Gold [why is it dropping?]

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boogiehead
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Gold [why is it dropping?]

Post by boogiehead »

Can someone explain to me why gold is dropping like stocks right now?
InvestingGeek
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Re: Gold [why is it dropping?]

Post by InvestingGeek »

boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Demand and supply? We're seeing a demand shock around the world. In the near term, people are going to be buying food and paying their bills, not getting more jewelry. Try walking into a store with a lump of gold.
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Forester
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Re: Gold [why is it dropping?]

Post by Forester »

boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Big day for US dollar. btw there's already a couple of gold threads.
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SmileyFace
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Re: Gold [why is it dropping?]

Post by SmileyFace »

Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
InvestingGeek
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Re: Gold [why is it dropping?]

Post by InvestingGeek »

DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Yes, gold is the bitcoin of olden times and also survives on the greater fool model like it's new-age counterpart, except it has at least some rudimentary utility as adornment.
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gmaynardkrebs
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Re: Gold [why is it dropping?]

Post by gmaynardkrebs »

DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold is an inflation hedge. Cash is a deflation hedge. Which would you rather own now?
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SmileyFace
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Re: Gold [why is it dropping?]

Post by SmileyFace »

gmaynardkrebs wrote: Wed Mar 18, 2020 3:38 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold is an inflation hedge. Cash is a deflation hedge. Which would you rather own now?
I've never held gold.
How and Why does it hedge against inflation? I thought I read backtesting has proven this not the case (and even if so - who knows if it will hedge against inflation in the future).
I may just not understand it - thought it stopped hedging ever since it wasn't a backstop for US cash.
(I suppose what you are saying is it is dropping in price purely BECAUSE people "think" it is an inflation hedge - and certainly no one is worried about inflation right now).
GRP
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Re: Gold [why is it dropping?]

Post by GRP »

It’s only a hedge against strong inflation.

If inflation is mild, stocks and even cash are better protection.

Gold shows its strength as an inflation shield only when it becomes more than a minor irritant.
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timboktoo
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Re: Gold [why is it dropping?]

Post by timboktoo »

All market prices are based on a combination of supply, demand and currency fluctuations.

I have never been able to understand gold. Right now, I would think that fear would be going up and that gold prices would go up with it. But once again, I'm wrong. Is it just the dollar strengthening? I don't care enough to Google it :)

- Tim
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Forester
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Re: Gold [why is it dropping?]

Post by Forester »

DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold still backs the US dollar implicitly.
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willthrill81
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Re: Gold [why is it dropping?]

Post by willthrill81 »

For all of the 'gold is speculation' arguments, it's beaten both stocks and bonds since the year 2000.

I would never advise anyone to hold too much gold, but 10-20% might be worthwhile.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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gmaynardkrebs
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Re: Gold [why is it dropping?]

Post by gmaynardkrebs »

DaftInvestor wrote: Wed Mar 18, 2020 3:40 pm
gmaynardkrebs wrote: Wed Mar 18, 2020 3:38 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold is an inflation hedge. Cash is a deflation hedge. Which would you rather own now?
I've never held gold.
How and Why does it hedge against inflation? I thought I read backtesting has proven this not the case (and even if so - who knows if it will hedge against inflation in the future).
I may just not understand it - thought it stopped hedging ever since it wasn't a backstop for US cash.
(I suppose what you are saying is it is dropping in price purely BECAUSE people "think" it is an inflation hedge - and certainly no one is worried about inflation right now).
It's a good inflation hedge because the supply of gold, unlike the supply of fiat currency, is fixed.
Mickstick
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Re: Gold [why is it dropping?]

Post by Mickstick »

boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Gold is basically negatively correlated with strength of the US dollar. People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
"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
NotTooDeepLearning
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Re: Gold [why is it dropping?]

Post by NotTooDeepLearning »

Panic selling. It's a liquid asset people are selling to get desperately needed cash. It did the same thing in 2008 where it declined from February through October.
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willthrill81
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Re: Gold [why is it dropping?]

