Gold - How Do Investors Model Price?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Locked
User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 11:58 am

When thinking about stocks and bonds, there are numerous pricing models (CAPM being the probably most famous), various valuation indexes (Shiller CAPE), and on the bond side, various measures relative to the risk-free rate that include duration, assumptions about inflation, etc.

Regardless of prediction accuracy, various firms like Vanguard, Blackrock, etc, use these pricing and valuation models to attempt to evaluate future returns, often for 5-10 years into the future.

And, on top of that, there are some general principles about how people tend to think of relationships between interest rates, stocks, and bonds.

But what the heck do people do for gold?

How do people even create SWAG models for gold when it's almost completely outside the normal financial system, and often responds strongly to emotional events? Or without a model, how do people know how much gold is buy?

Or is it all just 'buy and pray you're lucky'?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

dbr
Posts: 31308
Joined: Sun Mar 04, 2007 9:50 am

Re: Gold - How Do Investors Model Price?

Post by dbr » Sun Jan 05, 2020 12:04 pm

Well, one can compute the historical average real return and the historical standard deviation of annual returns and consider that an estimate of future behavior. I understand, staying away from historical nuances such as gold standard, that the expected real return of gold is zero, that the risk is high, and that the correlation with other assets is low.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 12:11 pm

dbr wrote:
Sun Jan 05, 2020 12:04 pm
Well, one can compute the historical average real return and the historical standard deviation of annual returns and consider that an estimate of future behavior. I understand, staying away from historical nuances such as gold standard, that the expected real return of gold is zero, that the risk is high, and that the correlation with other assets is low.
It's challenging.

Sometimes it acts like cash -- zero correlations with much of anything, no real return.

Other times it acts like a long treasury -- flight to panic when equities tank.

Other times, it seems to act like a commodity, and increases quickly with inflation.

And other times it just seems to crash for no obvious reason.

I don't get how one fits it into MPT other than it being a totally random actor.
Last edited by watchnerd on Sun Jan 05, 2020 12:19 pm, edited 1 time in total.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

petulant
Posts: 877
Joined: Thu Sep 22, 2016 1:09 pm

Re: Gold - How Do Investors Model Price?

Post by petulant » Sun Jan 05, 2020 12:13 pm

Many academic/commercial outfits do not develop models for gold to be used by individual investors.

If you were to develop a model, you would do a short-to-medium-run price forecast based on historically-grounded forecasts for mining sales, cost of mining the marginal unit, then net demand from jewelry, industrial, private investor, and central bank activities. This would be complicated but is accessible to major traders.

The expected real return on gold is zero unless you have one of these models. That is so even though you might imagine gold should go up over time as there is additional demand causing it to climb the marginal cost chain of miners. That assumption does not work because there is by far more gold that has been mined in the past than will be mined in the short run, meaning swings in investor demand, commercial bank activities, and industrial/jewelry purchases are the primary determinants of gold prices. You might expect an inflation-matching nominal return though since the cost of marginal unit should go up with the labor and capital expenses of the economy; further, high rates of inflation often track currency devaluation, and gold should perform well during local currency devaluation.

Because of that, I can tell you what I would do if I were setting up a Monte Carlo simulation or other modeling exercise with gold but lacking some kind of demand model. I would use parameters reflecting an expected real return of zero, an expected nominal return correlated with inflation, and a high standard deviation regardless.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 12:18 pm

petulant wrote:
Sun Jan 05, 2020 12:13 pm
Many academic/commercial outfits do not develop models for gold to be used by individual investors.

If you were to develop a model, you would do a short-to-medium-run price forecast based on historically-grounded forecasts for mining sales, cost of mining the marginal unit, then net demand from jewelry, industrial, private investor, and central bank activities. This would be complicated but is accessible to major traders.

The expected real return on gold is zero unless you have one of these models. That is so even though you might imagine gold should go up over time as there is additional demand causing it to climb the marginal cost chain of miners. That assumption does not work because there is by far more gold that has been mined in the past than will be mined in the short run, meaning swings in investor demand, commercial bank activities, and industrial/jewelry purchases are the primary determinants of gold prices. You might expect an inflation-matching nominal return though since the cost of marginal unit should go up with the labor and capital expenses of the economy; further, high rates of inflation often track currency devaluation, and gold should perform well during local currency devaluation.

Because of that, I can tell you what I would do if I were setting up a Monte Carlo simulation or other modeling exercise with gold but lacking some kind of demand model. I would use parameters reflecting an expected real return of zero, an expected nominal return correlated with inflation, and a high standard deviation regardless.

Yeah, that makes sense.

I wonder if that's what hedge funders who advocate gold, like Ray Dalio, do?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Watty
Posts: 18115
Joined: Wed Oct 10, 2007 3:55 pm

Re: Gold - How Do Investors Model Price?

Post by Watty » Sun Jan 05, 2020 12:20 pm

watchnerd wrote:
Sun Jan 05, 2020 11:58 am
But what the heck do people do for gold?
That is easy.

If you do your calculations in real(inflation adjusted) dollars then I would just use a 0% real rate of return less any carrying costs.

At best gold is just a store of value and and while there will be additional fluctuations in price because of market sentiment it should over time tend to return to the same value.

Ignoring any collectable value a one ounce nugget from 200 years ago is worth roughly the same amount today.

This is before taxes though since you will likely be taxed on increase in value that is just because of inflation.

stlutz
Posts: 5510
Joined: Fri Jan 02, 2009 1:08 am

Re: Gold - How Do Investors Model Price?

Post by stlutz » Sun Jan 05, 2020 12:28 pm

The 0% real approach assumes that there will be a declining interest in gold among investors over time.

Let's pretend that production and "consumption" (e.g. industrial uses etc.) net out over time.

If investors collectively want to hold, say, 5% of their portfolio in gold and a 40/60 portfolio (the global market weight to stocks to bonds) increases in value by 10%, then the price of gold must go up by the same 10% if investors are to continue to hold 5% of their portfolio in gold.

I think the assumption that investors will be less interested in gold over time is a reasonable one, but it is something to call out nonetheless.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 12:33 pm

I have one problem with the 0% return approach to modeling gold:

While it's probably accurate, it doesn't explain why anyone would include it in a port.

If you want a 0% return asset with 0 correlations to markets, just use cash.

I assume people hold in asset allocations because they think it improves on cash.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

HawkeyePierce
Posts: 863
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: Gold - How Do Investors Model Price?

Post by HawkeyePierce » Sun Jan 05, 2020 12:36 pm

I think I can sum this thread up nicely:

Image

dbr
Posts: 31308
Joined: Sun Mar 04, 2007 9:50 am

Re: Gold - How Do Investors Model Price?

