Gold - How Do Investors Model Price?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Wed Jan 15, 2020 6:04 pm

over45 wrote:
Wed Jan 15, 2020 6:00 pm
The other question I keep asking myself about gold (or silver) is: what would it be worth to anyone if there was no "spot price" system in place? What would the value be if someone had it and needed to sell it and there was no reference point to work off of ? We may have all seen videos where an interviewer hits the street and offers passers by a choice: a one ounce bar of silver -- or a chocolate bar. Virtually everyone takes the chocolate bar. If I have 10 ounces of gold and you have a bushel of apples and I am starving - those apples are more valuable to me than the gold. If I offered people a one ounce bar of silver or a $10 bill - 99.9% of them would take the $10 bill.
This is why you can't model the value of gold in a zombie apocalypse scenario.

And why, personally, I think that's a faith-based rationale that defies any logical analysis.

It's a fun drinking game, though.

So I, personally, limit any discussion about future gold returns / pricing to a world in which spot prices do exist.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

gougou
Posts: 262
Joined: Thu Sep 28, 2017 7:42 pm
Location: San Francisco Bay Area

Re: Gold - How Do Investors Model Price?

Post by gougou » Wed Jan 15, 2020 6:13 pm

watchnerd wrote:
Wed Jan 15, 2020 5:30 pm
gougou wrote:
Wed Jan 15, 2020 5:09 pm


Sure, you can put your full faith in the value of USD and assume it is the perfectly stable asset. Then you’ll reach the conclusion that gold is volatile and that its returns cannot make up for its volatility.
Yep, that's what I do. If I was European, I'd do the same thing with the euro. Japanese, I'd use yen.

Because if I don't do that, then CAPM, CAPE, Fama-French, MPT, Black Scholes, etc, all go out the window as they're based on the concept of the risk free asset being ultra short government bills in the currency of your choice.

All of these models require the ability to model a risk free rate of return which, at the crudest level, is a T-bill yield (or the euro/GBP/yen etc equivalent).

Because gold doesn't have a risk free rate of return, none of those analytical tools will work with it.

If you make gold your 0 reference you basically have no way to model stock valuations, equity risk premiums, bond duration, or much of anything.

You're basically intentionally choosing to abandon all of modern portfolio theory and monetary economics.

At that point, I'd rather just gamble -- because at least I can calculate the probabilities involved in a game of craps better than a financial world that uses gold as the definition of a stable asset.
CAPE specifically doesn't care about the risk free interest rate. Black Scholes model definitely works with r=0. Risk is usually measured by volatility which has nothing to do with risk free interest rate. Not sure why you think it's impossible to measure risk and that you could only gamble.

The world worked for many years when USD was backed by gold and an interest was paid on USD bonds. It's unfortunate no country is willing to issue a gold backed currency or a gold bond any more.

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Wed Jan 15, 2020 6:30 pm

gougou wrote:
Wed Jan 15, 2020 6:13 pm


CAPE specifically doesn't care about the risk free interest rate. Black Scholes model definitely works with r=0. Risk is usually measured by volatility which has nothing to do with risk free interest rate. Not sure why you think it's impossible to measure risk and that you could only gamble.

The world worked for many years when USD was backed by gold and an interest was paid on USD bonds. It's unfortunate no country is willing to issue a gold backed currency or a gold bond any more.
You can choose to run your finances as you wish the world to be, or they way it really is.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

gougou
Posts: 262
Joined: Thu Sep 28, 2017 7:42 pm
Location: San Francisco Bay Area

Re: Gold - How Do Investors Model Price?

Post by gougou » Wed Jan 15, 2020 8:04 pm

watchnerd wrote:
Wed Jan 15, 2020 6:04 pm
over45 wrote:
Wed Jan 15, 2020 6:00 pm
The other question I keep asking myself about gold (or silver) is: what would it be worth to anyone if there was no "spot price" system in place? What would the value be if someone had it and needed to sell it and there was no reference point to work off of ? We may have all seen videos where an interviewer hits the street and offers passers by a choice: a one ounce bar of silver -- or a chocolate bar. Virtually everyone takes the chocolate bar. If I have 10 ounces of gold and you have a bushel of apples and I am starving - those apples are more valuable to me than the gold. If I offered people a one ounce bar of silver or a $10 bill - 99.9% of them would take the $10 bill.
This is why you can't model the value of gold in a zombie apocalypse scenario.

And why, personally, I think that's a faith-based rationale that defies any logical analysis.

It's a fun drinking game, though.

So I, personally, limit any discussion about future gold returns / pricing to a world in which spot prices do exist.
I don’t think zombie apocalypse is a likely scenario and gold is probably worthless in such a world.

But if US influence is to decline dramatically and the world has no dominant superpower, then gold is likely to become the reserve currency. In such a scenario countries need to hold gold as foreign reserves to bolster their creditworthiness and conduct international trade using gold or gold backed currencies. Given the amount of trade ($6T/yr) and total foreign reserve held (>$11T) now, gold can be worth a lot in such a world.

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Wed Jan 15, 2020 8:26 pm

70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

sean.mcgrath
Posts: 358
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Wed Jan 15, 2020 8:32 pm

watchnerd wrote:
Wed Jan 15, 2020 5:57 pm
sean.mcgrath wrote:
Wed Jan 15, 2020 5:45 pm


Calculate the energy costs -- pretty prohibitive and not related to state of technological advancement unless energy becomes virtually free. In that case, life is easy anyway (says the geophysicist ;-)
We were assuming 1,000 years from now, when we'll have fusion reactors or miniature black hole particle accretion disk x-ray power sources.
Yep, you are assuming energy is free (do calculate the energy needed to change atoms, it is staggering). In that case, as said, free gold is the least of the benefits.

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Wed Jan 15, 2020 8:47 pm

sean.mcgrath wrote:
Wed Jan 15, 2020 8:32 pm
watchnerd wrote:
Wed Jan 15, 2020 5:57 pm
sean.mcgrath wrote:
Wed Jan 15, 2020 5:45 pm


Calculate the energy costs -- pretty prohibitive and not related to state of technological advancement unless energy becomes virtually free. In that case, life is easy anyway (says the geophysicist ;-)
We were assuming 1,000 years from now, when we'll have fusion reactors or miniature black hole particle accretion disk x-ray power sources.
Yep, you are assuming energy is free (do calculate the energy needed to change atoms, it is staggering). In that case, as said, free gold is the least of the benefits.
Yes....

(we're joking around)
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: Gold - How Do Investors Model Price?

