Gold - How Do Investors Model Price?

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watchnerd
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 5:59 pm

sean.mcgrath wrote:
Thu Jan 16, 2020 5:56 pm


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. :-)
The line between 0 and deflation is a thin one.

And it is believed by mainstream economists that mild inflation increases productivity and forces investment, while deflation leads to cash hoarding.

Personally, I'm not in the 0% inflation camp.
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Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 6:02 pm

watchnerd wrote:
Thu Jan 16, 2020 5:59 pm
sean.mcgrath wrote:
Thu Jan 16, 2020 5:56 pm


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. :-)
The line between 0 and deflation is a thin one.

And it is believed by mainstream economists that mild inflation increases productivity and forces investment, while deflation leads to cash hoarding.

Personally, I'm not in the 0% inflation camp.
I just don't know enough. I suspect the argument against 0 - 1% is not that strong; but I will stick with a belief in a consensus <= 2%.

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Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 6:07 pm

watchnerd wrote:
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.
Hopefully not a double post.

Yep, I veered pretty far off topic for that one (as has this thread, for good and for bad). I couldn't help the remark, as someone from Seattle with "RSU + ESPP" should be aware of how hot that topic is. :wink:

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Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Thu Jan 16, 2020 6:28 pm

grayfox wrote:
Thu Jan 16, 2020 3:39 pm

I have a 5 Norwegian Kroner and 1 Kroner. They have holes.
Usually I am quite disciplined about keeping a thread on topic. However, given the extent to which this one has veered (or possibly due to a very nice port that I have unbottled tonight with my wife), one more side comment:

US currency is the only one I am aware of (and I travel widely), that give no useful information in digits on their coins. "One cent and five cents" are bad enough if you don't read English. But really: "one dime????" In fact, my French and Latin are not terrible, but really??? And "quarter dollar." Most countries put a 1, 5, 10 and 25 on their coins ("most" meaning "all but one," as far as I am aware). And you are complaining about holes in coins? :confused

Pu239
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Re: Gold - How Do Investors Model Price?

Post by Pu239 » Thu Jan 16, 2020 6:35 pm

watchnerd wrote:
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.
All good points. I'm glad you have figured it out.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

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Re: Gold - How Do Investors Model Price?

Post by halfnine » Thu Jan 16, 2020 6:37 pm

watchnerd wrote:
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.
It would appear to me that going back about 85 years the GBP is worth about 25% of what it once was to the USD and British inflation has made goods and services now more than 3 times more expensive relative to inflation in the USA. So, the Brits must have had some really cheap Big Macs back then.

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Re: Gold - How Do Investors Model Price?

Post by Workable Goblin » Thu Jan 16, 2020 6:51 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.
Neither has any other kind of currency. Or are you not aware of the history of, for example, the Roman coinage? It shows that merely being on a “metal standard” in no way prevents the government from redefining money at will, claims to the contrary notwithstanding.

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Re: Gold - How Do Investors Model Price?

Post by columbia » Thu Jan 16, 2020 9:02 pm

If someone wants a gold standard, inherent in that is that the number of, for example, dollars must be fixed for a certain weight of gold. That correct?

If so, it would seem that they are ceding the value of their gold to the government. Is that what they really want?
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: Gold - How Do Investors Model Price?

Post by index2max » Thu Jan 16, 2020 9:32 pm

columbia wrote:
Thu Jan 16, 2020 9:02 pm
If someone wants a gold standard, inherent in that is that the number of, for example, dollars must be fixed for a certain weight of gold. That correct?

If so, it would seem that they are ceding the value of their gold to the government. Is that what they really want?
I think if you show people the ballooning governmental and individual debt alone and explain that a gold standard doesn't allow governments to keep printing money (because it's tied to something physical), they'd be willing to switch. Most people have common sense, it's just that we've just been trained to not think about these things.

The melt-up can't continue forever...

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Thu Jan 16, 2020 10:07 pm

columbia wrote:
Thu Jan 16, 2020 9:02 pm
If someone wants a gold standard, inherent in that is that the number of, for example, dollars must be fixed for a certain weight of gold. That correct?

If so, it would seem that they are ceding the value of their gold to the government. Is that what they really want?
Yes, gold must be fixed.

I don't understand why gold bugs would want that, as the government could set it to something far bellow free market.

They could, for example, say "Oh, gold is so volatile, we'll take the average over the last 20 years." So make it $500 or something.
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Re: Gold - How Do Investors Model Price?

Post by Smith1776 » Thu Jan 16, 2020 10:14 pm

Just curious. How many people here consider a gold bug to simply be anyone who owns gold?

