and (2) faith in the central banks appears to be inversely related to stock's performance, theory would state that gold could be a good diversifying asset in a portfolio with significant stock exposure. indicates that a relatively small (i.e. 10-20%) allocation to gold instead of just ITT in an otherwise stock heavy portfolio improved risk adjusted returns. But LTT have been a slightly better diversifier than ITT, gold, or a combination of the two, although the future could look very different. YMMV.
In hindsight, you are correct. Of course, other diversifying asset classes like REITs, emerging markets, SCV, international etc would work too. I'm taking some liberty with definitions here, but gold trust ETFs could be considered a negative yielding bond and I can't blame someone for holding gold if the alternative is overpriced fiat currency. The inability to lend out your gold and obtain interest is one of the primary drawbacks of holding it. With that eliminated the other drawbacks (volatility, counter party risk) are easier to swallow, especially in the current interest rate environment.
I wonder whether many here would be more open to a small allocation to gold if TBM had a negative expected real yield since that seems to be the most common argument against holding gold.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 15, 2019 11:46 am

I enjoyed Warren Buffett's thoughts on gold in his shareholder letter a few years ago.
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 15, 2019 11:47 am

Outside of that one interview with Mr. Bogle I am not aware that he ever recommended gold.
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Re: Bogle "5% Gold"

Post by willthrill81 » Thu Aug 15, 2019 3:21 pm

abuss368 wrote:
Thu Aug 15, 2019 11:47 am
Outside of that one interview with Mr. Bogle I am not aware that he ever recommended gold.
I'm not aware that he did. But he certainly did there, so I don't think that it's a stretch to say that Bogle wasn't diametrically opposed to gold in all circumstances. Granted, an endowment has different goals than an investor, but the long-term goals of an endowment and an early retiree may align fairly well.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle "5% Gold"

Post by Carlos Danger » Thu Aug 15, 2019 7:42 pm

Gold is a high yield asset. It yields nothing, which is quite lofty these days.

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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 15, 2019 9:24 pm

Carlos Danger wrote:
Thu Aug 15, 2019 7:42 pm
Gold is a high yield asset. It yields nothing, which is quite lofty these days.
Exactly. Rick Ferri and Warren Buffett have discussed how there are no cash flows from earnings. Makes a lot of sense.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Bogle "5% Gold"

Post by Forester » Fri Aug 16, 2019 12:30 am

Real interest rates have been 2% or lower since 2000; what is supposedly lost by having 5% to 10% in gold & gold equities doesn't justify the emotional response.

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Carlos Danger
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Re: Bogle "5% Gold"

Post by Carlos Danger » Fri Aug 16, 2019 7:13 am

Portfolio 1 is 40% S&P 500, 20% International Value, 40% Total Bond
Portfolio 2 takes the 40% bond down to 30% and adds 10% gold.
Equal monthly contributions, rebalanced annualy.

The portfolio with gold wins since 1986. Barely. Virtually identical.

I'm a long term treasury guy, and in that case adding gold for some of the treasuries loses. Barely. Virtually identical performance.

https://www.portfoliovisualizer.com/bac ... 0&total3=0

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Re: Bogle "5% Gold"

Post by vineviz » Fri Aug 16, 2019 9:11 am

Forester wrote:
Fri Aug 16, 2019 12:30 am
Real interest rates have been 2% or lower since 2000; what is supposedly lost by having 5% to 10% in gold & gold equities doesn't justify the emotional response.
An expected real rate of 0% is lower than a real rate of 2% on long-term Treasuries, but whether that’s an emotional or intellectual observation I’ll let the reader decide.

That said, I don’t see any reason to suspect that allocating 20% of fixed income to gold or other high inflation beta real assets is going to significantly derail most investors from reaching their investment goals.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Bogle "5% Gold"

Post by willthrill81 » Fri Aug 16, 2019 10:45 am

vineviz wrote:
Fri Aug 16, 2019 9:11 am
That said, I don’t see any reason to suspect that allocating 20% of fixed income to gold or other high inflation beta real assets is going to significantly derail most investors from reaching their investment goals.
I agree.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle "5% Gold"

Post by longinvest » Mon Aug 19, 2019 8:06 pm

This thread has been referred elsewhere.