Post by willthrill81 »

Mickstick wrote: Wed Mar 18, 2020 4:09 pm
boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Gold is basically negatively correlated with strength of the US dollar. People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
Excellent point.

I actually think that gold may be set to have a very good year.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
InvestingGeek
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Re: Gold [why is it dropping?]

Post by InvestingGeek »

Mickstick wrote: Wed Mar 18, 2020 4:09 pm
boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
T?he problem we have is not supply on the shelves, it's demand shock given social restrictions and jobs uncertainty. The problem is deflation or the US dollar becoming even more of a safe haven than it is today.
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Re: Gold [why is it dropping?]

Post by Northern Flicker »

Nobody really knows, but some ideas would be: gold does well when interest rates are low, and interest rates rose the last two days; liquidity is in short supply, which may drive sales of gold to raise cash; gold is a type of commodity, and commodities in general are dropping.
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Re: Gold [why is it dropping?]

Post by InvestingGeek »

Forester wrote: Wed Mar 18, 2020 3:48 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold still backs the US dollar implicitly.
Can you explain what this means? AFAIK, gold today is just a commodity like potatoes or any other material good. And demand for all commodities is dropping for obvious reasons.
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Re: Gold [why is it dropping?]

Post by Mickstick »

InvestingGeek wrote: Wed Mar 18, 2020 4:20 pm
Mickstick wrote: Wed Mar 18, 2020 4:09 pm
boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
T?he problem we have is not supply on the shelves, it's demand shock given social restrictions and jobs uncertainty. The problem is deflation or the US dollar becoming even more of a safe haven than it is today.
Where I live there is a problem with stock on the shelves. We have 400 people lining up at grocery stores every day at 5:30 in the morning.
"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
Thesaints
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Re: Gold [why is it dropping?]

Post by Thesaints »

boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Its specific weight is a whopping 19.3 g/cm^3 !!
Mickstick wrote: Wed Mar 18, 2020 4:09 pm Gold is basically negatively correlated with strength of the US dollar.
Only because its price is primarily quoted in dollars. It is an optical illusion.
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Re: Gold [why is it dropping?]

Post by Mickstick »

Thesaints wrote: Wed Mar 18, 2020 4:47 pm
Mickstick wrote: Wed Mar 18, 2020 4:09 pm Gold is basically negatively correlated with strength of the US dollar.
Only because its price is primarily quoted in dollars. It is an optical illusion.
How is it an optical illusion lol? If the price goes down it means you can get more gold/dollar or vice versa.
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7eight9
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Re: Gold [why is it dropping?]

Post by 7eight9 »

Article is from February 28 ---

Stock Rout Is Now So Severe Even Gold Hurts as Margin Calls Seen
Gold’s performed well in February as the risk-off mood swept markets, but its rally hit a wall this week despite the brutal rout in global equities driven by the coronavirus crisis. Standard Chartered Bank says that may come down to investors selling the metal to cover margin calls.
While bullion has rallied amid both risk-on and risk-off episodes, it could suffer from further profit-taking as it’s used to meet the calls amid the sharp declines in stocks, precious metals analyst Suki Cooper said in a note. Still, barring near-term profit-taking, risks for prices remain to the upside amid expectations that the Federal Reserve will cut interest rates twice this year.

https://www.bloomberg.com/news/articles ... ities-rout
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InvestingGeek
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Re: Gold [why is it dropping?]

Post by InvestingGeek »

Mickstick wrote: Wed Mar 18, 2020 4:41 pm
InvestingGeek wrote: Wed Mar 18, 2020 4:20 pm
Mickstick wrote: Wed Mar 18, 2020 4:09 pm
boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
T?he problem we have is not supply on the shelves, it's demand shock given social restrictions and jobs uncertainty. The problem is deflation or the US dollar becoming even more of a safe haven than it is today.
Where I live there is a problem with stock on the shelves. We have 400 people lining up at grocery stores every day at 5:30 in the morning.
Strange. Here, we have fully stocked shelves going a-begging for lack of buyer traffic. Ordering online at local stores, everything is available as much as you need (except some random panic-buying victims like TP or water of course).
Mickstick
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Re: Gold [why is it dropping?]