I consider gold bugs to be people with extremely heavy weighting’s like 50% or more, and who can’t help but lament about the government all the time. These investors typically top it off with gold mining stocks, too.

Someone with a modest allocation (like the 10% I mentioned) as a portfolio diversifier doesn’t seem all that “gold buggish” to me.

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Re: Gold - How Do Investors Model Price?

Post by Pu239 » Thu Jan 16, 2020 10:31 pm

watchnerd wrote:
Thu Jan 16, 2020 10:07 pm
columbia wrote:
Thu Jan 16, 2020 9:02 pm
If someone wants a gold standard, inherent in that is that the number of, for example, dollars must be fixed for a certain weight of gold. That correct?

If so, it would seem that they are ceding the value of their gold to the government. Is that what they really want?
Yes, gold must be fixed.

I don't understand why gold bugs would want that, as the government could set it to something far bellow free market.

They could, for example, say "Oh, gold is so volatile, we'll take the average over the last 20 years." So make it $500 or something.
If gold is set below market value and freely exchangeable with paper, gold would flow out of that country like a river and reserves would be depleted. The UK made that mistake returning to the gold standard after WWI.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

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Re: Gold - How Do Investors Model Price?

Post by halfnine » Fri Jan 17, 2020 5:17 am

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.
Based on this analogy then from the perspective of a Japanese investor the USD is crap. In my lifetime the USD is only now worth around 30% of the yen. Even more relevant gold would have provided a Japanese investor a safe haven during the financial crisis while the USD would have only increased losses.

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Re: Gold - How Do Investors Model Price?

Post by halfnine » Fri Jan 17, 2020 5:26 am

Pu239 wrote:
Thu Jan 16, 2020 10:31 pm
watchnerd wrote:
Thu Jan 16, 2020 10:07 pm
columbia wrote:
Thu Jan 16, 2020 9:02 pm
If someone wants a gold standard, inherent in that is that the number of, for example, dollars must be fixed for a certain weight of gold. That correct?

If so, it would seem that they are ceding the value of their gold to the government. Is that what they really want?
Yes, gold must be fixed.

I don't understand why gold bugs would want that, as the government could set it to something far bellow free market.

They could, for example, say "Oh, gold is so volatile, we'll take the average over the last 20 years." So make it $500 or something.
If gold is set below market value and freely exchangeable with paper, gold would flow out of that country like a river and reserves would be depleted. The UK made that mistake returning to the gold standard after WWI.
To add on to this I do not see how having currencies backed by gold would work in the modern world. This would by default force currencies to be fixed to each other. At some point an adjustment would have to be made adjusting the currency to gold ratio and resetting the currency exchange rates between countries. This may have been feasible 100 years ago but this would be way to easy to arbitrage in the modern world.

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Re: Gold - How Do Investors Model Price?

Post by grayfox » Fri Jan 17, 2020 6:27 am

It looks like they are all crap. The best is Japanese Yen which only lost -10% in 30 years.

Shouldn't a good store of value be more or less 0%?

You left out one country--Goldlandia, the only country that still uses Gold coins as money.
Where would they be on the chart?
sean.mcgrath wrote:
Thu Jan 16, 2020 4:40 pm

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%
Last edited by grayfox on Fri Jan 17, 2020 6:47 am, edited 1 time in total.
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Re: Gold - How Do Investors Model Price?

Post by grayfox » Fri Jan 17, 2020 6:43 am

sean.mcgrath wrote:
Thu Jan 16, 2020 6:28 pm
grayfox wrote:
Thu Jan 16, 2020 3:39 pm

I have a 5 Norwegian Kroner and 1 Kroner. They have holes.
Usually I am quite disciplined about keeping a thread on topic. However, given the extent to which this one has veered (or possibly due to a very nice port that I have unbottled tonight with my wife), one more side comment:

US currency is the only one I am aware of (and I travel widely), that give no useful information in digits on their coins. "One cent and five cents" are bad enough if you don't read English. But really: "one dime????" In fact, my French and Latin are not terrible, but really??? And "quarter dollar." Most countries put a 1, 5, 10 and 25 on their coins ("most" meaning "all but one," as far as I am aware). And you are complaining about holes in coins? :confused
Disme or dime meant a tenth. Are you asking how U.S. money is denominated? I will explain.