Post by beehivehave » Wed Jan 15, 2020 10:21 pm

watchnerd wrote:
Wed Jan 15, 2020 6:30 pm
gougou wrote:
Wed Jan 15, 2020 6:13 pm


CAPE specifically doesn't care about the risk free interest rate. Black Scholes model definitely works with r=0. Risk is usually measured by volatility which has nothing to do with risk free interest rate. Not sure why you think it's impossible to measure risk and that you could only gamble.

The world worked for many years when USD was backed by gold and an interest was paid on USD bonds. It's unfortunate no country is willing to issue a gold backed currency or a gold bond any more.
You can choose to run your finances as you wish the world to be, or they way it really is.
Gold bugs, like all ideologs, prefer the latter. They like the world as it was in 1900, or even better, 190.

over45
Posts: 125
Joined: Sat Nov 18, 2017 8:35 am

Re: Gold - How Do Investors Model Price?

Post by over45 » Wed Jan 15, 2020 10:44 pm

Gold bugs, like all ideologs, prefer the latter. They like the world as it was in 1900, or even better, 190.
Goldbugs have a point in that no fiat currency has ever survived.

Pu239
Posts: 264
Joined: Mon Dec 17, 2018 6:24 pm

Re: Gold - How Do Investors Model Price?

Post by Pu239 » Wed Jan 15, 2020 10:55 pm

over45 wrote:
Wed Jan 15, 2020 10:44 pm
Gold bugs, like all ideologs, prefer the latter. They like the world as it was in 1900, or even better, 190.
Goldbugs have a point in that no fiat currency has ever survived.
Obviously because the models were wrong.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

Pu239
Posts: 264
Joined: Mon Dec 17, 2018 6:24 pm

Re: Gold - How Do Investors Model Price?

Post by Pu239 » Wed Jan 15, 2020 10:57 pm

beehivehave wrote:
Wed Jan 15, 2020 10:21 pm
watchnerd wrote:
Wed Jan 15, 2020 6:30 pm
gougou wrote:
Wed Jan 15, 2020 6:13 pm


CAPE specifically doesn't care about the risk free interest rate. Black Scholes model definitely works with r=0. Risk is usually measured by volatility which has nothing to do with risk free interest rate. Not sure why you think it's impossible to measure risk and that you could only gamble.

The world worked for many years when USD was backed by gold and an interest was paid on USD bonds. It's unfortunate no country is willing to issue a gold backed currency or a gold bond any more.
You can choose to run your finances as you wish the world to be, or they way it really is.
Gold bugs, like all ideologs, prefer the latter. They like the world as it was in 1900, or even better, 190.
The latter??? You sure about that?
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

Pu239
Posts: 264
Joined: Mon Dec 17, 2018 6:24 pm

Re: Gold - How Do Investors Model Price?

Post by Pu239 » Wed Jan 15, 2020 10:59 pm

sean.mcgrath wrote:
Wed Jan 15, 2020 8:32 pm
watchnerd wrote:
Wed Jan 15, 2020 5:57 pm
sean.mcgrath wrote:
Wed Jan 15, 2020 5:45 pm


Calculate the energy costs -- pretty prohibitive and not related to state of technological advancement unless energy becomes virtually free. In that case, life is easy anyway (says the geophysicist ;-)
We were assuming 1,000 years from now, when we'll have fusion reactors or miniature black hole particle accretion disk x-ray power sources.
Yep, you are assuming energy is free (do calculate the energy needed to change atoms, it is staggering). In that case, as said, free gold is the least of the benefits.
And it would likely be radioactive at that. Remember Goldfinger?
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: Gold - How Do Investors Model Price?

Post by beehivehave » Wed Jan 15, 2020 11:07 pm

over45 wrote:
Wed Jan 15, 2020 10:44 pm
Gold bugs, like all ideologs, prefer the latter. They like the world as it was in 1900, or even better, 190.
Goldbugs have a point in that no fiat currency has ever survived.
That is not true:
The US dollar has survived 228 years, and it will out-live us all.
The British pound is about 1250 years old.
Nothing is more "fiat" (arbitrary) than the choice of a colored metal of value only for making jewelry as currency.
Only killing the US will kill the dollar, in which case we would have even bigger problems than "fiat" currency.

User avatar
JoMoney
Posts: 9340
Joined: Tue Jul 23, 2013 5:31 am

Re: Gold - How Do Investors Model Price?

Post by JoMoney » Wed Jan 15, 2020 11:33 pm

Goldbugs have a point in that no fiat currency has ever survived.
Not sure I see the point, gold has not survived as a currency.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Wed Jan 15, 2020 11:45 pm

JoMoney wrote:
Wed Jan 15, 2020 11:33 pm
Goldbugs have a point in that no fiat currency has ever survived.
Not sure I see the point, gold has not survived as a currency.
Or how much it matters, anyway.

The Euro replaced the Deutsche Mark, the Franc, the Lira. Did wealth cease to exist in Germany, France, and Italy?

Money != wealth
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Pu239
Posts: 264
Joined: Mon Dec 17, 2018 6:24 pm

Re: Gold - How Do Investors Model Price?

Post by Pu239 » Thu Jan 16, 2020 12:15 am

watchnerd wrote:
Wed Jan 15, 2020 6:30 pm
gougou wrote:
Wed Jan 15, 2020 6:13 pm


CAPE specifically doesn't care about the risk free interest rate. Black Scholes model definitely works with r=0. Risk is usually measured by volatility which has nothing to do with risk free interest rate. Not sure why you think it's impossible to measure risk and that you could only gamble.

The world worked for many years when USD was backed by gold and an interest was paid on USD bonds. It's unfortunate no country is willing to issue a gold backed currency or a gold bond any more.
You can choose to run your finances as you wish the world to be, or they way it really is.
The "way it really is" is unpredictable requiring some measure of insurance for the unknown. Some believe gold provides that insurance, others not so much. Many people in the world still value gold and will likely continue to do so in the future. It's for that proportion of gold buyers of the world population, which wanes and waxes - the preferred asset of choice for many investors, as Ledbetter notes, who are least able to afford it - and the many developed countries with sizable gold reserves, that makes gold endure. Perhaps it's better modeled as insurance rather than an investment. Reference to modeling suggests that you looking for a logical, rational basis for owning gold. I can't help you there but how good are the models used for predicting future stock and bond prices? Which models predicted an almost 30% gain for the S&P last year? Technically, most models are developed for understanding system behavior, not predicting future outcomes, although everyone uses them as such and are sometime successful within given a given error range. When dealing with human emotions, that error range tends to be very large resulting in inaccurate predictions. I have amassed "enough" - owing some precious metals doesn't hurt and possibly won't help but I'm not losing any sleep over it. As Andrew Tobias has said, one of the luxuries of wealth is not-having-to-try so hard. Analyzing the impact of owning some gold doesn't matter to me. Collectible or not, I like the added diversification. The "Longest Discipline" indeed...
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 12:46 am