Post by dbr » Sun Jan 05, 2020 12:37 pm

watchnerd wrote:
Sun Jan 05, 2020 12:33 pm
I have one problem with the 0% return approach to modeling gold:

While it's probably accurate, it doesn't explain why anyone would include it in a port.

If you want a 0% return asset with 0 correlations to markets, just use cash.

I assume people hold in asset allocations because they think it improves on cash.
It is also that gold is very volatile, so the diversification effect is greater than for a zero correlation, zero return investment that is not volatile.

However, I have no idea what reason people who hold gold actually have for holding it and I am not one arguing for gold in a portfolio.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 12:38 pm

Watty wrote:
Sun Jan 05, 2020 12:20 pm
watchnerd wrote:
Sun Jan 05, 2020 11:58 am
But what the heck do people do for gold?
That is easy.

If you do your calculations in real(inflation adjusted) dollars then I would just use a 0% real rate of return less any carrying costs.

At best gold is just a store of value and and while there will be additional fluctuations in price because of market sentiment it should over time tend to return to the same value.

Ignoring any collectable value a one ounce nugget from 200 years ago is worth roughly the same amount today.

This is before taxes though since you will likely be taxed on increase in value that is just because of inflation.
While that makes sense, that sounds very close to how long term treasuries look -- near zero real returns.

And guys like Dalio in his All Weather Port advocates 40% long treasuries, 7.5% gold. So he must see it as somehow different as just a 0% real return rate.

Everything you said is logical, but I can't see why anyone would hold it given that math.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 12:42 pm

dbr wrote:
Sun Jan 05, 2020 12:37 pm

It is also that gold is very volatile, so the diversification effect is greater than for a zero correlation, zero return investment that is not volatile.

However, I have no idea what reason people who hold gold actually have for holding it and I am not one arguing for gold in a portfolio.
Yeah....I'm a bit confused, too.

Especially if one holds modest amounts.

How much is the right amount?

I actually find the zombie apocalypse gold rationale easier to understand, in a weird way, because it's not even trying to fit gold into Modern Portfolio Theory.

MPT + gold seems to be a misfit, or requires some data / models not widely known.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

lazyday
Posts: 3759
Joined: Wed Mar 14, 2007 10:27 pm

Re: Gold - How Do Investors Model Price?

Post by lazyday » Sun Jan 05, 2020 12:46 pm

To be a bit cynical for a moment: I think some people hold gold because it looks good in backtests.

Sometimes when stocks fell, gold did well. Do some data mining, and you can construct a portfolio that produces a nice, safe historical return.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 1:31 pm

lazyday wrote:
Sun Jan 05, 2020 12:46 pm
To be a bit cynical for a moment: I think some people hold gold because it looks good in backtests.

Sometimes when stocks fell, gold did well. Do some data mining, and you can construct a portfolio that produces a nice, safe historical return.
I'm quasi sympathetic to that.

Hindsight can be informative, but my rule of backtesting is:

If you didn't know the back tests, would you buy it today?

If I can't make a thesis for that, then I have to regard the back tests as giving results I can't extrapolate forward.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
danielc
Posts: 944
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: Gold - How Do Investors Model Price?

Post by danielc » Sun Jan 05, 2020 2:36 pm

watchnerd wrote:
Sun Jan 05, 2020 11:58 am
When thinking about stocks and bonds, there are numerous pricing models (CAPM being the probably most famous), various valuation indexes (Shiller CAPE), and on the bond side, various measures relative to the risk-free rate that include duration, assumptions about inflation, etc.

Regardless of prediction accuracy, various firms like Vanguard, Blackrock, etc, use these pricing and valuation models to attempt to evaluate future returns, often for 5-10 years into the future.

And, on top of that, there are some general principles about how people tend to think of relationships between interest rates, stocks, and bonds.

But what the heck do people do for gold?

How do people even create SWAG models for gold when it's almost completely outside the normal financial system, and often responds strongly to emotional events? Or without a model, how do people know how much gold is buy?

Or is it all just 'buy and pray you're lucky'?
As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 2:58 pm

danielc wrote:
Sun Jan 05, 2020 2:36 pm

As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
In our "play account", we bought some gold, but it's like 0.8% of our portfolio.

I'm comfortable with "buy and pray" with a teensy percentage like that.

But big chunks...like the 5-10% that would be needed to have an impact on portfolio behavior? I'm not emotionally or intellectually ready for that.

I guess I just don't have the chutzpah to pull the trigger on a real asset allocation amount.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 3:06 pm

HawkeyePierce wrote:
Sun Jan 05, 2020 12:36 pm
I think I can sum this thread up nicely:

Image
I'm hoping some gold advocates show up and tell us how wrong we all are and that there is more to it than just rolling the statistical dice.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

dbr
Posts: 31308
Joined: Sun Mar 04, 2007 9:50 am

Re: Gold - How Do Investors Model Price?

Post by dbr » Sun Jan 05, 2020 4:27 pm

danielc wrote:
Sun Jan 05, 2020 2:36 pm


As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
I think the proposition is not that one is going to make money from it but that one is going to hold even in a way independent of the hazards of other kinds of holdings. People that advocate holding cash are doing the same kind of thing with less chance of holding a good MPT diversifier (if it turns out gold really is such a diversifier -- an argument to be made on the merits).

Again I am not one arguing that one should hold gold.

We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.

GRP
Posts: 114
Joined: Wed Nov 22, 2017 5:35 pm

Re: Gold - How Do Investors Model Price?

Post by GRP » Sun Jan 05, 2020 4:41 pm

watchnerd wrote:
Sun Jan 05, 2020 3:06 pm
HawkeyePierce wrote:
Sun Jan 05, 2020 12:36 pm
I think I can sum this thread up nicely:

Image
I'm hoping some gold advocates show up and tell us how wrong we all are and that there is more to it than just rolling the statistical dice.
Nah. Enjoy your paper money. :sharebeer

ronno2018
Posts: 193
Joined: Sat Apr 14, 2018 9:31 am

Re: Gold - How Do Investors Model Price?

Post by ronno2018 » Sun Jan 05, 2020 4:48 pm

lazyday wrote:
Sun Jan 05, 2020 12:46 pm
To be a bit cynical for a moment: I think some people hold gold because it looks good in backtests.

Sometimes when stocks fell, gold did well. Do some data mining, and you can construct a portfolio that produces a nice, safe historical return.
I have had a bit of gold (ishares etf) since April of 2019 and it has done well and seems to move in opposition to global corporate stocks on a daily basis. I have no idea what it will do long term but it does add a small amount of diversification to a portfolio of stocks and bonds. My other alternative is REIT ETF's and those must be less counter cyclical than gold but maybe not by much?