After reading it, I'm surprised to see that nobody commented on this post by forum member Dbr:
dbr wrote:
Sun May 19, 2019 11:57 am
He said two things in that interview:

1. Gold (and EM) are for "some kind of catastrophe." {Not a very helpful comment.}

2. The comment about gold and EM was for an endowment fund he manages and earlier he said 90% of individual investors should be invested only in marketable securities (not gold or commodities).

I think that this comment is quite relevant. In a post in the referring thread, I provided longer citations which reveal Jack Bogle's opinion quite clearly about the best approach for 90% of investors:

The One-Fund Portfolio as a default suggestion
longinvest wrote:
Mon Aug 19, 2019 4:42 pm
willthrill81 wrote:
Sun Aug 18, 2019 4:32 pm
Bogle recommended Wellington in this video (and gold too).
In the "The Perfect Portfolio" segment (which inspired the title of the video), at 00:49:35, in reply to Andrew Lo (the interviewer), Jack Bogle gave his advice for viewers about what he considers the perfect portfolio:

"I've come to conclude that 60/40 is probably the best option rather than going from 80/20 to 80/20 in a target retirement plan".

Later, at 00:53:47, he says the following about commodities and gold:

"[What] it all comes to, for your best portfolio, is: are you an investor or are you a speculator? And if your gonna keep changing things, you're speculating because we can't know. If we're gonna put commodities in there (the ultimate speculation!), it has nothing going for it: no internal rate of return, no dividend yields, no earnings growth, no interest coupon, nothing except the hope (largely vain, probably) that you can sell it to somebody else for more than you paid for it. How that could be even considered (gold let's say) an investment? I do not know."

At 00:54:35, he says:

"I think, for a huge (may 90%, certainly) of the investors, [they] should be limited to marketable securities".

At 00:58:53, he discloses that he kept an old Wellington Fund holding in his portfolio for sentimental reasons, but admits that he shouldn't:

"I do have the Wellington fund from those days with Mr. Morgan, and I wouldn't give that up as a sentimental matter, but I should!"

I think that Mr. Bogle's advice for 90% of investors is quite clear and comes down to: Only invest into marketable securities (investment-grade stocks and bonds) using index funds with a balanced allocation.

He argued quite vehemently against commodities (including gold, specifically) and admitted that it was only for sentimental reasons that he kept an old Wellington fund investment in his portfolio dating back to Mr. Morgan's days, knowing that he shouldn't. He certainly didn't recommend that common investors put their money into active funds or gold.

He also discussed how he used a different approach for a scholarship fund which was meant to have no fund manager after his death. It wasn't a recommendation for the retirement portfolio of a common investor (with a breathing human at the helm).
He constructed the endowment fund with the assumption that it would have no manager after his death. This means that it wouldn't be rebalanced and that scholarships would be solely funded from the income distributed by the three funds* it contains.

* Wellington fund, balanced index fund, and Emerging Markets fund. Gold provides no income.

It clearly wasn't a recommendation for the portfolio of common investors. My post provides clear quotes, from the same interview, that were specifically meant as recommendation for 90% of investors.

When I think about it, I can somehow understand Jack Bogle's process. He was thinking for the extremely long time, for future centuries. He was probably thinking about the possibility that maybe, one day, (1) the government could outlaw index funds (thus the use of an active fund), (2) his chosen concentration into US assets could prove catastrophic due to a decline of the US and other developed countries (thus the inclusion of a small Emerging Markets investment), or (3) that financial assets could go to zero (thus the inclusion of a small gold investment).

Note that this scholarship fund is constructed so that its two main components (both balanced funds, one active, one passive) have a sub-asset allocation of approximately 63/47 stocks/bonds and can't stray far from it (only for the two-fund component of the portfolio) without requiring any maintenance as both funds are internally rebalanced (to 60/40 and approximately 66.7/33.3). The small Emerging Markets and gold holdings are only meant as insurance against the unknown over future centuries and imply no rebalancing until a catastrophe happens.