Pu239 wrote:
Thu Jan 16, 2020 12:15 am

The "way it really is" is unpredictable requiring some measure of insurance for the unknown. Some believe gold provides that insurance, others not so much. Many people in the world still value gold and will likely continue to do so in the future. It's for that proportion of gold buyers of the world population, which wanes and waxes - the preferred asset of choice for many investors, as Ledbetter notes, who are least able to afford it - and the many developed countries with sizable gold reserves, that makes gold endure. Perhaps it's better modeled as insurance rather than an investment. Reference to modeling suggests that you looking for a logical, rational basis for owning gold. I can't help you there but how good are the models used for predicting future stock and bond prices? Which models predicted an almost 30% gain for the S&P last year? Technically, most models are developed for understanding system behavior, not predicting future outcomes, although everyone uses them as such and are sometime successful within given a given error range. When dealing with human emotions, that error range tends to be very large resulting in inaccurate predictions. I have amassed "enough" - owing some precious metals doesn't hurt and possibly won't help but I'm not losing any sleep over it. As Andrew Tobias has said, one of the luxuries of wealth is not-having-to-try so hard. Analyzing the impact of owning some gold doesn't matter to me. Collectible or not, I like the added diversification. The "Longest Discipline" indeed...
I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Smith1776
Posts: 75
Joined: Fri Apr 21, 2017 5:37 pm

Re: Gold - How Do Investors Model Price?

Post by Smith1776 » Thu Jan 16, 2020 1:30 am

Just wanted to offer some thoughts. It was suggested earlier in this thread that the U.S. Dollar is 200+ years old. It's really not. This applies to other ostensibly old currencies as well.

If my dog Max dies and I replace it with a new dog named Max, it's not the same dog.

The U.S. has had many currencies in its lifespan, but it just so happens that they were all given the same name.

Just a few examples of how the U.S. Dollar dog died and was replaced by a new dog by the same name:

- 1900 Gold Standard Act abandoned the bimetallic standard. 1 troy ounce is now $20.67.
- 1933 gold seizure meant you couldn't redeem your notes for gold
- 1934 the Dollar is redefined so that $35 buys you 1 troy ounce.
- 1968 the $35 peg is gone and there was a brief peg at $42.22
- 1971 Nixon Shock, last vestiges of gold connection are effectively gone

These are just off the top of my head. There are more of course going back to America's deep history.

The point I'm trying to make is this. Every time you make a material change to your currency it is, by definition, not the same thing as it was before. So simply taking this new currency and giving it the same name doesn't actually make it the same in terms of its substance. Just as how if my dog Max dies, buying another dog of the same breed named Max doesn't mean I haven't suffered a loss.

Make no mistake. Every one of the changes mentioned above (and the ones I didn't) constituted entirely new currencies. They just had the same name.

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 1:53 am

Smith1776 wrote:
Thu Jan 16, 2020 1:30 am
Just wanted to offer some thoughts. It was suggested earlier in this thread that the U.S. Dollar is 200+ years old. It's really not. This applies to other ostensibly old currencies as well.

If my dog Max dies and I replace it with a new dog named Max, it's not the same dog.

The U.S. has had many currencies in its lifespan, but it just so happens that they were all given the same name.

Just a few examples of how the U.S. Dollar dog died and was replaced by a new dog by the same name:

- 1900 Gold Standard Act abandoned the bimetallic standard. 1 troy ounce is now $20.67.
- 1933 gold seizure meant you couldn't redeem your notes for gold
- 1934 the Dollar is redefined so that $35 buys you 1 troy ounce.
- 1968 the $35 peg is gone and there was a brief peg at $42.22
- 1971 Nixon Shock, last vestiges of gold connection are effectively gone

These are just off the top of my head. There are more of course going back to America's deep history.

The point I'm trying to make is this. Every time you make a material change to your currency it is, by definition, not the same thing as it was before. So simply taking this new currency and giving it the same name doesn't actually make it the same in terms of its substance. Just as how if my dog Max dies, buying another dog of the same breed named Max doesn't mean I haven't suffered a loss.

Make no mistake. Every one of the changes mentioned above (and the ones I didn't) constituted entirely new currencies. They just had the same name.
This is one reason why I don't get why there is eagerness to go back to the "good old days" of precious metal backed currency.....which "old days" are we talking about?

1934, when there was no free market gold price and the price was set by the government?

1968, when the government unilaterally changed how much gold was "worth"?

Free market gold pricing + gold backed currency seems to co-exist in the minds of people in a way that it never actually did in reality over the last 35+ years of history the gold standard.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

gougou
Posts: 262
Joined: Thu Sep 28, 2017 7:42 pm
Location: San Francisco Bay Area

Re: Gold - How Do Investors Model Price?

Post by gougou » Thu Jan 16, 2020 2:56 am

watchnerd wrote:
Thu Jan 16, 2020 1:53 am
Smith1776 wrote:
Thu Jan 16, 2020 1:30 am
Just wanted to offer some thoughts. It was suggested earlier in this thread that the U.S. Dollar is 200+ years old. It's really not. This applies to other ostensibly old currencies as well.

If my dog Max dies and I replace it with a new dog named Max, it's not the same dog.

The U.S. has had many currencies in its lifespan, but it just so happens that they were all given the same name.

Just a few examples of how the U.S. Dollar dog died and was replaced by a new dog by the same name:

- 1900 Gold Standard Act abandoned the bimetallic standard. 1 troy ounce is now $20.67.
- 1933 gold seizure meant you couldn't redeem your notes for gold
- 1934 the Dollar is redefined so that $35 buys you 1 troy ounce.
- 1968 the $35 peg is gone and there was a brief peg at $42.22
- 1971 Nixon Shock, last vestiges of gold connection are effectively gone

These are just off the top of my head. There are more of course going back to America's deep history.

The point I'm trying to make is this. Every time you make a material change to your currency it is, by definition, not the same thing as it was before. So simply taking this new currency and giving it the same name doesn't actually make it the same in terms of its substance. Just as how if my dog Max dies, buying another dog of the same breed named Max doesn't mean I haven't suffered a loss.

Make no mistake. Every one of the changes mentioned above (and the ones I didn't) constituted entirely new currencies. They just had the same name.
This is one reason why I don't get why there is eagerness to go back to the "good old days" of precious metal backed currency.....which "old days" are we talking about?