U.S. Money was set up as a decimal system. There are five units, and the unit of account is the dollar. The units are eagle 10x, dollar 1x, disme or dime 1/10, cent 1/100, mille 1/1000. There can be whole, halves and quarters of each unit. So the coins were:

eagle $10, half eagle $5, quarter eagle $2.50 (Gold)
dollar $1, half dollar $0.50, quarter dollar $0.25 (Silver)
dime $0.10, half dime $0.05 (Silver)
cent $0.01, half cent $0.005 (Copper)
mille $0.001

After they discovered Gold in California in 1849, they added the Double Eagle $20
Milles were mostly used for calculating taxes. They were sometimes made from a cheap material, even paper. Gas stations often show prices down to one mille. 29-9/10 cents per gallon

This was set up in 1792 when the British were using pounds, 20 shilling per pound, 12 pence per shilling. The decimal system was simpler.

Most Americans are probably unaware of eagles and milles.
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Re: Gold - How Do Investors Model Price?

Post by grayfox » Fri Jan 17, 2020 7:17 am

watchnerd wrote:
Thu Jan 16, 2020 10:07 pm
columbia wrote:
Thu Jan 16, 2020 9:02 pm
If someone wants a gold standard, inherent in that is that the number of, for example, dollars must be fixed for a certain weight of gold. That correct?

If so, it would seem that they are ceding the value of their gold to the government. Is that what they really want?
Yes, gold must be fixed.

I don't understand why gold bugs would want that, as the government could set it to something far bellow free market.

They could, for example, say "Oh, gold is so volatile, we'll take the average over the last 20 years." So make it $500 or something.
It doesn't matter what how many dollars are set to how much Gold. It could be $20, $200, $2000, $20,000.
Suppose they set $20 = 1 troy ounce of Gold. The price in dollars of everything would adjust to reflect that.
The studio apartment in LA that today rents for $1500 per month would rent for $20 per month.
The dollar number doesn't matter, only that the apartment is costing you 1 troy ounce of Gold per month.

There would be no market setting the exchange of Gold and dollars. No need for it. The exchange rate is fixed by law at $20 for one ounce.
But there would still be a market for houses, cars, labor, etc. which would find the market price of everything in dollars/Gold.
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Re: Gold - How Do Investors Model Price?

Post by Mickstick » Fri Jan 17, 2020 9:51 am

watchnerd wrote:
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.
I'll admit I don't know how entrenched the GBP was when it was the reserve currency but I think the macroeconomic landscape has changed since then. There is a boost to the demand of US dollars due to the trade of oil and the need to stock pile dollars if you want to purchase it. The US benefits greatly due to the petrodollar system. A large chunk of demand for dollars would evaporate if this were to change.
"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

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Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Fri Jan 17, 2020 11:34 am

grayfox wrote:
Fri Jan 17, 2020 6:43 am
sean.mcgrath wrote:
Thu Jan 16, 2020 6:28 pm
grayfox wrote:
Thu Jan 16, 2020 3:39 pm

I have a 5 Norwegian Kroner and 1 Kroner. They have holes.
Usually I am quite disciplined about keeping a thread on topic. However, given the extent to which this one has veered (or possibly due to a very nice port that I have unbottled tonight with my wife), one more side comment:

US currency is the only one I am aware of (and I travel widely), that give no useful information in digits on their coins. "One cent and five cents" are bad enough if you don't read English. But really: "one dime????" In fact, my French and Latin are not terrible, but really??? And "quarter dollar." Most countries put a 1, 5, 10 and 25 on their coins ("most" meaning "all but one," as far as I am aware). And you are complaining about holes in coins? :confused
Disme or dime meant a tenth. Are you asking how U.S. money is denominated? I will explain.
Nope, I did not ask that. I am pointing out that your critique of holes in Krone is ironic, given that the US has some of the most poorly designed coins in the world (from a functional perspective). Coins should be intuitive to use, even for foreigners and non-native speakers. They should not require a travel guide to decode. The value should be in digits.

I just looked in my box of money for trips (about thirty currencies, although some are no longer valid). Since the UK improved theirs, the US coins are the only ones that fail the "require a travel guide" test. 8-)

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 11:37 am

Smith1776 wrote:
Thu Jan 16, 2020 10:14 pm
I consider gold bugs to be people with extremely heavy weighting’s like 50% or more, and who can’t help but lament about the government all the time. These investors typically top it off with gold mining stocks, too.

Someone with a modest allocation (like the 10% I mentioned) as a portfolio diversifier doesn’t seem all that “gold buggish” to me.
If that's the definition, I've never met anyone who is that high.