This is quite remote from most of the posts on this thread that seem to discuss including a fixed allocation (with rebalancing) to gold in the retirement portfolio (!) of a living investor who could change his portfolio if index funds were outlawed, or if some other calamity happened.

Jack Bogle couldn't have been clearer about his recommendation for 90% of investors.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: Bogle "5% Gold"

Post by index2max » Mon Aug 19, 2019 10:14 pm

I found an old interview Bogle did on CNN that was quoted by Newsmax in 2011 about his opinions on holding Gold.

https://www.newsmax.com/Finance/Investi ... id/409548/
'Gold is a speculation,' he told CNNMoney. 'It has absolutely no underlying intrinsic value,"'said the financial guru known for promoting low-cost, index-based mutual funds.

Holding about 1 percent to percent, or even 5 percent, of your assets in gold, he added, "is not the worst idea in the world but I wouldn't do it myself or recommend it."
Funny part is that Gold's dollar price peaked in 2011 too :D

I'm glad he finally came around and admitted it isn't crazy to hedge your bets a little bit and have ~5% of one's portfolio in gold!

We all have emergency savings in checking or savings accounts at bank (or credit union, if you want to get better interest rates and lower fees...). So why not have some of your emergency savings stored at home in the form of gold or silver coins?

I think it's a perfectly rational thing to do. It's naive to assume the consumer price index (CPI) is the actual rate of inflation. It's just a basket of some consumer goods arbitrarily picked by the government to track price changes. If the US government tracked inflation accurately, they'd have to pay more money to service our sovereign debt and pay more to seniors for social security checks...

The true definition of inflation is an increase in the money supply, which naturally leads to price increases, all else being equal.

I certainly plan on converting some of my emergency savings to gold or silver bullion just as a hedge. No point in selling for capital gains with capital gains on gold being taxed by the IRS as "collectable capital gains", rather than what it's designed to be, an inflation hedge.

Buy and hold gold or silver as long as you can just like an index fund.
Last edited by index2max on Tue Aug 20, 2019 6:58 pm, edited 1 time in total.

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Re: Bogle "5% Gold"

Post by Forester » Tue Aug 20, 2019 4:40 am

The utility of gold in its own right is a different question to its worth in a portfolio. An investor could think it is a dumb inanimate, useless yet beautiful metal and at the same time acknowledge it can be occasionally be the focus of irrational choices by other investors who bid up the price. Gold could also be "over sold" when it is assumed that steadily rising stock markets will continue ad infinitum.

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Re: Bogle "5% Gold"

Post by willthrill81 » Wed Aug 21, 2019 2:12 pm

Forester wrote:
Tue Aug 20, 2019 4:40 am
The utility of gold in its own right is a different question to its worth in a portfolio. An investor could think it is a dumb inanimate, useless yet beautiful metal and at the same time acknowledge it can be occasionally be the focus of irrational choices by other investors who bid up the price. Gold could also be "over sold" when it is assumed that steadily rising stock markets will continue ad infinitum.
:thumbsup

An asset's standalone performance is not as important, IMHO, as its performance in a portfolio.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle "5% Gold"

Post by abuss368 » Wed Aug 21, 2019 2:57 pm

In our stock picking days we often traded both gold and silver! Pure speculation.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Bogle "5% Gold"

Post by garlandwhizzer » Wed Aug 21, 2019 7:45 pm

I believe most Bogleheads, me included, do not invest in real physical gold or in the GLD ETF. Interestingly two famous investors who were never gold bugs in the past and who saw no real place in a portfolio for gold may have recently reconsidered. Bogle shocked the world when he recently suggested a 5% portfolio weight in gold. There is also a rumor that Warren Buffett has taken a small position in gold. I don't know the exact details on Buffett. These are two brilliant, knowledgeable, and experienced investors so it is reasonable to wonder what may be behind this change of mind. Clearly the main diversifier for equity exposure is now and has always been quality bonds which as Bogle said is your anchor in an equity storm. Adding gold to the mix is something new for both.