1934, when there was no free market gold price and the price was set by the government?

1968, when the government unilaterally changed how much gold was "worth"?

Free market gold pricing + gold backed currency seems to co-exist in the minds of people in a way that it never actually did in reality over the last 35+ years of history the gold standard.
Historically currencies were backed by precious metals so the governments were constrained on how much money they could create. They had to specifically change the rules (which won’t go uncontested) to overcome some of the constraints. There was peace of mind to protect purchasing power by simply owning currencies that are backed/made by gold.

In the past ~50 years the governments are given full power to create money as they see fit. Some people are going to be distrustful of such governments and want to return to the “good old days”.

It is really unprecedented how fiat currencies have completely taken over the world. But going back to gold standard may be inevitable if people lose faith in their governments.

User avatar
grayfox
Posts: 5570
Joined: Sat Sep 15, 2007 4:30 am

Re: Gold - How Do Investors Model Price?

Post by grayfox » Thu Jan 16, 2020 7:27 am

I would like to just clear some things regarding words and definitions. Anyone can use google or a dictionary to do research. Wikipedia contains a lot of good information. That way you can get your facts straight.

First, kinds of money.

Commodity money. The value comes from the commodity it is made from. Barley, cigarettes, salt, tea, gold, silver.

Representative money. Represents something of value. E.g. Gold Certificates or Silver Certificates. Silver Certificates have written on them: "THIS CERTIFIES THAT THERE IS ON DEPOSIT IN THE TREASURY OF THE UNITED STATES OF AMERICA ONE DOLLAR IN SILVER PAYABLE TO THE BEARER ON DEMAND". Read it on the certificate:

Image

Fiat Money. A currency without intrinsic value that has been established as money, often by government regulation.

Fiat in Latin means "Let it be done". And God said, "Fiat Lux," and there was light. In English, "fiat" just means a decree by some authority, like the government. It is not a derogatory term. It just means the powers-that-be decreed it.

Legal Tender. A medium of payment recognized by a legal system to be valid for meeting a financial obligation. Federal Reserve Notes are legal tender and have the words "This note is legal tender for all debts public and private." Read it on the one dollar note:

Image

Basically Legal tender means that you can use it to pay your taxes, which is a huge part of what makes the dollar valuable. Everyone has to pay taxes in dollars, so everyone needs to get the hands on dollars. There is a huge demand for dollars.

De facto currency. Money that is not legal tender in a country but is treated as such by most of the populace. Many countries have their own offical currency that no one trusts. The U.S. Dollar is the de facto currency. When someone goes to buy a $3,000 used car, they will not pay in the local currency, bongo bucks, but in U.S. $100 bills. "Show me the Benjamins."

Reserve Currency. Foreign currency held in significant quantities by central banks as part of their foreign exchange reserves. The U.S. Dollar is the number one reserve currency in the world, held by many Central Banks.

Full Faith and Credit of the United States. Applies to bonds and other debt instruments. it is the unconditional guarantee that the principle and interest will be paid. E.g. certain agency bonds like GNMA bonds are backed by the Full Faith and Credit of the United States. It makes the bonds risk free, because the lender knows he will be paid.

There is also a Full Faith and Credit Clause in the Constitution, but that has to do with states respecting the laws of other states. I can not find anything official that applies the term "Full Faith and Credit" to currency.
Sic transit gloria mundi. [STGM]

User avatar
grayfox
Posts: 5570
Joined: Sat Sep 15, 2007 4:30 am

Re: Gold - How Do Investors Model Price?

Post by grayfox » Thu Jan 16, 2020 8:47 am

Do research. Look things up. Understand what the words mean. Use the words properly.

Summary:
1. Gold and Silver coins were commodity money.
2. The old banknotes that you could exchange for Silver or Gold were representational money.
3. Federal Reserve Notes are fiat money.
4. U.S. Dollar is the number one reserve currency in the world.
5. The U.S. Dollar is also the de facto currency in many countries with shaky governments. In many countries, people's savings are in U.S. $100 bills.
6. As far as I know, today every country in the World uses a fiat money system. This has only been the case since the 1970s.

In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Sic transit gloria mundi. [STGM]

index2max
Posts: 286
Joined: Mon Jan 21, 2019 11:01 pm

Re: Gold - How Do Investors Model Price?

Post by index2max » Thu Jan 16, 2020 9:05 am

Some really good points being made in this thread.

Also wanted to chime in about the historical reason for having dollars that were convertible to gold. It served as a way for citizens to "veto" any congressional budgets they didn't want. If government spends more dollars than is possible to convert back to gold, as promised, then people could make a rush on their gold certificates.This in a way, made sure government couldn't spend too much money.

Having a gold-backed currency also meant your money is effectively good all over the world since everyone understands gold's value. During the interwar period (between WWI and WWII), most governments would not let their own citizens move their gold around between countries.

Nowadays with different paper currencies floating around, it's more tricky to spend your money abroad in physical form. You have to convert one form of paper to another. Much easier to establish exchange rates if you know how many ounces of gold each unit of currency such as a US dollar or German Mark would get you.

Warren Buffet's father, Howard, a former congressman and stock broker explains some of the rationale behind sound national budgets and gold convertibility here.

https://www.fgmr.com/wp-content/uploads ... y-1948.pdf

Mickstick
Posts: 47
Joined: Thu Nov 02, 2017 8:16 am

Re: Gold - How Do Investors Model Price?

Post by Mickstick » Thu Jan 16, 2020 10:08 am

I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design" - F.A. Hayek, The Fatal Conceit

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 10:10 am

Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
So you're anticipating inflation getting out of control?

If so, why not TIPS?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

DB2
Posts: 903
Joined: Thu Jan 17, 2019 10:07 pm

Re: Gold - How Do Investors Model Price?

Post by DB2 » Thu Jan 16, 2020 10:18 am

Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
Yes, with this much debt everywhere, only very low interest rates and QE makes it sustainable (for now anyway). Look what happened in late 2018 when the Fed said they were on "auto-pilot" QT and had rate increases. We only got the worst December in the stock market since the Great Depression. They had to revert to three rate cuts and return to QE rather quickly. Talk about an about face. Ben Bernanke lied after the financial crisis when he said QT was only temporary. The markets bought into that but assumed it would be temporary. Had he said it was going to be permanent, they would have freaked. However, they have come to just accept it and now want it.

I also think what has been going on in the repo market since September is not getting the coverage it should.

index2max
Posts: 286
Joined: Mon Jan 21, 2019 11:01 pm

Re: Gold - How Do Investors Model Price?