Post by Mickstick »

InvestingGeek wrote: Wed Mar 18, 2020 5:00 pm
Mickstick wrote: Wed Mar 18, 2020 4:41 pm
InvestingGeek wrote: Wed Mar 18, 2020 4:20 pm
Mickstick wrote: Wed Mar 18, 2020 4:09 pm
boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
T?he problem we have is not supply on the shelves, it's demand shock given social restrictions and jobs uncertainty. The problem is deflation or the US dollar becoming even more of a safe haven than it is today.
Where I live there is a problem with stock on the shelves. We have 400 people lining up at grocery stores every day at 5:30 in the morning.
Strange. Here, we have fully stocked shelves going a-begging for lack of buyer traffic. Ordering online at local stores, everything is available as much as you need (except some random panic-buying victims like TP or water of course).
Sounds like you have an arbitrage opportunity! Although you would probably get blacklisted for "Price Gouging".

Our grocery stores have quotas for how much stuff you can buy of things that are flying off faster than they can restock.
"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
mickroark
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Re: Gold [why is it dropping?]

Post by mickroark »

Margin calls by brokers. Ones on margin have to sell all assets to pay the broker. :mrgreen:
Thesaints
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Re: Gold [why is it dropping?]

Post by Thesaints »

Mickstick wrote: Wed Mar 18, 2020 4:56 pm How is it an optical illusion lol? If the price goes down it means you can get more gold/dollar or vice versa.
Yes, but it is not linked to any economic fundamentals. If dollar depreciates, you need more dollars to buy gold at first, but it doesn't say anyhting on the strength of gold itself. Its value could very well plunge right after.
Patzer
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Re: Gold [why is it dropping?]

Post by Patzer »

boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Russia has a lot of gold reserves, which they are selling to fund their oil war with Saudi Arabia.
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Re: Gold [why is it dropping?]

Post by Seasonal »

Lots of people are facing diminished earnings or unemployment. Lots of companies are being shutdown or are facing diminished demand. Many don't have sufficient cash reserves to last for the months this is expected to continue. Therefore they need cash and are selling whatever they can, especially things that can be sold quickly, including gold.
tech123
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Re: Gold [why is it dropping?]

Post by tech123 »

Gold is dropping since funds need to sell gold to cover their positions.
Mickstick
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Re: Gold [why is it dropping?]

Post by Mickstick »

Thesaints wrote: Wed Mar 18, 2020 5:18 pm
Mickstick wrote: Wed Mar 18, 2020 4:56 pm How is it an optical illusion lol? If the price goes down it means you can get more gold/dollar or vice versa.
Yes, but it is not linked to any economic fundamentals. If dollar depreciates, you need more dollars to buy gold at first, but it doesn't say anyhting on the strength of gold itself. Its value could very well plunge right after.
Ah I see correlation but not causation in your opinion?
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alpenglow
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Re: Gold [why is it dropping?]

Post by alpenglow »

Mickstick wrote: Wed Mar 18, 2020 5:01 pm
InvestingGeek wrote: Wed Mar 18, 2020 5:00 pm
Mickstick wrote: Wed Mar 18, 2020 4:41 pm
InvestingGeek wrote: Wed Mar 18, 2020 4:20 pm
Mickstick wrote: Wed Mar 18, 2020 4:09 pm
People believe the US dollar is a safe haven. I think they will be wrong once they start helicoptering thousands of dollars to everyone. It's not going to help stock replenish on the shelves, just add to bidding the price of what's left up.
T?he problem we have is not supply on the shelves, it's demand shock given social restrictions and jobs uncertainty. The problem is deflation or the US dollar becoming even more of a safe haven than it is today.
Where I live there is a problem with stock on the shelves. We have 400 people lining up at grocery stores every day at 5:30 in the morning.
Strange. Here, we have fully stocked shelves going a-begging for lack of buyer traffic. Ordering online at local stores, everything is available as much as you need (except some random panic-buying victims like TP or water of course).
Sounds like you have an arbitrage opportunity! Although you would probably get blacklisted for "Price Gouging".