The history of gold prices shows massive volatility. After 14 years of ever increasing inflation in 1980, gold reached an all time high, $2200/oz. LT Bonds were offering incredibly high long term rates at that time (>10%) but most investors had been burned by buying LTB over the prior 14 years at what looked like great yields only to watch helplessly as their principal values eroded more and more especially in real terms as both inflation and interest rates continued to increase. So investors largely ignored buying LTB at that time, assuming increasing inflation which had been going on for 14 years was never going to stop. What they flocked to was gold, which just keep getting more and more expensive as inflation went into high gear. Rather than losing principal value over time like LTB did, gold's principal value continued to climb with every new jump in inflation. It was the greatest gold bull market in history, the price per ounce increased by about 10 times, 1000%, in just 10 years while both stocks and bonds suffered substantial loses in real terms. It was THE ONLY place to hide out that made you big money during this nightmare.

However runaway inflation was finally killed by Volker, and the price of gold went from $2200/oz in 1980 to $380/oz. by 2000, a span of 20 years in which there was a massive bull market in both stocks and bonds while gold lost more than 83% of its nominal value. Since inflation was brisk during that time frame about 95%+ of its real inflation adjusted value went down the drain. It was the worst gold bear market in US history following directly on the heels of its greatest bull market.

From that low point of $390/oz. in 2000 it proceeded to rise to 1950/oz. over the next 11 years, a gain of 500% in a period dominated by the two biggest equity bear markets since the Great Depression including the Black Swan Financial Crisis which without aggressive action by the FED would have gone into another Great Depression IMO. Stocks massively struggled in that era but this time with the risk came from deflation rather than inflation. Hence, bonds produced positive returns but nowhere near 500%.

Several points are clear from the above. First of all, gold is exceptionally volatile. If you choose to hold it a very small allocation (5%?) is likely wise. Second, its diversification works effectively only in very extreme environments like Black Swans. It can skyrocket when hope is abandoned and it withers when markets are doing great. One last point: gold's value varies inversely and instantly with the strength or weakness of the dollar since its price is expressed in dollars. When the dollar weakens it takes more dollars to buy an ounce of gold so the gold price goes up. So when Warren and Jack suddenly looked more favorably on gold, a question arises. Maybe they believe that another Black Swan in the US has a non-zero probability going forward, or perhaps they believe that the dollar which has risen by 40% as measured by the dollar index over the last 11 years may be poised to weaken in the future. Or both.

I've never been a gold bug but I'm going to think about this a bit more.

Garland Whizzer

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Re: Bogle "5% Gold"

Post by index2max » Wed Aug 21, 2019 10:02 pm

garlandwhizzer wrote:
Wed Aug 21, 2019 7:45 pm
I believe most Bogleheads, me included, do not invest in real physical gold or in the GLD ETF. Interestingly two famous investors who were never gold bugs in the past and who saw no real place in a portfolio for gold may have recently reconsidered. Bogle shocked the world when he recently suggested a 5% portfolio weight in gold. There is also a rumor that Warren Buffett has taken a small position in gold. I don't know the exact details on Buffett. These are two brilliant, knowledgeable, and experienced investors so it is reasonable to wonder what may be behind this change of mind. Clearly the main diversifier for equity exposure is now and has always been quality bonds which as Bogle said is your anchor in an equity storm. Adding gold to the mix is something new for both.

The history of gold prices shows massive volatility. After 14 years of ever increasing inflation in 1980, gold reached an all time high, $2200/oz. LT Bonds were offering incredibly high long term rates at that time (>10%) but most investors had been burned by buying LTB over the prior 14 years at what looked like great yields only to watch helplessly as their principal values eroded more and more especially in real terms as both inflation and interest rates continued to increase. So investors largely ignored buying LTB at that time, assuming increasing inflation which had been going on for 14 years was never going to stop. What they flocked to was gold, which just keep getting more and more expensive as inflation went into high gear. Rather than losing principal value over time like LTB did, gold's principal value continued to climb with every new jump in inflation. It was the greatest gold bull market in history, the price per ounce increased by about 10 times, 1000%, in just 10 years while both stocks and bonds suffered substantial loses in real terms. It was THE ONLY place to hide out that made you big money during this nightmare.