I should probably sell the gold. I sort of think it might be more important for industrial production in the future and it is sort of fun to follow the price flucuations.

User avatar
Forester
Posts: 623
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Gold - How Do Investors Model Price?

Post by Forester » Sun Jan 05, 2020 4:57 pm

danielc wrote:
Sun Jan 05, 2020 2:36 pm

As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
Current 10 Year Real Interest Rate: 0.03% -5.54 bps

https://www.multpl.com/10-year-real-interest-rate

User avatar
danielc
Posts: 944
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: Gold - How Do Investors Model Price?

Post by danielc » Sun Jan 05, 2020 5:01 pm

dbr wrote:
Sun Jan 05, 2020 4:27 pm
We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
For social upheval I would rather have a stockpile of canned food.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 5:17 pm

dbr wrote:
Sun Jan 05, 2020 4:27 pm


I think the proposition is not that one is going to make money from it but that one is going to hold even in a way independent of the hazards of other kinds of holdings. People that advocate holding cash are doing the same kind of thing with less chance of holding a good MPT diversifier (if it turns out gold really is such a diversifier -- an argument to be made on the merits).

Again I am not one arguing that one should hold gold.

We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
Cash is definitely not a great MPT diversifier.

On the other hand, it's neutral and we know how to model it in MPT.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 5:19 pm

Forester wrote:
Sun Jan 05, 2020 4:57 pm

Current 10 Year Real Interest Rate: 0.03% -5.54 bps

https://www.multpl.com/10-year-real-interest-rate
I'm not understanding the gold point relative to the 10 year Treasury....
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

TheNightsToCome
Posts: 467
Joined: Fri Jun 30, 2017 11:48 pm

Re: Gold - How Do Investors Model Price?

Post by TheNightsToCome » Sun Jan 05, 2020 5:33 pm

dbr wrote:
Sun Jan 05, 2020 4:27 pm
danielc wrote:
Sun Jan 05, 2020 2:36 pm


As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
I think the proposition is not that one is going to make money from it but that one is going to hold even in a way independent of the hazards of other kinds of holdings. People that advocate holding cash are doing the same kind of thing with less chance of holding a good MPT diversifier (if it turns out gold really is such a diversifier -- an argument to be made on the merits).

Again I am not one arguing that one should hold gold.

We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
"We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold."

I hold gold because of the risk of economic and monetary upheaval, primarily the latter.

Gold was money for centuries. Central bank money, untethered from gold, has been used for a few decades and I'm not confident that things will continue to go well.

Central banks are creating money from nothing and using it to buy securities, only government bonds in the US, but even equities in Japan. This makes me worry about long-term monetary stability.

Central banks intervene when there is a market hiccup, but not during manias; i.e., I believe they create moral hazard.

We have negative interest rates in much of the developed world now. Everyone believed that was impossible until a few years ago. This is an unprecedented, momentous event, but because the economy has not collapsed everyone seems content to believe it's not a harbinger of bad events to come.

Honestly, I don't know if this portends awful economic events to come, but it seems to me that we ought to regard this as we would the arrival of massive alien space ships suddenly hovering overhead; maybe these aliens will prove to be benign, but maybe they will cause widespread destruction.

As a related matter, I think the euro will disintegrate at some point (because complete economic integration within the euro area seems very unlikely). This would be monetary upheaval by definition, and I expect it would be good for gold.

In short, I hold gold as a hedge against untoward events, but especially untoward monetary events, while acknowledging that it may not serve its intended purpose.

I have some company here. Jean Marie Eveillard was a sensational investor who always held some gold. When I was an equity analyst I attended a conference where he was on the panel. I asked him how he valued gold, did he divide the monetary base by the ounces of gold held by the US government, etc. He said it was pointless to try to assign a value to gold (this from one of the best value investors of all time). I wasn't able to ask a follow-up question, but I read in an interview later that he holds it as a hedge. He also made it clear in a later CNBC interview that he lacks confidence in the judgments of central bankers.

Gold is 7.5% of my current portfolio, but if the CAPE was 10, or even 15 (maybe 20), then I doubt I would hold any. I'd prefer to hold none. At the current CAPE (about 31) in a world with negative interest rates and a Fed that needs to cut rates despite an expanding economy with extremely low unemployment, the risk to stocks relative to the potential return looks high, and I prefer to have a diversified portfolio including some gold and some long treasury bonds (in case of deflation).
Last edited by TheNightsToCome on Sun Jan 05, 2020 5:49 pm, edited 1 time in total.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 5:36 pm

TheNightsToCome wrote:
Sun Jan 05, 2020 5:33 pm
dbr wrote:
Sun Jan 05, 2020 4:27 pm
danielc wrote:
Sun Jan 05, 2020 2:36 pm


As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
I think the proposition is not that one is going to make money from it but that one is going to hold even in a way independent of the hazards of other kinds of holdings. People that advocate holding cash are doing the same kind of thing with less chance of holding a good MPT diversifier (if it turns out gold really is such a diversifier -- an argument to be made on the merits).

Again I am not one arguing that one should hold gold.

We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
"We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold."

I hold gold because of the risk of economic and monetary upheaval, primarily the latter.

Gold was money for centuries. Central bank money, untethered from gold, has been used for a few decades and I'm not confident that things will continue to go well.

Central banks are creating money from nothing and using it to buy securities, only government bonds in the US, but even equities in Japan. This makes me worry about long-term monetary stability.

Central banks intervene when there is a market hiccup, but not during manias; i.e., I believe they create moral hazard.

We have negative interest rates in much of the developed world now. Everyone believed that was impossible until a few years ago. This is an unprecedented, momentous event, but because the economy has not collapsed everyone seems content to believe it's not a harbinger of bad events to come.

Honestly, I don't know if this portends awful economic events to come, but it seems to me that we ought to regard this as we would the arrival of massive alien space ships suddenly hovering overhead; maybe these aliens will prove to be benign, but maybe they will cause widespread destruction.

As a related matter, I think the euro will disintegrate at some point (because complete economic integration within the euro area seems very unlikely). This would be monetary upheaval by definition, and I expect it would be good for gold.

In short, I hold gold as a hedge against untoward events, but especially untoward monetary events, while acknowledging that it may not serve its intended purpose.

I have some company here. Jean Marie Eveillard was a sensational investor who always held some gold. When I was an equity analyst I attended a conference where he was on the panel. I asked him how he valued gold, did he divide the monetary base by the ounces of gold held by the US government, etc. He said it was pointless to try to assign a value to gold (this from one of the best value investors of all time). I wasn't able to ask a follow-up question, but I read in an interview later that he holds it as a hedge. He also made it clear in a later CNBC interview that he lacks confidence in the judgments of central bankers.