Post by index2max » Thu Jan 16, 2020 10:45 am

DB2 wrote:
Thu Jan 16, 2020 10:18 am
Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
Yes, with this much debt everywhere, only very low interest rates and QE makes it sustainable (for now anyway). Look what happened in late 2018 when the Fed said they were on "auto-pilot" QT and had rate increases. We only got the worst December in the stock market since the Great Depression. They had to revert to three rate cuts and return to QE rather quickly. Talk about an about face. Ben Bernanke lied after the financial crisis when he said QT was only temporary. The markets bought into that but assumed it would be temporary. Had he said it was going to be permanent, they would have freaked. However, they have come to just accept it and now want it.

I also think what has been going on in the repo market since September is not getting the coverage it should.
Agreed, the emergency money-printing or QE, turned out to not he temporary, indeed. Once you rely on money-printing to fix problems, we’re stuck with it.

The only places that seem to cover up-to-date QE news are alternative news sites like ZeroHedge or internet shows like the Keiser report on RT. I’m guessing the mainstream media don’t focus too much on the consequences of these monetary policies because they’d lose interview access with government officials and hurt their media businesses.

Pu239
Posts: 264
Joined: Mon Dec 17, 2018 6:24 pm

Re: Gold - How Do Investors Model Price?

Post by Pu239 » Thu Jan 16, 2020 11:02 am

watchnerd wrote:
Thu Jan 16, 2020 12:46 am

I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
The thread is about price not the gold standard or bonds. Trying to stay on track.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

index2max
Posts: 286
Joined: Mon Jan 21, 2019 11:01 pm

Re: Gold - How Do Investors Model Price?

Post by index2max » Thu Jan 16, 2020 11:06 am

Pu239 wrote:
Thu Jan 16, 2020 11:02 am
watchnerd wrote:
Thu Jan 16, 2020 12:46 am

I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
The thread is about price not the gold standard or bonds. Trying to stay on track.
People have to give context to explain why gold has 0% real returns by talking about the gold standard etc.

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 11:08 am

Pu239 wrote:
Thu Jan 16, 2020 11:02 am
watchnerd wrote:
Thu Jan 16, 2020 12:46 am

I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
The thread is about price not the gold standard or bonds. Trying to stay on track.
Then I'm still confused.

Because it sounds like you're saying:

1. price is unknowable, buy it for insurance reasons, but don't expect to be able to determine a price of that insurance policy.

2. sometimes it beats the S&P500

3. 1 + 2 = why not, if you have the funds
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: Gold - How Do Investors Model Price?

Post by beehivehave » Thu Jan 16, 2020 11:15 am

index2max wrote:
Thu Jan 16, 2020 10:45 am
DB2 wrote:
Thu Jan 16, 2020 10:18 am
Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
Yes, with this much debt everywhere, only very low interest rates and QE makes it sustainable (for now anyway). Look what happened in late 2018 when the Fed said they were on "auto-pilot" QT and had rate increases. We only got the worst December in the stock market since the Great Depression. They had to revert to three rate cuts and return to QE rather quickly. Talk about an about face. Ben Bernanke lied after the financial crisis when he said QT was only temporary. The markets bought into that but assumed it would be temporary. Had he said it was going to be permanent, they would have freaked. However, they have come to just accept it and now want it.

I also think what has been going on in the repo market since September is not getting the coverage it should.
Agreed, the emergency money-printing or QE, turned out to not he temporary, indeed. Once you rely on money-printing to fix problems, we’re stuck with it.

The only places that seem to cover up-to-date QE news are alternative news sites like ZeroHedge or internet shows like the Keiser report on RT. I’m guessing the mainstream media don’t focus too much on the consequences of these monetary policies because they’d lose interview access with government officials and hurt their media businesses.
It's a conspiracy!
So your sources are Russians and pro-Russian Bulgarians who don't sign their real names? It figures.

index2max
Posts: 286
Joined: Mon Jan 21, 2019 11:01 pm

Re: Gold - How Do Investors Model Price?

Post by index2max » Thu Jan 16, 2020 11:22 am

beehivehave wrote:
Thu Jan 16, 2020 11:15 am
index2max wrote:
Thu Jan 16, 2020 10:45 am
DB2 wrote:
Thu Jan 16, 2020 10:18 am
Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
Yes, with this much debt everywhere, only very low interest rates and QE makes it sustainable (for now anyway). Look what happened in late 2018 when the Fed said they were on "auto-pilot" QT and had rate increases. We only got the worst December in the stock market since the Great Depression. They had to revert to three rate cuts and return to QE rather quickly. Talk about an about face. Ben Bernanke lied after the financial crisis when he said QT was only temporary. The markets bought into that but assumed it would be temporary. Had he said it was going to be permanent, they would have freaked. However, they have come to just accept it and now want it.

I also think what has been going on in the repo market since September is not getting the coverage it should.
Agreed, the emergency money-printing or QE, turned out to not he temporary, indeed. Once you rely on money-printing to fix problems, we’re stuck with it.

The only places that seem to cover up-to-date QE news are alternative news sites like ZeroHedge or internet shows like the Keiser report on RT. I’m guessing the mainstream media don’t focus too much on the consequences of these monetary policies because they’d lose interview access with government officials and hurt their media businesses.
It's a conspiracy!
So your sources are Russians and pro-Russian Bulgarians who don't sign their real names? It figures.
If the entity publishing news backs up their reporting with publicly available documents, their name could be “Billy bob” for all I care.

It’s good to be challenged. I look at it as an opportunity to find holes in my arguments.

Mickstick
Posts: 47
Joined: Thu Nov 02, 2017 8:16 am

Re: Gold - How Do Investors Model Price?

Post by Mickstick » Thu Jan 16, 2020 12:13 pm

watchnerd wrote:
Thu Jan 16, 2020 10:10 am
Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
So you're anticipating inflation getting out of control?

If so, why not TIPS?
TIPS have only been around for a couple of decades and I don't really understand how they work. I have more confidence in the history of gold. Gold also has the benefit that if a gold standard is ever returned to then it's probably currently undervalued since largely no one is using it as a medium of exchange.
watchnerd wrote:
Thu Jan 16, 2020 11:08 am
Pu239 wrote:
Thu Jan 16, 2020 11:02 am
watchnerd wrote:
Thu Jan 16, 2020 12:46 am

I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
The thread is about price not the gold standard or bonds. Trying to stay on track.
Then I'm still confused.

Because it sounds like you're saying:

1. price is unknowable, buy it for insurance reasons, but don't expect to be able to determine a price of that insurance policy.