25%, like Harry Browne, fits the bill in my books because 25% into any asset means it's no longer a diversifier, but a core holding.
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 11:41 am

Mickstick wrote:
Fri Jan 17, 2020 9:51 am


I'll admit I don't know how entrenched the GBP was when it was the reserve currency but I think the macroeconomic landscape has changed since then. There is a boost to the demand of US dollars due to the trade of oil and the need to stock pile dollars if you want to purchase it. The US benefits greatly due to the petrodollar system. A large chunk of demand for dollars would evaporate if this were to change.
Which means the value of the dollar would decline, which would upset countries that export to the US as their goods would cost more, and make US exporters happy, as it would make US exports cheaper.

US Treasuries would have to charge a bit more in interest...but lots of people think Treasuries are 'too low yield' anyway.

Are you so sure losing reserve currency status is a catastrophe you need to protect against?
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Pu239
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Re: Gold - How Do Investors Model Price?

Post by Pu239 » Fri Jan 17, 2020 12:06 pm

grayfox wrote:
Fri Jan 17, 2020 6:43 am

After they discovered Gold in California in 1849,
Actually 1848 with the main rush beginning in 1849. Those earliest seekers did all right.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot

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Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Fri Jan 17, 2020 12:52 pm

grayfox wrote:
Fri Jan 17, 2020 6:27 am
It looks like they are all crap. The best is Japanese Yen which only lost -10% in 30 years.

Shouldn't a good store of value be more or less 0%?

You left out one country--Goldlandia, the only country that still uses Gold coins as money.
Where would they be on the chart?
Well, if you saw watchnerd's reply, he would like a currency to lose 1-2% per year. That is a matter of opinion -- my personal view is any currency that is between 0 and 3% loss p.a. over a reasonably long period can be considered "stable."

EDIT: I just checked what "my view" would come out to for my list: the line would be drawn at -46%. I didn't intend it to work out that way, but that would put the USD (just barely) out of stable range.


I don't know how gold has performed over that time frame. What is the result?

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Re: Gold - How Do Investors Model Price?

Post by index2max » Fri Jan 17, 2020 1:07 pm

Another advantage to allocating some of your emergency cash savings to gold:

When you store money in an interest-bearing deposit account, you will pay income tax on your interest, even if it’s not keeping your head above real inflation.

:idea: Inflation is effectively a hidden tax.

When you buy and hold a precious physical commodity like gold or silver yourself, you only pay need to pay a capital gains tax once it’s sold. Unfortunately that tax is currently based on your nominal capital gains, which over the long-run should only be inflationary.

Seems like the tax code seriously disincentives storing of wealth, even though that’s what investments are built from.

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 1:14 pm

index2max wrote:
Fri Jan 17, 2020 1:07 pm
Another advantage to allocating some of your emergency cash savings to gold:

When you store money in an interest-bearing deposit account, you will pay income tax on your interest, even if it’s not keeping your head above real inflation.

:idea: Inflation is effectively a hidden tax.

When you buy and hold a precious physical commodity like gold or silver yourself, you only pay need to pay a capital gains tax once it’s sold. Unfortunately that tax is currently based on your nominal capital gains, which over the long-run should only be inflationary.

Seems like the tax code seriously disincentives storing of wealth, even though that’s what investments are built from.
Sorry, this is not correct.

Gold is not taxed as either capital gains or ordinary income.

It's taxed at the 'collectibles' tax rate -- 28%.

If you're retired, that could be quite a bit higher than the rest of your income taxes.
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Re: Gold - How Do Investors Model Price?

Post by Mickstick » Fri Jan 17, 2020 2:28 pm

watchnerd wrote:
Fri Jan 17, 2020 11:41 am
Mickstick wrote:
Fri Jan 17, 2020 9:51 am


I'll admit I don't know how entrenched the GBP was when it was the reserve currency but I think the macroeconomic landscape has changed since then. There is a boost to the demand of US dollars due to the trade of oil and the need to stock pile dollars if you want to purchase it. The US benefits greatly due to the petrodollar system. A large chunk of demand for dollars would evaporate if this were to change.
Which means the value of the dollar would decline, which would upset countries that export to the US as their goods would cost more, and make US exporters happy, as it would make US exports cheaper.

US Treasuries would have to charge a bit more in interest...but lots of people think Treasuries are 'too low yield' anyway.