Gold is 7.5% of my current portfolio, but if the CAPE was 10, or even 15 (maybe 20), then I doubt I would hold any. I'd prefer to hold none. At the current CAPE (about 31) in a world with negative interest rates and a Fed that needs to cut rates despite an expanding economy with extremely low unemployment, the risks to stocks relative to the potential return looks high, and I prefer to have a diversified portfolio including some gold and some long treasury bonds (in case of deflation).
How did you decide upon 7.5%, as opposed to, say, 5% or 10%?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

petulant
Posts: 877
Joined: Thu Sep 22, 2016 1:09 pm

Re: Gold - How Do Investors Model Price?

Post by petulant » Sun Jan 05, 2020 5:38 pm

danielc wrote:
Sun Jan 05, 2020 5:01 pm
dbr wrote:
Sun Jan 05, 2020 4:27 pm
We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
For social upheval I would rather have a stockpile of canned food.
There's a broad spectrum between apocalypse and business as usual. For example, sometimes bad conditions are concentrated in a particular country, like Syria or Venezuela. Even more mild conditions could still be bad for investors, as in modern Argentina. Such bad conditions may include a devaluation of the local currency. In that event, gold may be a key store of value or emergency reserve for exiting the country. The canned food may last a few weeks and need to be managed for expiration dates; the gold can get you out indefinitely.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 5:41 pm

petulant wrote:
Sun Jan 05, 2020 5:38 pm
danielc wrote:
Sun Jan 05, 2020 5:01 pm
dbr wrote:
Sun Jan 05, 2020 4:27 pm
We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
For social upheval I would rather have a stockpile of canned food.
There's a broad spectrum between apocalypse and business as usual. For example, sometimes bad conditions are concentrated in a particular country, like Syria or Venezuela. Even more mild conditions could still be bad for investors, as in modern Argentina. Such bad conditions may include a devaluation of the local currency. In that event, gold may be a key store of value or emergency reserve for exiting the country. The canned food may last a few weeks and need to be managed for expiration dates; the gold can get you out indefinitely.
If I hypothesize that to be true, what does that tell me of how much of my AA should go into gold?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

DB2
Posts: 532
Joined: Thu Jan 17, 2019 10:07 pm

Re: Gold - How Do Investors Model Price?

Post by DB2 » Sun Jan 05, 2020 5:51 pm

TheNightsToCome wrote:
Sun Jan 05, 2020 5:33 pm
dbr wrote:
Sun Jan 05, 2020 4:27 pm
danielc wrote:
Sun Jan 05, 2020 2:36 pm


As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
I think the proposition is not that one is going to make money from it but that one is going to hold even in a way independent of the hazards of other kinds of holdings. People that advocate holding cash are doing the same kind of thing with less chance of holding a good MPT diversifier (if it turns out gold really is such a diversifier -- an argument to be made on the merits).

Again I am not one arguing that one should hold gold.

We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
"We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold."

I hold gold because of the risk of economic and monetary upheaval, primarily the latter.

Gold was money for centuries. Central bank money, untethered from gold, has been used for a few decades and I'm not confident that things will continue to go well.

Central banks are creating money from nothing and using it to buy securities, only government bonds in the US, but even equities in Japan. This makes me worry about long-term monetary stability.

Central banks intervene when there is a market hiccup, but not during manias; i.e., I believe they create moral hazard.

We have negative interest rates in much of the developed world now. Everyone believed that was impossible until a few years ago. This is an unprecedented, momentous event, but because the economy has not collapsed everyone seems content to believe it's not a harbinger of bad events to come.

Honestly, I don't know if this portends awful economic events to come, but it seems to me that we ought to regard this as we would the arrival of massive alien space ships suddenly hovering overhead; maybe these aliens will prove to be benign, but maybe they will cause widespread destruction.

As a related matter, I think the euro will disintegrate at some point (because complete economic integration within the euro area seems very unlikely). This would be monetary upheaval by definition, and I expect it would be good for gold.

In short, I hold gold as a hedge against untoward events, but especially untoward monetary events, while acknowledging that it may not serve its intended purpose.

I have some company here. Jean Marie Eveillard was a sensational investor who always held some gold. When I was an equity analyst I attended a conference where he was on the panel. I asked him how he valued gold, did he divide the monetary base by the ounces of gold held by the US government, etc. He said it was pointless to try to assign a value to gold (this from one of the best value investors of all time). I wasn't able to ask a follow-up question, but I read in an interview later that he holds it as a hedge. He also made it clear in a later CNBC interview that he lacks confidence in the judgments of central bankers.

Gold is 7.5% of my current portfolio, but if the CAPE was 10, or even 15 (maybe 20), then I doubt I would hold any. I'd prefer to hold none. At the current CAPE (about 31) in a world with negative interest rates and a Fed that needs to cut rates despite an expanding economy with extremely low unemployment, the risks to stocks relative to the potential return looks high, and I prefer to have a diversified portfolio including some gold and some long treasury bonds (in case of deflation).
Good post and mirrors much of my concern regarding central bank policies...especially if the U.S. goes full-bore MMT at some point.
Last edited by DB2 on Sun Jan 05, 2020 5:54 pm, edited 3 times in total.

petulant
Posts: 877
Joined: Thu Sep 22, 2016 1:09 pm

Re: Gold - How Do Investors Model Price?

Post by petulant » Sun Jan 05, 2020 5:52 pm

watchnerd wrote:
Sun Jan 05, 2020 5:41 pm
petulant wrote:
Sun Jan 05, 2020 5:38 pm
danielc wrote:
Sun Jan 05, 2020 5:01 pm
dbr wrote:
Sun Jan 05, 2020 4:27 pm
We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
For social upheval I would rather have a stockpile of canned food.
There's a broad spectrum between apocalypse and business as usual. For example, sometimes bad conditions are concentrated in a particular country, like Syria or Venezuela. Even more mild conditions could still be bad for investors, as in modern Argentina. Such bad conditions may include a devaluation of the local currency. In that event, gold may be a key store of value or emergency reserve for exiting the country. The canned food may last a few weeks and need to be managed for expiration dates; the gold can get you out indefinitely.
If I hypothesize that to be true, what does that tell me of how much of my AA should go into gold?
It means a small part. Frankly the way I intend to do it once I handle some other things is to purchase an amount of physical gold that could, at today's prices, buy plane tickets and living costs for a few months for my immediate family with a bit left over. I may hold a little bit more for rebalancing purposes.