2. sometimes it beats the S&P500

3. 1 + 2 = why not, if you have the funds
The price is whatever the market determines it to be at the moment. I expect fiat currencies to weaken relative to it in the long run while accepting the volatility along the way.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design" - F.A. Hayek, The Fatal Conceit

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: Gold - How Do Investors Model Price?

Post by beehivehave » Thu Jan 16, 2020 12:21 pm

Mickstick wrote:
Thu Jan 16, 2020 12:13 pm
watchnerd wrote:
Thu Jan 16, 2020 10:10 am
Mickstick wrote:
Thu Jan 16, 2020 10:08 am
I own 10% gold because I think at least part of the growth we are experiencing is due to central bank manipulation. I do not think central banks will be able to raise interest rates by any meaningful amount without causing some sort of economic collapse.
So you're anticipating inflation getting out of control?

If so, why not TIPS?
TIPS have only been around for a couple of decades and I don't really understand how they work. I have more confidence in the history of gold. Gold also has the benefit that if a gold standard is ever returned to then it's probably currently undervalued since largely no one is using it as a medium of exchange.
watchnerd wrote:
Thu Jan 16, 2020 11:08 am
Pu239 wrote:
Thu Jan 16, 2020 11:02 am
watchnerd wrote:
Thu Jan 16, 2020 12:46 am

I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
The thread is about price not the gold standard or bonds. Trying to stay on track.
Then I'm still confused.

Because it sounds like you're saying:

1. price is unknowable, buy it for insurance reasons, but don't expect to be able to determine a price of that insurance policy.

2. sometimes it beats the S&P500

3. 1 + 2 = why not, if you have the funds
The price is whatever the market determines it to be at the moment. I expect fiat currencies to weaken relative to it in the long run while accepting the volatility along the way.
Here's how TIPS works: They are backed by the full faith and credit of the US Government.
Here's how gold works: it is backed by nothing except the whims of speculators and supply/demand of gold.
There are ZERO nations still on the gold standard and ZERO with any plans to change that as would surrender a nation's control of their money supply.
(In fact, the trend is away from centralized currencies like the euro.)
As an investment, at best it is a stand-in for commodities.
I hope this clears up some of your confusion.

sean.mcgrath
Posts: 358
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 1:11 pm

grayfox wrote:
Thu Jan 16, 2020 8:47 am
In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Wow. What makes a currency "crap?"

The Norwegian krone, Canadian/Aussie/Singapore dollars? And, of course, the Cayman Island dollar has a pretty good history. :D

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: Gold - How Do Investors Model Price?

Post by beehivehave » Thu Jan 16, 2020 1:24 pm

sean.mcgrath wrote:
Thu Jan 16, 2020 1:11 pm
grayfox wrote:
Thu Jan 16, 2020 8:47 am
In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Wow. What makes a currency "crap?"

The Norwegian krone, Canadian/Aussie/Singapore dollars? And, of course, the Cayman Island dollar has a pretty good history. :D
If someone gave the poster free money in anything other than certain currencies, they would refuse it. :happy

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 1:37 pm

Mickstick wrote:
Thu Jan 16, 2020 12:13 pm

The price is whatever the market determines it to be at the moment. I expect fiat currencies to weaken relative to it in the long run while accepting the volatility along the way.
Since you expect fiat currencies to weak relative to gold, what's the annual rate of return you're predicting for that?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Pu239
Posts: 264
Joined: Mon Dec 17, 2018 6:24 pm

Re: Gold - How Do Investors Model Price?

Post by Pu239 » Thu Jan 16, 2020 2:38 pm

watchnerd wrote:
Thu Jan 16, 2020 11:08 am
Pu239 wrote:
Thu Jan 16, 2020 11:02 am
watchnerd wrote:
Thu Jan 16, 2020 12:46 am

I'm not understanding what that has to do with wishing the world had a gold-backed currency or gold-backed bond.
The thread is about price not the gold standard or bonds. Trying to stay on track.
Then I'm still confused.

Because it sounds like you're saying:

1. price is unknowable, buy it for insurance reasons, but don't expect to be able to determine a price of that insurance policy.

2. sometimes it beats the S&P500

3. 1 + 2 = why not, if you have the funds
When the market behaves rationally and predictably, I'll do the same. :happy
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 3:29 pm

Pu239 wrote:
Thu Jan 16, 2020 2:38 pm

When the market behaves rationally and predictably, I'll do the same. :happy
For gold, that's possibly never.

That's slightly less true for other options.

Individual nominal Treasuries are predictable if held to maturity, although you don't know if you beat inflation or not. For liability matching, this is perfectly predictable if my liabilities are nominal as opposed to real.

For real return, individual TIPS are predictable for real return if held to maturity, as long as I understand I won't know the nominal return until it matures.

So in terms insurance, nominal Treasuries are predictable for nominal return needs, and TIPS are predictable for a decent chunk of real return needs.

Note that the options above are not heavily dependent upon how the market behaves.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

Mickstick
Posts: 47
Joined: Thu Nov 02, 2017 8:16 am

Re: Gold - How Do Investors Model Price?

Post by Mickstick » Thu Jan 16, 2020 3:30 pm

watchnerd wrote:
Thu Jan 16, 2020 1:37 pm
Mickstick wrote:
Thu Jan 16, 2020 12:13 pm

The price is whatever the market determines it to be at the moment. I expect fiat currencies to weaken relative to it in the long run while accepting the volatility along the way.
Since you expect fiat currencies to weak relative to gold, what's the annual rate of return you're predicting for that?
Hard to say because fear of instability is definitely a large factor in the year to year gains (or losses). Generally I'd expect it to increase in price relative to inflation. I wouldn't be surprised if the the US dollar is no longer the dominant world reserve currency at some point, which is why I think it's prudent to have an asset not denominated in dollars. For me it is necessary diversification.
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design" - F.A. Hayek, The Fatal Conceit

User avatar
grayfox
Posts: 5570
Joined: Sat Sep 15, 2007 4:30 am

Re: Gold - How Do Investors Model Price?

Post by grayfox » Thu Jan 16, 2020 3:39 pm

sean.mcgrath wrote:
Thu Jan 16, 2020 1:11 pm
grayfox wrote:
Thu Jan 16, 2020 8:47 am
In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Wow. What makes a currency "crap?"

The Norwegian krone, Canadian/Aussie/Singapore dollars? And, of course, the Cayman Island dollar has a pretty good history. :D
I have a 5 Norwegian Kroner and 1 Kroner. They have holes.