Are you so sure losing reserve currency status is a catastrophe you need to protect against?
I think you are oversimplifying the effect of what would happen if confidence in the dollar was lost. Savings in US dollar denominated assets would get crushed. A change in trade balance is not going to help those who are holding cash or bonds because they were "safe". The lead up to why
another reserve currency might be considered would also lead to devaluation. I don't think the increasing debt will continue forever and I don't think lawmakers will have the courage to make budget cuts. With increasing interest payments I don't think the US will be able to pay its debts without monetizing it or defaulting on it.
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 2:48 pm

Mickstick wrote:
Fri Jan 17, 2020 2:28 pm


I think you are oversimplifying the effect of what would happen if confidence in the dollar was lost. Savings in US dollar denominated assets would get crushed. A change in trade balance is not going to help those who are holding cash or bonds because they were "safe". The lead up to why
another reserve currency might be considered would also lead to devaluation. I don't think the increasing debt will continue forever and I don't think lawmakers will have the courage to make budget cuts. With increasing interest payments I don't think the US will be able to pay its debts without monetizing it or defaulting on it.
What do you mean by "lost"? It's not a binary effect.

As for the debt/interest rates/etc, it's the same situation for every other currency in the world that isn't the global reserve currency.
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Re: Gold - How Do Investors Model Price?

Post by beehivehave » Fri Jan 17, 2020 2:53 pm

Smith1776 wrote:
Thu Jan 16, 2020 10:14 pm
Just curious. How many people here consider a gold bug to simply be anyone who owns gold?

I consider gold bugs to be people with extremely heavy weighting’s like 50% or more, and who can’t help but lament about the government all the time. These investors typically top it off with gold mining stocks, too.

Someone with a modest allocation (like the 10% I mentioned) as a portfolio diversifier doesn’t seem all that “gold buggish” to me.
You can argue for Investment in gold as a hedge against inflation. I don't think it's much of a diversifier - if you want to diversify, buy a diverse basket of commodities, not just one.
Gold bugs, on the other hand, are those who long to go back to the "gold standard and are continually announcing that all "fiat" money is about to collapse. Most are driven by ideological belief in conspiracies, nostalgia for the so-called "good old days" and ignorance of economic history, but don't have the courage of their convictions, so they don't invest anywhere near 50%.

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Re: Gold - How Do Investors Model Price?

Post by index2max » Fri Jan 17, 2020 2:53 pm

watchnerd wrote:
Fri Jan 17, 2020 1:14 pm
index2max wrote:
Fri Jan 17, 2020 1:07 pm
Another advantage to allocating some of your emergency cash savings to gold:

When you store money in an interest-bearing deposit account, you will pay income tax on your interest, even if it’s not keeping your head above real inflation.

:idea: Inflation is effectively a hidden tax.

When you buy and hold a precious physical commodity like gold or silver yourself, you only pay need to pay a capital gains tax once it’s sold. Unfortunately that tax is currently based on your nominal capital gains, which over the long-run should only be inflationary.

Seems like the tax code seriously disincentives storing of wealth, even though that’s what investments are built from.
Sorry, this is not correct.

Gold is not taxed as either capital gains or ordinary income.

It's taxed at the 'collectibles' tax rate -- 28%.

If you're retired, that could be quite a bit higher than the rest of your income taxes.
It’s taxed at one’s marginal rate up to 28%. Apparently it is a capital gains tax.

https://www.investopedia.com/articles/p ... tments.asp

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 3:06 pm

index2max wrote:
Fri Jan 17, 2020 2:53 pm


It’s taxed at one’s marginal rate up to 28%. Apparently it is a capital gains tax.

https://www.investopedia.com/articles/p ... tments.asp

Right...but you can't get the 'normal' long term capital gains tax of 15%.

https://www.investopedia.com/articles/p ... -taxed.asp

"Collectibles are taxed pretty heavily. The capital gains tax on your net gain from selling a collectible is 28%. Provided you hold the piece for more than one year, you won't pay more than that amount – even if you're in a high tax bracket. However, this level of tax is considerably higher than the tax rate on most net capital gains, which is an average of 15% for most taxpayers, according to the IRS."

Additionally, none of it is tax-exempt / tax-sheltered.

Whereas you can buy Treasuries / Munis to save on taxes.

I'm pretty sure the general recommendation for electronic gold (ETFs) is to hold them in a tax-deferred account for all of these reasons.
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Re: Gold - How Do Investors Model Price?