Our grocery stores have quotas for how much stuff you can buy of things that are flying off faster than they can restock.
Wow. Where are you? I'm in NY Metro with no supply problems right now.
Mickstick
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Re: Gold [why is it dropping?]

Post by Mickstick »

alpenglow wrote: Wed Mar 18, 2020 7:35 pm
Mickstick wrote: Wed Mar 18, 2020 5:01 pm
InvestingGeek wrote: Wed Mar 18, 2020 5:00 pm
Mickstick wrote: Wed Mar 18, 2020 4:41 pm
InvestingGeek wrote: Wed Mar 18, 2020 4:20 pm

T?he problem we have is not supply on the shelves, it's demand shock given social restrictions and jobs uncertainty. The problem is deflation or the US dollar becoming even more of a safe haven than it is today.
Where I live there is a problem with stock on the shelves. We have 400 people lining up at grocery stores every day at 5:30 in the morning.
Strange. Here, we have fully stocked shelves going a-begging for lack of buyer traffic. Ordering online at local stores, everything is available as much as you need (except some random panic-buying victims like TP or water of course).
Sounds like you have an arbitrage opportunity! Although you would probably get blacklisted for "Price Gouging".

Our grocery stores have quotas for how much stuff you can buy of things that are flying off faster than they can restock.
Wow. Where are you? I'm in NY Metro with no supply problems right now.
Upstate NY.
"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
Lee_WSP
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Re: Gold [why is it dropping?]

Post by Lee_WSP »

Seems like a serious question, so I'll answer.

Gold was already peaking before the crash.

Gold is not considered a "safety" asset. It is an alternative asset. You cannot physically hold a gold ETF. It really has no value other than to be there as a source of value in case you need it.

As such a source of value, it's going to be tapped to satisfy margin calls. Next up are LTT's.

So, there you have it, people are selling it because it retained most of it's value from the peak and selling stocks would be much worse.
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Phineas J. Whoopee
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Re: Gold [why is it dropping?]

Post by Phineas J. Whoopee »

A true gold believer, I won't use that other b-word, would explain gold has exactly the same value today it has always had for thousands of years. It's the US dollar that is being irrationally bid up.

I am not a true gold believer.

PJW
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Re: Gold [why is it dropping?]

Post by Lee_WSP »

Phineas J. Whoopee wrote: Thu Mar 19, 2020 12:24 am A true gold believer, I won't use that other b-word, would explain gold has exactly the same value today it has always had for thousands of years. It's the US dollar that is being irrationally bid up.

I am not a true gold believer.

PJW
Well, they're not mutually exclusive ideas. The problem is finding someone to trade you those same goods and services in exchange for gold.
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Phineas J. Whoopee
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Re: Gold [why is it dropping?]

Post by Phineas J. Whoopee »

Forester wrote: Wed Mar 18, 2020 3:48 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold still backs the US dollar implicitly.
Are you talking about the gold in the United States Bullion Depository, within the perimeter of Fort Knox? Most of the gold in the vault of the New York Fed belongs to others, who have entrusted it to us for safekeeping. So far we've earned their trust.

One can't show up at the Treasury Department with tens of thousands in hundred dollar bills and be given gold for them. It used to be the case that foreign countries could, but Nixon ended that in 1971, for good, bad, or indifferent reasons. Anyhow we are, as the saying goes, where we are. The Bretton Woods system has ended.

Will you please elaborate on your statement that gold still backs the US dollar implicitly?

Thanks in advance.

PJW
AlohaJoe
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Re: Gold [why is it dropping?]

Post by AlohaJoe »

GRP wrote: Wed Mar 18, 2020 3:45 pm It’s only a hedge against strong inflation.

If inflation is mild, stocks and even cash are better protection.