2013 1.00 NOK kr = 0.18 USD today 11 cents lost -39%
2012 1.00 CAD $ = 1.00 USD today 77 cents lost -23%
2012 1.00 SGD $ = 0.79 USD today 74 cents lost -6% OK that didn't lose so much.

All the currencies that I am familiar have higher inflation than the U.S. so they lose value faster.
And some of them have de-valued at various times.

None of them were a good store of Value.
Last edited by grayfox on Thu Jan 16, 2020 3:40 pm, edited 1 time in total.
Sic transit gloria mundi. [STGM]

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 3:40 pm

Mickstick wrote:
Thu Jan 16, 2020 3:30 pm


Hard to say because fear of instability is definitely a large factor in the year to year gains (or losses). Generally I'd expect it to increase in price relative to inflation. I wouldn't be surprised if the the US dollar is no longer the dominant world reserve currency at some point, which is why I think it's prudent to have an asset not denominated in dollars. For me it is necessary diversification.
Okay, so let's unpack this for a bit:

Once upon a time, the British pound was a much more important currency, globally, than it is today.

But it obviously hasn't disappeared.

As long as you're living your life in terms of purchasing-power-parity (PPP), how much does it matter to you if your home currency is no longer the world's return currency if that change happens slowly over decades?

Well, we can look at the Big Mac Index:

https://www.economist.com/news/2020/01/ ... -mac-index

"A Big Mac costs £3.39 in Britain and US$5.67 in the United States. The implied exchange rate is 0.60. The difference between this and the actual exchange rate, 0.77, suggests the British pound is 22.2% undervalued."


It doesn't seem to me like the loss of the GBP's world reserve currency status has hurt the average Brit much.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: Gold - How Do Investors Model Price?

Post by beehivehave » Thu Jan 16, 2020 3:45 pm

Mickstick wrote:
Thu Jan 16, 2020 3:30 pm
watchnerd wrote:
Thu Jan 16, 2020 1:37 pm
Mickstick wrote:
Thu Jan 16, 2020 12:13 pm

The price is whatever the market determines it to be at the moment. I expect fiat currencies to weaken relative to it in the long run while accepting the volatility along the way.
Since you expect fiat currencies to weak relative to gold, what's the annual rate of return you're predicting for that?
Hard to say because fear of instability is definitely a large factor in the year to year gains (or losses). Generally I'd expect it to increase in price relative to inflation. I wouldn't be surprised if the the US dollar is no longer the dominant world reserve currency at some point, which is why I think it's prudent to have an asset not denominated in dollars. For me it is necessary diversification.
What point is "some point"?
The US dollar remains far and away the dominant currency, about 62% of the world reserves. This has remained remarkably stable since about 1990, when it was less than 50%.
Second place is the euro, about 20%. Third, the yen at 5%.

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 3:52 pm

beehivehave wrote:
Thu Jan 16, 2020 3:45 pm

What point is "some point"?
The US dollar remains far and away the dominant currency, about 62% of the world reserves. This has remained remarkably stable since about 1990, when it was less than 50%.
Second place is the euro, about 20%. Third, the yen at 5%.
Also, what does it matter?

Reserve currency status has impact on current account imbalances and gives the dominant power extra muscle to weaponize the currency.

But does it matter much for the quality of life for the people inside the country using it?

I have a lot of friends and coworkers from different nations, from all over the world, and they'll complain about all sorts of things both here and in their home country, but I've never in my life heard one of them say, "Wow, life would be so much better if XXX was a reserve currency."
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

sean.mcgrath
Posts: 358
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 4:40 pm

grayfox wrote:
Thu Jan 16, 2020 3:39 pm
I have a 5 Norwegian Kroner and 1 Kroner. They have holes.

2013 1.00 NOK kr = 0.18 USD today 11 cents lost -39%
2012 1.00 CAD $ = 1.00 USD today 77 cents lost -23%
2012 1.00 SGD $ = 0.79 USD today 74 cents lost -6% OK that didn't lose so much.

All the currencies that I am familiar have higher inflation than the U.S. so they lose value faster.
And some of them have de-valued at various times.

None of them were a good store of Value.
Ah, let's try a bit longer. Here's the list of currencies the OECD tracks, starting with 1990 (first year we can include the Euro). The US clocks in at 19 or so. The "holey" Krone hanging tough. Oh, and let's do it properly, this is value vs. CPI -- measuring value vs. the USD adds some statistical issues.

And if the Fed didn't devalue the USD after the First World war, you'll need to explain the concept. Not to mention Nixon, who halved it, I think.


LOCATION Value drop
JPN -10%
CHE -24%
FRA -35%
FIN -36%
SWE -37%
DEU -39%
DNK -40%
CAN -41%
IRL -42%
BEL -42%
G-7 -42%
NZL -42%
LUX -43%
NLD -43%
EA19 -43%
AUT -43%
NOR -45%
USA -48%
GBR -48%
ITA -49%
AUS -49%
ESP -53%
PRT -56%
OECD -58%
KOR -61%
OECDE -68%
ISL -68%
ISR -70%
GRC -71%
CHL -77%
ZAF -83%
IND -86%
IDN -91%
MEX -91%
HUN -92%
COL -93%
CRI -93%
POL -94%
SVN -97%
TUR -100%
BRA -100%

sean.mcgrath
Posts: 358
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 4:50 pm

grayfox wrote:
Thu Jan 16, 2020 3:39 pm
sean.mcgrath wrote:
Thu Jan 16, 2020 1:11 pm
grayfox wrote:
Thu Jan 16, 2020 8:47 am
In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Wow. What makes a currency "crap?"

The Norwegian krone, Canadian/Aussie/Singapore dollars? And, of course, the Cayman Island dollar has a pretty good history. :D
I have a 5 Norwegian Kroner and 1 Kroner. They have holes.

2013 1.00 NOK kr = 0.18 USD today 11 cents lost -39%
2012 1.00 CAD $ = 1.00 USD today 77 cents lost -23%
2012 1.00 SGD $ = 0.79 USD today 74 cents lost -6% OK that didn't lose so much.

All the currencies that I am familiar have higher inflation than the U.S. so they lose value faster.
And some of them have de-valued at various times.

None of them were a good store of Value.
And here's the buying power of the USD since inception (assuming it's all the same dog). If we had been having the discussion in 1910, I would have agreed with you. You are basically arguing that, since the USD has been stable since 2000, we should trust it forever.