Post by Mickstick » Fri Jan 17, 2020 4:05 pm

watchnerd wrote:
Fri Jan 17, 2020 2:48 pm
Mickstick wrote:
Fri Jan 17, 2020 2:28 pm


I think you are oversimplifying the effect of what would happen if confidence in the dollar was lost. Savings in US dollar denominated assets would get crushed. A change in trade balance is not going to help those who are holding cash or bonds because they were "safe". The lead up to why
another reserve currency might be considered would also lead to devaluation. I don't think the increasing debt will continue forever and I don't think lawmakers will have the courage to make budget cuts. With increasing interest payments I don't think the US will be able to pay its debts without monetizing it or defaulting on it.
What do you mean by "lost"? It's not a binary effect.

As for the debt/interest rates/etc, it's the same situation for every other currency in the world that isn't the global reserve currency.
I agree that it's not binary but I think it will be significant if the petrodollar ends up being supplanted.

I agree most other currencies are also garbage and some will probably end up being a canary in the coal mine personally I think the Yen is in the most jeopardy.
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 4:32 pm

Mickstick wrote:
Fri Jan 17, 2020 4:05 pm

I agree that it's not binary but I think it will be significant if the petrodollar ends up being supplanted.

I agree most other currencies are also garbage and some will probably end up being a canary in the coal mine personally I think the Yen is in the most jeopardy.
So here is the other part of hedging that scenario:

1. How much do you think the dollar will devalue by / gold will go up by?

2. How much gold do you need to hedge the decline of the dollar value of all your liquid holdings?

3. Is gold more cost effective than buying normal currency hedges?
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Re: Gold - How Do Investors Model Price?

Post by Workable Goblin » Fri Jan 17, 2020 4:44 pm

index2max wrote:
Fri Jan 17, 2020 1:07 pm
Another advantage to allocating some of your emergency cash savings to gold:

When you store money in an interest-bearing deposit account, you will pay income tax on your interest, even if it’s not keeping your head above real inflation.

:idea: Inflation is effectively a hidden tax.

When you buy and hold a precious physical commodity like gold or silver yourself, you only pay need to pay a capital gains tax once it’s sold. Unfortunately that tax is currently based on your nominal capital gains, which over the long-run should only be inflationary.

Seems like the tax code seriously disincentives storing of wealth, even though that’s what investments are built from.
It disincentivizes unproductively sticking your wealth in a vault, yes, because that does very little for anyone.

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 4:55 pm

Workable Goblin wrote:
Fri Jan 17, 2020 4:44 pm

It disincentivizes unproductively sticking your wealth in a vault, yes, because that does very little for anyone.
+1

Hence my point that money != wealth creation.

I'm pro modest inflation for this reason. A mild decay of money forces capital investment into wealth creation.

Hoarding is a non-entrepreneur, non-capitalist, non-investor way to look at money.

It is, however, probably how rent-seekers view money.
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Re: Gold - How Do Investors Model Price?

Post by index2max » Fri Jan 17, 2020 4:58 pm

Workable Goblin wrote:
Fri Jan 17, 2020 4:44 pm
index2max wrote:
Fri Jan 17, 2020 1:07 pm
Another advantage to allocating some of your emergency cash savings to gold:

When you store money in an interest-bearing deposit account, you will pay income tax on your interest, even if it’s not keeping your head above real inflation.

:idea: Inflation is effectively a hidden tax.

When you buy and hold a precious physical commodity like gold or silver yourself, you only pay need to pay a capital gains tax once it’s sold. Unfortunately that tax is currently based on your nominal capital gains, which over the long-run should only be inflationary.

Seems like the tax code seriously disincentives storing of wealth, even though that’s what investments are built from.
It disincentivizes unproductively sticking your wealth in a vault, yes, because that does very little for anyone.
What's "unproductive"? Who defines that? What gives them the right to interfere in an individual's personal finance? Isn't teaching your children to save money for a rainy day a good idea?

Is needless consumerism more "productive" in the long-run?
watchnerd wrote:
Fri Jan 17, 2020 4:55 pm
Workable Goblin wrote:
Fri Jan 17, 2020 4:44 pm

It disincentivizes unproductively sticking your wealth in a vault, yes, because that does very little for anyone.
+1

Hence my point that money != wealth creation.

I'm pro modest inflation for this reason. A mild decay of money forces capital investment into wealth creation.

Hoarding is a non-entrepreneur, non-capitalist, non-investor way to look at money.

It is, however, probably how rent-seekers view money.
Like loaning your money to WeWork? :?

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 5:03 pm

index2max wrote:
Fri Jan 17, 2020 4:58 pm

Like loaning your money to WeWork? :?

Venture Capitalists take calculated risks.

Some of them are bad investments. That one was really bad.