Another way to do it is backtesting. Although backtesting is not perfect, posters in other areas such as international diversification haven't been afraid to review backtesting data to see clues for an international allocation. When doing so with gold, the backtesting I have done (using the simba spreadsheet) shows that around 10 percent creates the best Sharpe ratio and safe withdrawal rate. This is primarily driven by the experience of the late 1970s, which was a quintessential local currency devaluation scenario for an American investor.
Last edited by petulant on Sun Jan 05, 2020 5:53 pm, edited 1 time in total.

TheNightsToCome
Posts: 467
Joined: Fri Jun 30, 2017 11:48 pm

Re: Gold - How Do Investors Model Price?

Post by TheNightsToCome » Sun Jan 05, 2020 5:52 pm

watchnerd wrote:
Sun Jan 05, 2020 5:36 pm
TheNightsToCome wrote:
Sun Jan 05, 2020 5:33 pm
dbr wrote:
Sun Jan 05, 2020 4:27 pm
danielc wrote:
Sun Jan 05, 2020 2:36 pm


As far as I can tell, gold is 100% "buy and pray you're lucky". The fair market value of any investment is the present value of all future cashflows for some discount rate. Markets are volatile because people's perceptions of likely future cashflows and reasonable discount rates change every time someone sneezes. But gold has no cashflows; we can all agree that gold pays no dividends and no interest. That makes its present value $0.00. The only way to make money on gold is to find a "greater fool" who will take it off your hands for a higher price than what you paid for it. That is a long way of saying "buy and pray you're lucky".
I think the proposition is not that one is going to make money from it but that one is going to hold even in a way independent of the hazards of other kinds of holdings. People that advocate holding cash are doing the same kind of thing with less chance of holding a good MPT diversifier (if it turns out gold really is such a diversifier -- an argument to be made on the merits).

Again I am not one arguing that one should hold gold.

We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold.
"We are not considering issues of social and political upheaval here, which is an aspect that will eventually enter any discussion of gold."

I hold gold because of the risk of economic and monetary upheaval, primarily the latter.

Gold was money for centuries. Central bank money, untethered from gold, has been used for a few decades and I'm not confident that things will continue to go well.

Central banks are creating money from nothing and using it to buy securities, only government bonds in the US, but even equities in Japan. This makes me worry about long-term monetary stability.

Central banks intervene when there is a market hiccup, but not during manias; i.e., I believe they create moral hazard.

We have negative interest rates in much of the developed world now. Everyone believed that was impossible until a few years ago. This is an unprecedented, momentous event, but because the economy has not collapsed everyone seems content to believe it's not a harbinger of bad events to come.

Honestly, I don't know if this portends awful economic events to come, but it seems to me that we ought to regard this as we would the arrival of massive alien space ships suddenly hovering overhead; maybe these aliens will prove to be benign, but maybe they will cause widespread destruction.

As a related matter, I think the euro will disintegrate at some point (because complete economic integration within the euro area seems very unlikely). This would be monetary upheaval by definition, and I expect it would be good for gold.

In short, I hold gold as a hedge against untoward events, but especially untoward monetary events, while acknowledging that it may not serve its intended purpose.

I have some company here. Jean Marie Eveillard was a sensational investor who always held some gold. When I was an equity analyst I attended a conference where he was on the panel. I asked him how he valued gold, did he divide the monetary base by the ounces of gold held by the US government, etc. He said it was pointless to try to assign a value to gold (this from one of the best value investors of all time). I wasn't able to ask a follow-up question, but I read in an interview later that he holds it as a hedge. He also made it clear in a later CNBC interview that he lacks confidence in the judgments of central bankers.

Gold is 7.5% of my current portfolio, but if the CAPE was 10, or even 15 (maybe 20), then I doubt I would hold any. I'd prefer to hold none. At the current CAPE (about 31) in a world with negative interest rates and a Fed that needs to cut rates despite an expanding economy with extremely low unemployment, the risks to stocks relative to the potential return looks high, and I prefer to have a diversified portfolio including some gold and some long treasury bonds (in case of deflation).
How did you decide upon 7.5%, as opposed to, say, 5% or 10%?
7.5% because it's enough to be meaningful, but not so much that I feel foolish holding a rock that produces no cash flow, and not so much that it will sink me if the price collapses.

User avatar
JAZZISCOOL
Posts: 520
Joined: Sat May 18, 2019 11:49 am
Location: Colorado - 5,700 ft.

Re: Gold - How Do Investors Model Price?

Post by JAZZISCOOL » Sun Jan 05, 2020 6:20 pm

FWIW, JP Morgan Asset Mgmt. models capital markets risk/return expectations. They used a 3% (nominal) return forecast for gold with an expected annualized volatility (risk) of 17.6% in their 2020 model in a study I reviewed. This is viewed by many institutional investors. :happy

User avatar
Watty
Posts: 18115
Joined: Wed Oct 10, 2007 3:55 pm

Re: Gold - How Do Investors Model Price?

Post by Watty » Sun Jan 05, 2020 6:21 pm

watchnerd wrote:
Sun Jan 05, 2020 12:38 pm
Everything you said is logical, but I can't see why anyone would hold it given that math.
You are talking about the math for diversification.

There is a separate problem which is using gold as an insurance policy in case things pretty much collapse.

The typical recommended portfolio would already have a lot of international investments so for a collapsed to be bad enough that gold would be needed it would there would have to be some sort of worldwide collapse.

The question then become if gold would be the best way to protect yourself in a worldwide financial collapse.

Going into Walmart with a bag of gold coins will not help you much if all the shelves at Walmart are empty.

People have posted here about their relatives using gold to bribe bribe people to get out of Nazi Germany or Vietnam but that is a bit different scenario.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 6:34 pm

TheNightsToCome wrote:
Sun Jan 05, 2020 5:52 pm

7.5% because it's enough to be meaningful, but not so much that I feel foolish holding a rock that produces no cash flow, and not so much that it will sink me if the price collapses.
petulant wrote:
Sun Jan 05, 2020 5:52 pm
osts for a few months for my immediate family with a bit left over. I may hold a little bit more for rebalancing purposes.

Another way to do it is backtesting. Although backtesting is not perfect, posters in other areas such as international diversification haven't been afraid to review backtesting data to see clues for an international allocation. When doing so with gold, the backtesting I have done (using the simba spreadsheet) shows that around 10 percent creates the best Sharpe ratio and safe withdrawal rate. This is primarily driven by the experience of the late 1970s, which was a quintessential local currency devaluation scenario for an American investor.

7.5-10%.

Yeah, I agree that's what it takes to move the needle on portfolio diversification.

But on a 7 figure portfolio, that's 6 figure amounts of gold.