Gold shows its strength as an inflation shield only when it becomes more than a minor irritant.
This isn't true. Erb & Harvey's The Golden Dilemma paper destroyed this myth.

They examine how gold performed as a "strong inflation" hedge in Brazil in 1980: it failed, losing 70% of its value.
Imagine a Brazilian investor in 1980 who possessed perfect foresight of how Brazilian inflation would unfold between 1980 and 2000. Table 4 shows that from 1980 to 2000, Brazil had an average annual inflation rate of about 250%, the currency was renamed and devalued numerous times, and the nominal price of gold rose substantially in Brazilian currency terms. Yet, using the IMF’s measure of Brazilian inflation, the real price of gold fell by about 70% between 1980 and 2000. Broadly and illustratively speaking, this means that by the year 2000, an ounce of gold had 30% of its 1980 inflation- adjusted purchasing power.
This is exactly what you'd expect:
gold’s inflation-adjusted return should be roughly the same regardless of the currency in which gold is bought or sold. “Even though countries, such as U.S. or Brazil, may experience very different inflation experiences their real gold return experiences will probably be similar,” Erb and Harvey wrote. “There is no reason to expect that the real return will be positive when a specific country experiences hyperinflation.”
I mean, I suppose you could argue that "losing 70% is better than losing 100% in hyperinflation" but...I'm not sure that's really what anyone has in mind when they buy gold.
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Forester
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Re: Gold [why is it dropping?]

Post by Forester »

InvestingGeek wrote: Wed Mar 18, 2020 4:24 pm
Forester wrote: Wed Mar 18, 2020 3:48 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold still backs the US dollar implicitly.
Can you explain what this means? AFAIK, gold today is just a commodity like potatoes or any other material good. And demand for all commodities is dropping for obvious reasons.
The Fed is capitalised by its 8 thousand tons of gold (via Treasury gold certificates). Faith in the US dollar rests on a few major things, one of these being the solvency of the Fed.
TJSI
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Re: Gold [why is it dropping?]

Post by TJSI »

I think gold has been replaced by toilet paper. People use to buy gold when there was fear running wild. Now they buy toilet paper.
I am trying to think of a good name for a portfolio that has 25% toilet paper. Suggestions?
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Re: Gold [why is it dropping?]

Post by InvestingGeek »

Forester wrote: Thu Mar 19, 2020 2:48 am
InvestingGeek wrote: Wed Mar 18, 2020 4:24 pm
Forester wrote: Wed Mar 18, 2020 3:48 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold still backs the US dollar implicitly.
Can you explain what this means? AFAIK, gold today is just a commodity like potatoes or any other material good. And demand for all commodities is dropping for obvious reasons.
The Fed is capitalised by its 8 thousand tons of gold (via Treasury gold certificates). Faith in the US dollar rests on a few major things, one of these being the solvency of the Fed.
https://www.federalreserve.gov/faqs/doe ... d-gold.htm
The Federal Reserve does not own gold.

The Gold Reserve Act of 1934 required the Federal Reserve System to transfer ownership of all of its gold to the Department of the Treasury. In exchange, the Secretary of the Treasury issued gold certificates to the Federal Reserve for the amount of gold transferred at the then-applicable statutory price for gold held by the Treasury.

Gold certificates are denominated in U.S. dollars. Their value is based on the statutory price for gold at the time the certificates are issued. Gold certificates do not give the Federal Reserve any right to redeem the certificates for gold.

The statutory price of gold is set by law. It does not fluctuate with the market price of gold and has been constant at $42 2/9, or $42.2222, per fine troy ounce since 1973.
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Forester
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Re: Gold [why is it dropping?]

Post by Forester »

Yes but ultimately the Treasury would use its gold to support the dollar that's what the certificates imply.
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hagridshut
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Re: Gold [why is it dropping?]

Post by hagridshut »

InvestingGeek wrote: Wed Mar 18, 2020 3:32 pm
boogiehead wrote: Wed Mar 18, 2020 3:12 pm Can someone explain to me why gold is dropping like stocks right now?
Demand and supply? We're seeing a demand shock around the world. In the near term, people are going to be buying food and paying their bills, not getting more jewelry. Try walking into a store with a lump of gold.
I agree completely. You can't buy food, or pay rent, or settle up on taxes with gold.