What does that have to do with gold?
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Fri Jan 17, 2020 5:15 pm

Workable Goblin wrote:
Fri Jan 17, 2020 5:10 pm


And consumer spending is certainly more economically useful than someone sticking large amounts of money in a mattress or buying gold or even leaving it in a bank account. But you missed the point I was making, which is that the laws are structured to favor investing in riskier but more societally beneficial investments like stocks over simply leaving money in a savings account.
It needn't be stocks; even savings accounts are more socially productive than gold.

The 'old' banking model (which I think credit unions still follow), was to pay interest on savings deposit, loan it out for for mortgages, business loans, etc at a higher rate, and make profit on the spread.

Do gold advocates think this is bad for society?

Banks can't make loans to grow the economy from physical assets like gold sitting in a safety deposit box. Those assets have sucked capital out of the economy and deprive the money supply machine of fuel.

Full disclosure: I have collectible watches. They have also sucked capital out of the system and sit in a safe. But it's a hobby because I like watches, not an investment strategy or part of my AA
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Re: Gold - How Do Investors Model Price?

Post by sean.mcgrath » Fri Jan 17, 2020 7:07 pm

watchnerd wrote:
Fri Jan 17, 2020 4:55 pm

I'm pro modest inflation for this reason. A mild decay of money forces capital investment into wealth creation.

Hoarding is a non-entrepreneur, non-capitalist, non-investor way to look at money.

It is, however, probably how rent-seekers view money.
I understand this has become a fashionable argument, but are you aware of any actual data/studies supporting it? To be honest, it makes no sense to me: I have yet to meet a potential entrepreneur who said, "well, I was going to let my money just sit there, but once I learned that I would lose 1.5% per year, I decided to go for being fabulously rich instead." I have also never met an inherited wealth person who said, "well, I was content to let my money just retain its value, but now that I've learned it loses 1.5% per year, I have decided to let it work for me."

Yellen is smarter than I am, so I will reserve judgement. But I would love to see something data-driven, instead of hard to credit stories.

I do buy some of the traditional arguments for moderate inflation in a growing economy (easier to have flexible wages, for example), but this one really comes across as kooky.

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Re: Gold - How Do Investors Model Price?

Post by gougou » Fri Jan 17, 2020 7:45 pm

I don’t understand all the discussion about whether using gold as currency is “bad for society” or whether it causes deflation. The question should be, do we have another choice in the long term? What is a better store of value/universal currency if tomorrow (or 300 years later) the US is no longer dominant?

And if gold becomes the reserve currency, there are some models such as the Quantity Theory of Money to evaluate its price. Because a certain amount of money is needed for the economy to function, and there is a certain amount of gold that exist, you can divide those to get the price of gold. It is the same reason any currency such as USD or Bitcoin has a price.

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Re: Gold - How Do Investors Model Price?

Post by Pu239 » Fri Jan 17, 2020 9:25 pm

index2max wrote:
Fri Jan 17, 2020 9:10 pm
The only things out there that aren't as overvalued are.. precious metals.
The point of this thread is how does one know that? Gold doesn't look especially cheap to me right now, nor does palladium and especially rhodium (platinum perhaps). But these are just personal SWAGs. Why buy more?
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Re: Gold - How Do Investors Model Price?

Post by index2max » Fri Jan 17, 2020 9:34 pm

Pu239 wrote:
Fri Jan 17, 2020 9:25 pm
index2max wrote:
Fri Jan 17, 2020 9:10 pm
The only things out there that aren't as overvalued are.. precious metals.
The point of this thread is how does one know that? Gold doesn't look especially cheap to me right now, nor does palladium and especially rhodium (platinum perhaps). But these are just personal SWAGs. Why buy more?
Just looking at the dollar value of gold in 2011, it was up to $1,900 an ounce. The thing is, there was a lot of fear and uncertainty about how the 2008 recession was going to turn out. So speculation definitely contributed to it's all-time high price.

Another thing to consider, which I mentioned earlier, is that traders working for wall street banks have been caught manipulating the price of precious metals in paper form (that are more easily tradeable).

https://www.justice.gov/opa/pr/current- ... nipulation

This makes it difficult to know exactly what the intrinsic value of any precious metal really is when you price it in dollars. I wish I had a better answer than going off a gut feeling that the real return on precious metals is zero percent because of fiat currency devaluation, but all I can work off of is intuition. Of course, someone like Jack Bogle would say you should have data to back up your common-sense reasoning, but I don't. Unfortunately we don't have a free market that let's participants really determine what the fair price for just about anything is. All I can do is shrug my shoulders.