That's a lot of cheddar for an asset that declined 40% between 2012 and 2016, and still hasn't gotten back to all time highs. It makes the stock market look reasonable.

If you had a six figure amount of gold, that's a luxury car's worth of value that still hasn't been recouped and who knows when you might.

Woof. :shock:

I'm pretty risk tolerant, but if you guys are doing this, either you're more risk tolerant than me, or you're more worried about the downside of not having gold than I am. Or both. :wink:
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 6:36 pm

Watty wrote:
Sun Jan 05, 2020 6:21 pm
watchnerd wrote:
Sun Jan 05, 2020 12:38 pm
Everything you said is logical, but I can't see why anyone would hold it given that math.
You are talking about the math for diversification.

There is a separate problem which is using gold as an insurance policy in case things pretty much collapse.

The typical recommended portfolio would already have a lot of international investments so for a collapsed to be bad enough that gold would be needed it would there would have to be some sort of worldwide collapse.

The question then become if gold would be the best way to protect yourself in a worldwide financial collapse.

Going into Walmart with a bag of gold coins will not help you much if all the shelves at Walmart are empty.

People have posted here about their relatives using gold to bribe bribe people to get out of Nazi Germany or Vietnam but that is a bit different scenario.
Yes, I'm only interested in the AA / MPT role of gold and how to model it.

Civilization apocalypse / becoming a refugee is beyond the scope of anything I would try to model, so off topic for me.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 6:40 pm

JAZZISCOOL wrote:
Sun Jan 05, 2020 6:20 pm
FWIW, JP Morgan Asset Mgmt. models capital markets risk/return expectations. They used a 3% (nominal) return forecast for gold with an expected annualized volatility (risk) of 17.6% in their 2020 model in a study I reviewed. This is viewed by many institutional investors. :happy
Ah, that's the kind of info I'm looking for.

Do you know if it's publicly available, or was it firewalled?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

petulant
Posts: 877
Joined: Thu Sep 22, 2016 1:09 pm

Re: Gold - How Do Investors Model Price?

Post by petulant » Sun Jan 05, 2020 6:41 pm

Watty wrote:
Sun Jan 05, 2020 6:21 pm
watchnerd wrote:
Sun Jan 05, 2020 12:38 pm
Everything you said is logical, but I can't see why anyone would hold it given that math.
You are talking about the math for diversification.

There is a separate problem which is using gold as an insurance policy in case things pretty much collapse.

The typical recommended portfolio would already have a lot of international investments so for a collapsed to be bad enough that gold would be needed it would there would have to be some sort of worldwide collapse.

The question then become if gold would be the best way to protect yourself in a worldwide financial collapse.

Going into Walmart with a bag of gold coins will not help you much if all the shelves at Walmart are empty.

People have posted here about their relatives using gold to bribe bribe people to get out of Nazi Germany or Vietnam but that is a bit different scenario.
This is not correct. International stocks are highly correlated with U.S. stocks, and most large-cap multinational corporations have operations in many jurisdictions. A significant problem in the U.S. could tank stocks in other countries even if lifestyle in those countries remains relatively acceptable. In that event, international stocks would not be a great diversifier for the portfolio nor an asset useful for escape, but gold would do both. See gold price movements during the GFC.

EDIT: As I said earlier, there's a broad spectrum between apocalypse and business as usual. Poor conditions with high inflation can be just as good for gold as anything else. See U.S. in late 1970s. But, the reason for high inflation could be tied to deteriorating confidence that accelerates a rush to gold. You can't separate these things.
Last edited by petulant on Sun Jan 05, 2020 6:47 pm, edited 1 time in total.

petulant
Posts: 877
Joined: Thu Sep 22, 2016 1:09 pm

Re: Gold - How Do Investors Model Price?

Post by petulant » Sun Jan 05, 2020 6:45 pm

watchnerd wrote:
Sun Jan 05, 2020 6:34 pm
TheNightsToCome wrote:
Sun Jan 05, 2020 5:52 pm

7.5% because it's enough to be meaningful, but not so much that I feel foolish holding a rock that produces no cash flow, and not so much that it will sink me if the price collapses.
petulant wrote:
Sun Jan 05, 2020 5:52 pm
osts for a few months for my immediate family with a bit left over. I may hold a little bit more for rebalancing purposes.

Another way to do it is backtesting. Although backtesting is not perfect, posters in other areas such as international diversification haven't been afraid to review backtesting data to see clues for an international allocation. When doing so with gold, the backtesting I have done (using the simba spreadsheet) shows that around 10 percent creates the best Sharpe ratio and safe withdrawal rate. This is primarily driven by the experience of the late 1970s, which was a quintessential local currency devaluation scenario for an American investor.

7.5-10%.

Yeah, I agree that's what it takes to move the needle on portfolio diversification.

But on a 7 figure portfolio, that's 6 figure amounts of gold.

That's a lot of cheddar for an asset that declined 40% between 2012 and 2016, and still hasn't gotten back to all time highs. It makes the stock market look reasonable.

If you had a six figure amount of gold, that's a luxury car's worth of value that still hasn't been recouped and who knows when you might.

Woof. :shock:

I'm pretty risk tolerant, but if you guys are doing this, either you're more risk tolerant than me, or you're more worried about the downside of not having gold than I am. Or both. :wink:
One way the insurance policy view, and your reaction to 10%, is relevant to AA is that there's a wealth effect in behavioral economics. Basically, the same or similar decision may be very different based on the total amount of wealth available to a person. If an investor does have a very significant portfolio, it could be that certain types of "safe" assets are fair to have as smaller allocations. Thus, $50,000-$100,000 might be where gold tops out for anybody, but it provides a level of safety for all AAs. AA for a particular asset may not be linear.

Bonds could be similar. For some investors, beyond a certain portfolio level, it could be that their willingness and ability to take risk increases since they can have a certain amount of bonds regardless of equity outcome. For other investors, it could be that they have no need to take risk, and accordingly increase the bond allocation.

Since AA for individual investors is really a behavioral economics issue as much as a rational or MPT issue, the insurance policy outlook may be quite helpful.

User avatar
fredflinstone
Posts: 2254
Joined: Mon Mar 29, 2010 7:35 am
Location: Bedrock

Re: Gold - How Do Investors Model Price?

Post by fredflinstone » Sun Jan 05, 2020 6:45 pm

watchnerd wrote:
Sun Jan 05, 2020 11:58 am
When thinking about stocks and bonds, there are numerous pricing models (CAPM being the probably most famous), various valuation indexes (Shiller CAPE), and on the bond side, various measures relative to the risk-free rate that include duration, assumptions about inflation, etc.