However runaway inflation was finally killed by Volker, and the price of gold went from $2200/oz in 1980 to $380/oz. by 2000, a span of 20 years in which there was a massive bull market in both stocks and bonds while gold lost more than 83% of its nominal value. Since inflation was brisk during that time frame about 95%+ of its real inflation adjusted value went down the drain. It was the worst gold bear market in US history following directly on the heels of its greatest bull market.

From that low point of $390/oz. in 2000 it proceeded to rise to 1950/oz. over the next 11 years, a gain of 500% in a period dominated by the two biggest equity bear markets since the Great Depression including the Black Swan Financial Crisis which without aggressive action by the FED would have gone into another Great Depression IMO. Stocks massively struggled in that era but this time with the risk came from deflation rather than inflation. Hence, bonds produced positive returns but nowhere near 500%.

Several points are clear from the above. First of all, gold is exceptionally volatile. If you choose to hold it a very small allocation (5%?) is likely wise. Second, its diversification works effectively only in very extreme environments like Black Swans. It can skyrocket when hope is abandoned and it withers when markets are doing great. One last point: gold's value varies inversely and instantly with the strength or weakness of the dollar since its price is expressed in dollars. When the dollar weakens it takes more dollars to buy an ounce of gold so the gold price goes up. So when Warren and Jack suddenly looked more favorably on gold, a question arises. Maybe they believe that another Black Swan in the US has a non-zero probability going forward, or perhaps they believe that the dollar which has risen by 40% as measured by the dollar index over the last 11 years may be poised to weaken in the future. Or both.

I've never been a gold bug but I'm going to think about this a bit more.

Garland Whizzer
Thanks for sharing your analysis. I remember reading in Bogle's 2nd edition of Common Sense on Mutual Funds how over a period of 200 years, stocks did far better than holding gold (assuming both are priced in US dollars). This led Bogle to conclude that gold isn't worth holding because it doesn't have any rate of return. It doesn't pay dividends etc. like stocks do. Therefore he considered it to be speculative to buy gold.

Here's my problem with Bogle's and other's analyses:

We are assuming that the price on the market for an asset IS what that asset is actually worth. That's not always true. People get things wrong based on the limited amount of information available. Or sometimes the information available is false (e.g. price manipulation)

There is price manipulation that occurs in precious metals markets. Sometimes by traders working for big bank. Here's a snippet:

https://www.zerohedge.com/news/2019-08- ... years-jail
Christiaan Trunz, another former JPMorgan metals trader, pleaded guilty on Tuesday to conspiracy and to manipulating prices in the precious-metals market as part of the U.S. government’s continuing crackdown on bogus spoofing trades.

Trunz, 34, admitted during a hearing in federal court in Brooklyn, New York, that he also used spoofing to manipulate precious metal prices and to extract a profit while he worked at Bear Stearns and at JPMorgan between 2007 to 2016. He pleaded guilty to in connection with a specific spoofing incident in June 2016.
In the short-term, yes, gold's dollar price fluctuates, but in the long-term as more dollars are added to the money supply, gold's price goes up by default. True, some gold is added to the existing supply from mining, but is it anywhere near the rate of fiat currencies?

I think just looking at the historical price of an assets alone isn't enough. We've got to ask why those prices became what they are. Look at the US stock market. Sure, the prices of stocks shot up after the 2008 crash, but that's because interest rates were set so low, that there was little else for small investors to pour their money into if they wanted to achieve any kind of growth for their retirement.

I believe it makes sense to convert 5% of one's long-term emergency funds from cash to gold. If you hold onto it long-enough, some of those short-term (i.e. 10-year) fluctuations will die out. Also makes sense when you consider central banks across the world have been on a buying spree of gold. If they didn't see any value in the material whatsoever, why would they buy it?