Buying power of one U.S. dollar compared to 1775 Continental currency
Year Equivalent buying power
1775 $1.00
1780 $0.59
1790 $0.89
1800 $0.64
1810 $0.66
1820 $0.69
1830 $0.88
1840 $0.94
1850 $1.03
1860 $0.97
1870 $0.62
1880 $0.79
1890 $0.89
1900 $0.96
1910 $0.85
1920 $0.39
1930 $0.47
1940 $0.56
1950 $0.33
1960 $0.26
1970 $0.20
1980 $0.10
1990 $0.06
2000 $0.05
2007 $0.04
2008 $0.04
2009 $0.04
2010 $0.035
2011 $0.034
2012 $0.03

sean.mcgrath
Posts: 358
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 4:55 pm

watchnerd wrote:
Thu Jan 16, 2020 3:52 pm
beehivehave wrote:
Thu Jan 16, 2020 3:45 pm

What point is "some point"?
The US dollar remains far and away the dominant currency, about 62% of the world reserves. This has remained remarkably stable since about 1990, when it was less than 50%.
Second place is the euro, about 20%. Third, the yen at 5%.
Also, what does it matter?

Reserve currency status has impact on current account imbalances and gives the dominant power extra muscle to weaponize the currency.

But does it matter much for the quality of life for the people inside the country using it?

I have a lot of friends and coworkers from different nations, from all over the world, and they'll complain about all sorts of things both here and in their home country, but I've never in my life heard one of them say, "Wow, life would be so much better if XXX was a reserve currency."
You don't have many Chinese friends. :wink:

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 5:50 pm

sean.mcgrath wrote:
Thu Jan 16, 2020 4:55 pm

You don't have many Chinese friends. :wink:
I do, but not going to touch that one for political reasons.
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

User avatar
Topic Author
watchnerd
Posts: 5981
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 5:52 pm

sean.mcgrath wrote:
Thu Jan 16, 2020 4:50 pm
grayfox wrote:
Thu Jan 16, 2020 3:39 pm
sean.mcgrath wrote:
Thu Jan 16, 2020 1:11 pm
grayfox wrote:
Thu Jan 16, 2020 8:47 am
In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Wow. What makes a currency "crap?"

The Norwegian krone, Canadian/Aussie/Singapore dollars? And, of course, the Cayman Island dollar has a pretty good history. :D
I have a 5 Norwegian Kroner and 1 Kroner. They have holes.

2013 1.00 NOK kr = 0.18 USD today 11 cents lost -39%
2012 1.00 CAD $ = 1.00 USD today 77 cents lost -23%
2012 1.00 SGD $ = 0.79 USD today 74 cents lost -6% OK that didn't lose so much.

All the currencies that I am familiar have higher inflation than the U.S. so they lose value faster.
And some of them have de-valued at various times.

None of them were a good store of Value.
And here's the buying power of the USD since inception (assuming it's all the same dog). If we had been having the discussion in 1910, I would have agreed with you. You are basically arguing that, since the USD has been stable since 2000, we should trust it forever.

Buying power of one U.S. dollar compared to 1775 Continental currency
Year Equivalent buying power
1775 $1.00
1780 $0.59
1790 $0.89
1800 $0.64
1810 $0.66
1820 $0.69
1830 $0.88
1840 $0.94
1850 $1.03
1860 $0.97
1870 $0.62
1880 $0.79
1890 $0.89
1900 $0.96
1910 $0.85
1920 $0.39
1930 $0.47
1940 $0.56
1950 $0.33
1960 $0.26
1970 $0.20
1980 $0.10
1990 $0.06
2000 $0.05
2007 $0.04
2008 $0.04
2009 $0.04
2010 $0.035
2011 $0.034
2012 $0.03
Are you saying a currency should have 0 inflation over a multi century history?

Would you prefer deflation?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

sean.mcgrath
Posts: 358
Joined: Thu Dec 29, 2016 6:15 am
Location: US in NL

Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 5:56 pm

watchnerd wrote:
Thu Jan 16, 2020 5:52 pm
sean.mcgrath wrote:
Thu Jan 16, 2020 4:50 pm
grayfox wrote:
Thu Jan 16, 2020 3:39 pm
sean.mcgrath wrote:
Thu Jan 16, 2020 1:11 pm
grayfox wrote:
Thu Jan 16, 2020 8:47 am
In my opinion, the only good currencies in the World are U.S. Dollar, Swiss Frank, Great British Pound, Japanese Yen and Euro. The rest are crap. And I am not so sure about the Euro.
Wow. What makes a currency "crap?"

The Norwegian krone, Canadian/Aussie/Singapore dollars? And, of course, the Cayman Island dollar has a pretty good history. :D
I have a 5 Norwegian Kroner and 1 Kroner. They have holes.

2013 1.00 NOK kr = 0.18 USD today 11 cents lost -39%
2012 1.00 CAD $ = 1.00 USD today 77 cents lost -23%
2012 1.00 SGD $ = 0.79 USD today 74 cents lost -6% OK that didn't lose so much.

All the currencies that I am familiar have higher inflation than the U.S. so they lose value faster.
And some of them have de-valued at various times.

None of them were a good store of Value.
And here's the buying power of the USD since inception (assuming it's all the same dog). If we had been having the discussion in 1910, I would have agreed with you. You are basically arguing that, since the USD has been stable since 2000, we should trust it forever.

Buying power of one U.S. dollar compared to 1775 Continental currency
Year Equivalent buying power
1775 $1.00
1780 $0.59
1790 $0.89
1800 $0.64
1810 $0.66
1820 $0.69
1830 $0.88
1840 $0.94
1850 $1.03
1860 $0.97
1870 $0.62
1880 $0.79
1890 $0.89
1900 $0.96
1910 $0.85
1920 $0.39
1930 $0.47
1940 $0.56
1950 $0.33
1960 $0.26
1970 $0.20
1980 $0.10
1990 $0.06
2000 $0.05
2007 $0.04
2008 $0.04
2009 $0.04
2010 $0.035
2011 $0.034
2012 $0.03
Are you saying a currency should have 0 inflation over a multi century history?

Would you prefer deflation?
That is an interesting debate. There are schools for 0 and schools for 1-2%; I don't think there are many schools above 2%. I was thinking the same: if 1.5% is ideal, who hit it perfectly? But, looking at grayfox's quote above he went with price stability, so I accepted that. Personally, I have no idea and could accept any gold standard between 0 and 2%. Nonetheless, choose what you may, I am interested in grayfox's "crap currency" definition -- and am willing to bet that the Krone and Cayman Island dollar don't meet it. :-)

Edit: given the start of this thread, gold standard was a poor choice of words. Can we agree on "any blue ribbon standard?" :-)

Locked