Regardless of prediction accuracy, various firms like Vanguard, Blackrock, etc, use these pricing and valuation models to attempt to evaluate future returns, often for 5-10 years into the future.

And, on top of that, there are some general principles about how people tend to think of relationships between interest rates, stocks, and bonds.

But what the heck do people do for gold?

How do people even create SWAG models for gold when it's almost completely outside the normal financial system, and often responds strongly to emotional events? Or without a model, how do people know how much gold is buy?

Or is it all just 'buy and pray you're lucky'?
I currently have about 25% of my portfolio in gold and gold miners. I do not use a pricing model. My general philosophy is that it is good to be well-diversified, and this means more than holding stocks and bonds. It's not so much "buy and pray you're lucky" as "buy and sleep better at night knowing that I own something that will probably appreciate in times of inflation or war."

TheNightsToCome
Posts: 467
Joined: Fri Jun 30, 2017 11:48 pm

Re: Gold - How Do Investors Model Price?

Post by TheNightsToCome » Sun Jan 05, 2020 6:46 pm

watchnerd wrote:
Sun Jan 05, 2020 6:34 pm
TheNightsToCome wrote:
Sun Jan 05, 2020 5:52 pm

7.5% because it's enough to be meaningful, but not so much that I feel foolish holding a rock that produces no cash flow, and not so much that it will sink me if the price collapses.
petulant wrote:
Sun Jan 05, 2020 5:52 pm
osts for a few months for my immediate family with a bit left over. I may hold a little bit more for rebalancing purposes.

Another way to do it is backtesting. Although backtesting is not perfect, posters in other areas such as international diversification haven't been afraid to review backtesting data to see clues for an international allocation. When doing so with gold, the backtesting I have done (using the simba spreadsheet) shows that around 10 percent creates the best Sharpe ratio and safe withdrawal rate. This is primarily driven by the experience of the late 1970s, which was a quintessential local currency devaluation scenario for an American investor.

7.5-10%.

Yeah, I agree that's what it takes to move the needle on portfolio diversification.

But on a 7 figure portfolio, that's 6 figure amounts of gold.

That's a lot of cheddar for an asset that declined 40% between 2012 and 2016, and still hasn't gotten back to all time highs. It makes the stock market look reasonable.

If you had a six figure amount of gold, that's a luxury car's worth of value that still hasn't been recouped and who knows when you might.

Woof. :shock:

I'm pretty risk tolerant, but if you guys are doing this, either you're more risk tolerant than me, or you're more worried about the downside of not having gold than I am. Or both. :wink:
I hold gold because I seek to reduce risk. If I was risk tolerant I'd own a high percentage of my portfolio in US stocks selling at a CAPE of 31.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 6:47 pm

JAZZISCOOL wrote:
Sun Jan 05, 2020 6:20 pm
FWIW, JP Morgan Asset Mgmt. models capital markets risk/return expectations. They used a 3% (nominal) return forecast for gold with an expected annualized volatility (risk) of 17.6% in their 2020 model in a study I reviewed. This is viewed by many institutional investors. :happy
Well, okay, now JP Morgan is apparently saying gold could fall in 2020, because of slowing economic growth in India and China:


https://marketrealist.com/2019/12/jpmor ... t-outlook/


While Goldman Sachs is predicting $1600/oz (about +10%)


https://marketrealist.com/2019/12/goldm ... -and-gold/

Nobody knows nothin'....
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 6:49 pm

TheNightsToCome wrote:
Sun Jan 05, 2020 6:46 pm


I hold gold because I seek to reduce risk. If I was risk tolerant I'd own a high percentage of my portfolio in US stocks selling at a CAPE of 31.
How long have you had it at that portion of your AA? A long time, or fairly recent?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 6:51 pm

fredflinstone wrote:
Sun Jan 05, 2020 6:45 pm


I currently have about 25% of my portfolio in gold and gold miners. I do not use a pricing model. My general philosophy is that it is good to be well-diversified, and this means more than holding stocks and bonds. It's not so much "buy and pray you're lucky" as "buy and sleep better at night knowing that I own something that will probably appreciate in times of inflation or war."
Do you follow normal rebalancing rules with gold (the metal, not the miners)?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
JAZZISCOOL
Posts: 520
Joined: Sat May 18, 2019 11:49 am
Location: Colorado - 5,700 ft.

Re: Gold - How Do Investors Model Price?

Post by JAZZISCOOL » Sun Jan 05, 2020 6:52 pm

watchnerd wrote:
Sun Jan 05, 2020 6:40 pm
JAZZISCOOL wrote:
Sun Jan 05, 2020 6:20 pm
FWIW, JP Morgan Asset Mgmt. models capital markets risk/return expectations. They used a 3% (nominal) return forecast for gold with an expected annualized volatility (risk) of 17.6% in their 2020 model in a study I reviewed. This is viewed by many institutional investors. :happy
Ah, that's the kind of info I'm looking for.

Do you know if it's publicly available, or was it firewalled?
https://am.jpmorgan.com/us/institutiona ... ethodology

Try this.

TheNightsToCome
Posts: 467
Joined: Fri Jun 30, 2017 11:48 pm

Re: Gold - How Do Investors Model Price?

Post by TheNightsToCome » Sun Jan 05, 2020 6:55 pm

watchnerd wrote:
Sun Jan 05, 2020 6:49 pm
TheNightsToCome wrote:
Sun Jan 05, 2020 6:46 pm


I hold gold because I seek to reduce risk. If I was risk tolerant I'd own a high percentage of my portfolio in US stocks selling at a CAPE of 31.
How long have you had it at that portion of your AA? A long time, or fairly recent?
Since late 2018.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 7:02 pm

JAZZISCOOL wrote:
Sun Jan 05, 2020 6:52 pm
watchnerd wrote:
Sun Jan 05, 2020 6:40 pm
JAZZISCOOL wrote:
Sun Jan 05, 2020 6:20 pm
FWIW, JP Morgan Asset Mgmt. models capital markets risk/return expectations. They used a 3% (nominal) return forecast for gold with an expected annualized volatility (risk) of 17.6% in their 2020 model in a study I reviewed. This is viewed by many institutional investors. :happy
Ah, that's the kind of info I'm looking for.

Do you know if it's publicly available, or was it firewalled?
https://am.jpmorgan.com/us/institutiona ... ethodology

Try this.
Thanks!