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Re: Bogle "5% Gold"

Post by willthrill81 » Wed Aug 21, 2019 10:04 pm

garlandwhizzer wrote:
Wed Aug 21, 2019 7:45 pm
I've never been a gold bug but I'm going to think about this a bit more.
Nice post. :thumbsup

The idea of gold potentially being a sort of 'anti-dollar' and a hedge against the central banks' ability to influence global economies for the better is a relatively new one to me. While we don't hold any gold in what we consider to be our investment portfolio, the very small amount we own in relation to our net worth helps me sleep just a little bit better at night. It might not be entirely logical, but there it is.
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 7:22 am

index2max wrote:
Wed Aug 21, 2019 10:02 pm

Thanks for sharing your analysis. I remember reading in Bogle's 2nd edition of Common Sense on Mutual Funds how over a period of 200 years, stocks did far better than holding gold (assuming both are priced in US dollars). This led Bogle to conclude that gold isn't worth holding because it doesn't have any rate of return. It doesn't pay dividends etc. like stocks do. Therefore he considered it to be speculative to buy gold.
This was my understanding of Mr. Bogle's position on gold as well. That there is no rate or return and no dividends paid. Pure speculation.
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 7:24 am

Image

That is incredible. Thanks for the historical performance chart of various asset classes.
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Re: Bogle "5% Gold"

Post by index2max » Thu Aug 22, 2019 8:59 am

abuss368 wrote:
Thu Aug 22, 2019 7:24 am
Image

That is incredible. Thanks for the historical performance chart of various asset classes.
One thing the chart clearly shows is that recent inflation starting from 1913 has eaten away at the purchasing power of the dollar.

Therefore I believe it does make sense to convert your CASH from an emergency fund (say at least 5-10%) into precious metals like gold and silver in physical form.

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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 9:14 am

index2max wrote:
Thu Aug 22, 2019 8:59 am
abuss368 wrote:
Thu Aug 22, 2019 7:24 am
Image

That is incredible. Thanks for the historical performance chart of various asset classes.
One thing the chart clearly shows is that recent inflation starting from 1913 has eaten away at the purchasing power of the dollar.

Therefore I believe it does make sense to convert your CASH from an emergency fund (say at least 5-10%) into precious metals like gold and silver in physical form.
Agreed. Cash is your insurance sleep well at night account!
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Re: Bogle "5% Gold"

Post by willthrill81 » Thu Aug 22, 2019 10:36 am

index2max wrote:
Thu Aug 22, 2019 8:59 am
One thing the chart clearly shows is that recent inflation starting from 1913 has eaten away at the purchasing power of the dollar.

Therefore I believe it does make sense to convert your CASH from an emergency fund (say at least 5-10%) into precious metals like gold and silver in physical form.
That's basically what we did several years ago. We have about 3 months' of expenses in our EF, and about 2/3 of that is in precious metals. If my employment situation wasn't as secure as it is, I wouldn't feel comfortable with only one month's expenses in cash, but it's adequate for now at least, and we could of course pull funds from accounts like Roth IRAs if necessary. I don't really care about how volatile the prices of the PMs are because the only time that we would sell them would be during a truly dire financial emergency and/or if the prices of the metals increased to the point that the specific amount we paid for them didn't really matter.

The PMs we hold are just 'insurance against the unknown', as David Stein puts it, and we don't anticipate earning a real return from them any more than we anticipate a positive return from our insurance policies.
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 10:47 am

We follow Warren Buffett's advice of keeping enough in cash. This let's one sleep well at night.
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Re: Bogle "5% Gold"

Post by nedsaid » Thu Aug 22, 2019 1:35 pm

When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
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Re: Bogle "5% Gold"

Post by willthrill81 » Thu Aug 22, 2019 1:55 pm

nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
How is that a con? If your marginal tax rate is lower than 28%, you pay the lower rate. But if you're in the 35% bracket, your maximum capital gains tax rate on gold is 28%.
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Re: Bogle "5% Gold"

Post by nedsaid » Thu Aug 22, 2019 1:56 pm

willthrill81 wrote:
Thu Aug 22, 2019 1:55 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
How is that a con? If your marginal tax rate is lower than 28%, you pay the lower rate. But if you're in the 35% bracket, your maximum capital gains tax rate on gold is 28%.
Your maximum capital gains rate on stocks is 20%, you could also get nicked for the Net Investment Income Tax which is 3.8%.
A fool and his money are good for business.