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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sat Jan 18, 2020 12:43 am

Pu239 wrote:
Fri Jan 17, 2020 9:25 pm
index2max wrote:
Fri Jan 17, 2020 9:10 pm
The only things out there that aren't as overvalued are.. precious metals.
The point of this thread is how does one know that? Gold doesn't look especially cheap to me right now, nor does palladium and especially rhodium (platinum perhaps). But these are just personal SWAGs. Why buy more?
The interesting question for those who say something is overvalued / undervalued:

What's the neutral / fair price?

If gold is undervalued right now....by how much? 10%? 50%? 500%?

Without a number, it just sounds like "I think it will go up somehow"
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Re: Gold - How Do Investors Model Price?

Post by LadyGeek » Sat Jan 18, 2020 4:21 pm

I removed a contentious interchange regarding the rights of a person to spend money. The discussion was derailed. As a reminder, see: General Etiquette
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sat Jan 18, 2020 4:47 pm

sean.mcgrath wrote:
Fri Jan 17, 2020 7:07 pm

Yellen is smarter than I am, so I will reserve judgement. But I would love to see something data-driven, instead of hard to credit stories.
I haven't read Yellen's paper on the topic. When I do, I'll report back.
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Re: Gold - How Do Investors Model Price?

Post by 7eight9 » Sat Jan 18, 2020 5:24 pm

I don't know how to model price. However, if memory serves correct, seven ounces of gold was what it took to get out of Vietnam circa 1975. Should we adjust that for inflation or is gold stable? I don't know. But a certain amount of gold (per person) seems prudent.
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sat Jan 18, 2020 6:03 pm

7eight9 wrote:
Sat Jan 18, 2020 5:24 pm
I don't know how to model price. However, if memory serves correct, seven ounces of gold was what it took to get out of Vietnam circa 1975. Should we adjust that for inflation or is gold stable? I don't know. But a certain amount of gold (per person) seems prudent.
Do you live someplace where fleeing a civil war is a likely event?

I don't think I do.
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Re: Gold - How Do Investors Model Price?

Post by 7eight9 » Sat Jan 18, 2020 7:11 pm

watchnerd wrote:
Sat Jan 18, 2020 6:03 pm
7eight9 wrote:
Sat Jan 18, 2020 5:24 pm
I don't know how to model price. However, if memory serves correct, seven ounces of gold was what it took to get out of Vietnam circa 1975. Should we adjust that for inflation or is gold stable? I don't know. But a certain amount of gold (per person) seems prudent.
Do you live someplace where fleeing a civil war is a likely event?

I don't think I do.
Maybe. I'm not sure how to answer your question without sounding political. That said, there are certainly parts of this country that want nothing to do with your stated location (Seattle, WA) and wouldn't necessarily mind seceding.

Isn't the insurance (7 oz Au per person) cheap enough to book the risk?
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sat Jan 18, 2020 8:31 pm

7eight9 wrote:
Sat Jan 18, 2020 7:11 pm


Isn't the insurance (7 oz Au per person) cheap enough to book the risk?
Whatever answer one might give to that question, I think that's a completely different scenario than holding gold as part of one's AA in a substantial portion (say >5% of portfolio).

This falls in the "zombie apocalypse" scenario, which is impossible to price and a totally separate use from role vis a vis stocks, bonds.
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Re: Gold - How Do Investors Model Price?

Post by 7eight9 » Sat Jan 18, 2020 8:39 pm

watchnerd wrote:
Sat Jan 18, 2020 8:31 pm
7eight9 wrote:
Sat Jan 18, 2020 7:11 pm


Isn't the insurance (7 oz Au per person) cheap enough to book the risk?
Whatever answer one might give to that question, I think that's a completely different scenario than holding gold as part of one's AA in a substantial portion (say >5% of portfolio).

This falls in the "zombie apocalypse" scenario, which is impossible to price and a totally separate use from role vis a vis stocks, bonds.
Was Vietnam circa 1975 a "zombie apocalypse" scenario? In my opinion it wasn't. You may differ in opinion.
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Re: Gold - How Do Investors Model Price?

Post by watchnerd » Sat Jan 18, 2020 8:46 pm

7eight9 wrote:
Sat Jan 18, 2020 8:39 pm

Was Vietnam circa 1975 a "zombie apocalypse" scenario? In my opinion it wasn't. You may differ in opinion.
We've been throwing that term around in this thread to refer to any "end of civilization" scenario.

I'm not commenting on whether it's valid or not.

I'm saying that's completely outside the realm of normal asset allocation discussion and impossible to price because anything that saves your life is priceless.
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