So far, there is mostly color commentary:

"Gold has provided positive returns during periods of negative
growth shocks as well as positive inflation shocks. However,
in terms of inflation regimes, average returns have generally
been most pronounced during extremely low (less than 1%)
or high (greater than 3%) inflation. In the episodes in
between, however, gold returns were lackluster (Exhibit 9A).
At the same time, gold has delivered positive returns in both
rising and falling equity markets (Exhibit 9B). For example,
in monthly periods when the S&P 500 experienced a
1-standard deviation (std) decline (-1std, or -4.4%), the
average monthly return for gold was +1.3%. When the S&P
500 experienced a +1std monthly increase (+4.4%), the
average monthly return for gold was a slightly lower +1.0%"


I've finished reading the main gold section, but it's 116 pages so I may not have found all the relevant gold bits yet..
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

DB2
Posts: 532
Joined: Thu Jan 17, 2019 10:07 pm

Re: Gold - How Do Investors Model Price?

Post by DB2 » Sun Jan 05, 2020 7:03 pm

watchnerd wrote:
Sun Jan 05, 2020 6:34 pm
TheNightsToCome wrote:
Sun Jan 05, 2020 5:52 pm

7.5% because it's enough to be meaningful, but not so much that I feel foolish holding a rock that produces no cash flow, and not so much that it will sink me if the price collapses.
petulant wrote:
Sun Jan 05, 2020 5:52 pm
osts for a few months for my immediate family with a bit left over. I may hold a little bit more for rebalancing purposes.

Another way to do it is backtesting. Although backtesting is not perfect, posters in other areas such as international diversification haven't been afraid to review backtesting data to see clues for an international allocation. When doing so with gold, the backtesting I have done (using the simba spreadsheet) shows that around 10 percent creates the best Sharpe ratio and safe withdrawal rate. This is primarily driven by the experience of the late 1970s, which was a quintessential local currency devaluation scenario for an American investor.

7.5-10%.

Yeah, I agree that's what it takes to move the needle on portfolio diversification.

But on a 7 figure portfolio, that's 6 figure amounts of gold.

That's a lot of cheddar for an asset that declined 40% between 2012 and 2016, and still hasn't gotten back to all time highs. It makes the stock market look reasonable.

If you had a six figure amount of gold, that's a luxury car's worth of value that still hasn't been recouped and who knows when you might.

Woof. :shock:

I'm pretty risk tolerant, but if you guys are doing this, either you're more risk tolerant than me, or you're more worried about the downside of not having gold than I am. Or both. :wink:
Watchnerd,

If at all interested in gold, it's important to understand the key issues and macro picture that influences gold.

You pointed out how gold tanked between 2012-2016. That is true, but it's averaged 9.54% a year since 2002. That is greater than the U.S. stock market which has averaged 8.54% a year since 2002. Why do I back test from that year? Cherry picking? Not at all. Because of key events that changed our world since. There were obviously a number of issues stemming from a recession, 9/11, Mideast wars, and the 2008 financial crisis. Gold reached it's peak price per ounz in 2011. However, by 2011 the market (re)gained confidence in the federal reserve and QE policies that pulled us out of the financial crisis. So, gold lost value because there was more positive attitude about the bigger picture and economy. However, gold has generally been going up in recent years (as well as miners/royalty companies as they trade basically against a multiple depending on gold's direction. Interestingly enough, the GDX index has outperformed the S&P 500 over the last four years). Gold has been rising again because of: a very likelihood of a weakening dollar in upcoming years, growing debt, large deficits (yet in a growing economy), doubts about the Fed's abilities or tools to help us in the next recession especially given we are probably late in the business cycle, strong political divisions only likely to worsen and potential polices as a result, potential trade battles, potential military conflicts (Mideast, North Korea?) , etc., etc.
Last edited by DB2 on Sun Jan 05, 2020 7:05 pm, edited 2 times in total.

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 7:04 pm

TheNightsToCome wrote:
Sun Jan 05, 2020 6:55 pm

Since late 2018.
So can I ask a question (and please don't feel like I'm trying to bait you, as I genuinely want to know):

If you determined that stocks are overpriced because of CAPE, how did you know gold was a good price when you bought it in 2018?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 2695
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sun Jan 05, 2020 7:07 pm

DB2 wrote:
Sun Jan 05, 2020 7:03 pm


Watchnerd,

If at all interested in gold, it's important to understand the key issues and macro picture that influences gold.

You pointed out how gold tanked between 2012-2016. That is true, but it's averaged 9.54% a year since 2002. That is greater than the U.S. stock market which has averaged 8.54% a year since 2002. Why do I back test from that year? Cherry picking? Not at all. Because of key events that changed our world since. There were obviously a number of issues stemming from a recession, 9/11, Mideast wars, and the 2008 financial crisis. Gold reached it's peak price per ounz in 2011. However, the market (re)gained confidence in the federal reserve and QE policies that pulled us out of the financial crisis by 2011. So, gold lost value because there was more positive attitude about the bigger picture and economy. However, gold has generally been going up in recent years (as well as miners/royalty companies as they trade basically against a multiple depending on gold's direction. Interestingly enough, the GDX index has outperformed the S&P 500 over the last four years). Gold has been rising again because of: a very likelihood of a weakening dollar in upcoming years, growing debt, large deficits (yet in a growing economy), doubts about the Fed's abilities or tools to help us in the next recession especially given we are probably late in the business cycle, strong political divisions only likely to worsen and potential polices as a result, potential trade battles, potential military conflicts (Mideast, North Korea?) , etc., etc.
The problem with all of that history is that it still doesn't provide us a model for what the price might do going forward, or what might lead it to increase.

If we believe in EMH, then I would counter that every thing you mentioned regarding debt, deficits, etc, is already priced in.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

TheNightsToCome
Posts: 467
Joined: Fri Jun 30, 2017 11:48 pm

Re: Gold - How Do Investors Model Price?

Post by TheNightsToCome » Sun Jan 05, 2020 7:21 pm

watchnerd wrote:
Sun Jan 05, 2020 7:04 pm
TheNightsToCome wrote:
Sun Jan 05, 2020 6:55 pm

Since late 2018.
So can I ask a question (and please don't feel like I'm trying to bait you, as I genuinely want to know):

If you determined that stocks are overpriced because of CAPE, how did you know gold was a good price when you bought it in 2018?
I didn't and don't. That is, like Eveillard, I don't know the intrinsic value of gold. I simply think it is likely to do well if there is concern about monetary stability, and/or the Fed's ability to manage events, and/or a disintegration of the euro, etc. I acknowledge that it may not work as an effective hedge, and if prospective returns to stocks and bonds looked better, and if monetary policy looked like it was on stable ground, then I would hold none.

Before the purchase I held that 7.5% in cash earning a negative real return. Given negative returns to cash and very low expected real returns to stocks and bonds (my projections), gold looks useful (to me). I can't make a strong case for it, but the investment landscape looks barren and full of mines today (again, my projections), so weak investment rationales look relatively stronger.

Locked