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Re: Bogle "5% Gold"

Post by willthrill81 » Thu Aug 22, 2019 2:18 pm

nedsaid wrote:
Thu Aug 22, 2019 1:56 pm
willthrill81 wrote:
Thu Aug 22, 2019 1:55 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
How is that a con? If your marginal tax rate is lower than 28%, you pay the lower rate. But if you're in the 35% bracket, your maximum capital gains tax rate on gold is 28%.
Your maximum capital gains rate on stocks is 20%, you could also get nicked for the Net Investment Income Tax which is 3.8%.
Good point and reason to hold gold in a tax-advantaged account if possible.
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 3:28 pm

nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
Hi nedsaid -

Many folks are not aware that precious metals are taxed at the collectible rate of 28%.
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Re: Bogle "5% Gold"

Post by nedsaid » Thu Aug 22, 2019 3:58 pm

abuss368 wrote:
Thu Aug 22, 2019 3:28 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
Hi nedsaid -

Many folks are not aware that precious metals are taxed at the collectible rate of 28%.
My understanding is that you pay at whatever tax bracket you are in for ordinary income but are capped at 28%. Ordinary income can be taxed up to a 37% rate Federal. Not 100% sure if gains on sale of Gold are subject to Net Investment Income Tax, someone can look that up. The NIIT would be on top of the Federal Tax Rate.
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Re: Bogle "5% Gold"

Post by willthrill81 » Thu Aug 22, 2019 4:01 pm

nedsaid wrote:
Thu Aug 22, 2019 3:58 pm
abuss368 wrote:
Thu Aug 22, 2019 3:28 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
Hi nedsaid -

Many folks are not aware that precious metals are taxed at the collectible rate of 28%.
My understanding is that you pay at whatever tax bracket you are in for ordinary income but are capped at 28%. Ordinary income can be taxed up to a 37% rate Federal. Not 100% sure if gains on sale of Gold are subject to Net Investment Income Tax, someone can look that up. The NIIT would be on top of the Federal Tax Rate.
ThinkAdvisor says that the NIIT does apply to precious metals.
In general, the IRS generally deems a precious metal asset investment a “collectible” and thereby a capital asset for income tax purposes. Hence, a net sale profit or loss is taxed as a capital gain or loss, and as either long-term or short-term. For long-term capital gains, the applicable tax rate in 2013 and beyond is based upon the ordinary income tax rate of the taxpayer. Further, for taxpayers with income in excess of $250,000 (joint returns) or $200,000 (single returns), the additional 3.8% investment income tax (the 3.8% net investment income tax, or NIIT) is added to the otherwise applicable capital gains rate.
https://www.thinkadvisor.com/2017/03/24 ... lectibles/
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 4:14 pm

nedsaid wrote:
Thu Aug 22, 2019 3:58 pm
abuss368 wrote:
Thu Aug 22, 2019 3:28 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
Hi nedsaid -

Many folks are not aware that precious metals are taxed at the collectible rate of 28%.
My understanding is that you pay at whatever tax bracket you are in for ordinary income but are capped at 28%. Ordinary income can be taxed up to a 37% rate Federal. Not 100% sure if gains on sale of Gold are subject to Net Investment Income Tax, someone can look that up. The NIIT would be on top of the Federal Tax Rate.
Agreed
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Re: Bogle "5% Gold"

Post by nedsaid » Thu Aug 22, 2019 4:15 pm

abuss368 wrote:
Thu Aug 22, 2019 4:14 pm
nedsaid wrote:
Thu Aug 22, 2019 3:58 pm
abuss368 wrote:
Thu Aug 22, 2019 3:28 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
Hi nedsaid -

Many folks are not aware that precious metals are taxed at the collectible rate of 28%.
My understanding is that you pay at whatever tax bracket you are in for ordinary income but are capped at 28%. Ordinary income can be taxed up to a 37% rate Federal. Not 100% sure if gains on sale of Gold are subject to Net Investment Income Tax, someone can look that up. The NIIT would be on top of the Federal Tax Rate.
Agreed
Willthrill graciously researched and gave the answer above.
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Re: Bogle "5% Gold"

Post by abuss368 » Thu Aug 22, 2019 4:22 pm

nedsaid wrote:
Thu Aug 22, 2019 4:15 pm
abuss368 wrote:
Thu Aug 22, 2019 4:14 pm
nedsaid wrote:
Thu Aug 22, 2019 3:58 pm
abuss368 wrote:
Thu Aug 22, 2019 3:28 pm
nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
Hi nedsaid -

Many folks are not aware that precious metals are taxed at the collectible rate of 28%.
My understanding is that you pay at whatever tax bracket you are in for ordinary income but are capped at 28%. Ordinary income can be taxed up to a 37% rate Federal. Not 100% sure if gains on sale of Gold are subject to Net Investment Income Tax, someone can look that up. The NIIT would be on top of the Federal Tax Rate.
Agreed
Willthrill graciously researched and gave the answer above.
Thanks!
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Re: Bogle "5% Gold"

Post by index2max » Thu Aug 22, 2019 4:41 pm

nedsaid wrote:
Thu Aug 22, 2019 1:35 pm
When you sell Gold, your maximum capital gains tax rate is 28%. Yet another thing going against gold.
That’s because capital gains earned from selling gold are taxed the same as collectibles (classical artwork, comic books etc.).

Why should long-term capital gains on selling stocks only be 15 or 20%? What makes them so much better?

The myriad of tax exemptions that Congress sets are designed for a reason. It’s to encourage and discourage certain behaviors.

If people could freely buy and sell gold as a store of value to keep up with inflation without being taxed in dollars, demand for the fiat currency would decrease.

That might be one reason why somebody like Jack Bogle recommended only 5-10% of a portfolio in gold.

No need to sell. Just keep it as a store of value long-term. It’s a hedge against financial catastrophes. Or planning ahead for when we eventually switch back to a gold standard.

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Re: Bogle "5% Gold"

Post by halfnine » Thu Aug 22, 2019 5:50 pm

To pay 28% instead of 20% one would have to have a high income, one would have to hold it in a taxable account, and one would have to realize gains when they could otherwise not offset it agains capital losses in equities. I could easily avoid higher taxation on gold and so could most people.

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Re: Bogle "5% Gold"

Post by Portfolio7 » Fri Aug 23, 2019 2:36 pm

I think it depends somewhat on your portfolio whether it makes sense to add some gold.

A simple US 60/40, over the past 32 years, beats 60% S&P, 40% gold. However, if you measure peak to peak, or trough to trough, they do about equally as well. One could likely use gold, total bonds, or any combo as your fixed income allocation, and over a very long time, results might be about equal.

Bonds have tended to provide a bit more efficiency than gold, less volatility per unit of return when reviewing an annually rebalanced portfolio. If rates flatten or increase, perhaps that will change.

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Re: Bogle "5% Gold"

Post by Scooter57 » Fri Aug 23, 2019 8:54 pm

The VanEck goldminers ETF is one way to diversify into a gold related holding without running into the collectibles tax issue. I bought a small amount to educate myself on how it behaves and so far it seems to move opposite the broader stock market.

I never believed physical gold would be much practical use in a crisis because the transaction costs are so high and in severe crises I doubt people will take shiny metal in return for scarce food etc. If they do, I have my mother's jewelry.

But there are enough people who turn to gold when the market tanks to make it interesting right now when governments around the world are behaving very rashly led by populist demagogues.

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Re: Bogle "5% Gold"

Post by willthrill81 » Fri Aug 23, 2019 9:03 pm

Scooter57 wrote:
Fri Aug 23, 2019 8:54 pm
I never believed physical gold would be much practical use in a crisis because the transaction costs are so high and in severe crises I doubt people will take shiny metal in return for scarce food etc. If they do, I have my mother's jewelry.
As noted further up the thread, you don't have to be a survivalist to allocate some of your portfolio to gold.

Further, even if you were holding gold for a financial collapse type of event, you shouldn't need to be trading it for food and water because you should have stored plenty of both long before even thinking about gold. Where gold could potentially come in useful is for helping you rebuild your life after the 'event' is over.
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