When people are feeling short of Cash, Gold is Trash!
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mickroark
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Re: Gold [why is it dropping?]

Post by mickroark »

Investing Geek would you quit spreading fake news dude. :confused

I just sold my gold and deposited the cash in my bank. All with the click of a mouse. Then I went out and bought groceries with it. :sharebeer
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Re: Gold [why is it dropping?]

Post by ScubaHogg »

AlohaJoe wrote: Thu Mar 19, 2020 12:51 am
I mean, I suppose you could argue that "losing 70% is better than losing 100% in hyperinflation" but...I'm not sure that's really what anyone has in mind when they buy gold.
But don't you have to look at it in a global context? After a big run up in the 70s, gold dropped worldwide in the 80s. That coincided with hyperinflation in Brazil. So of course gold lost some purchasing power in Brazil in the 80s, it did everywhere in the world (or virtually everywhere). Did anyone serious ever say that gold would never, ever, ever lose real purchasing power relative to it's all time highs? This claim by Erb & Harvey, as I understand it, seems like a real strawman to me. As a regular poster on Bogleheads like to ask, why did the authors start and end in 1980 and 2000? They should do gold in Brazil 1970 to today and see how it compares.

As an aside, having 30% of your money is a lot, lot better than having 0%. It's even more of a difference going from 0->30% than 30->100%.
“Unexpected Returns dominate the Expected Returns” - Ken French
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Phineas J. Whoopee
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Re: Gold [why is it dropping?]

Post by Phineas J. Whoopee »

Forester wrote: Thu Mar 19, 2020 2:48 am
InvestingGeek wrote: Wed Mar 18, 2020 4:24 pm
Forester wrote: Wed Mar 18, 2020 3:48 pm
DaftInvestor wrote: Wed Mar 18, 2020 3:35 pm Gold is pure speculation - I stopped trying to figure it out years ago.
In this case - folks probably are just dumping it right now for real money.
Gold still backs the US dollar implicitly.
Can you explain what this means? AFAIK, gold today is just a commodity like potatoes or any other material good. And demand for all commodities is dropping for obvious reasons.
The Fed is capitalised by its 8 thousand tons of gold (via Treasury gold certificates). Faith in the US dollar rests on a few major things, one of these being the solvency of the Fed.
That's entirely incorrect.

The Fed owns no gold. There are no Treasury gold certificates. The Treasury owns somewhat more than 4,500 tonnes, but it isn't used to back anything anymore. Nixon zapped those goings on in 1971.

The Fed operates independently. Its assets are US Treasury securities, and sometimes, like now, other fixed income securities. It can't legally buy them in the primary market, per Congress which created the Fed and to whom the Fed reports.

The New York Fed's vault holds gold, but mostly it belongs to other countries which have entrusted it to the US for safekeeping. So far we've earned their trust. The remainder is the Treasury's.

There is no question about the Fed's solvency, as in it might not be able to pay its obligations. It makes so much profit every year, after subtracting its own operating expenses, that it donates the entirety to the Treasury.

One can't show up at the Federal Reserve building in Washington, or even the New York Fed, with piles and piles of hundred dollar bills and exchange them for gold.

Gold has nothing to do with anything going on at the Fed.


PJW
Last edited by Phineas J. Whoopee on Thu Mar 19, 2020 8:56 pm, edited 2 times in total.
Willmunny
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Re: Gold [why is it dropping?]

Post by Willmunny »

Phineas J. Whoopee wrote: Thu Mar 19, 2020 8:16 pm
That's entirely incorrect.

The Fed owns no gold. There are no Treasury gold certificates. The Treasury owns somewhat more than 4,500 tonnes, but it isn't used to back anything anymore. Nixon zapped those goings on in 1971.
Are you sure about that? The fed publishes on its website certain data. Take a look at Item six at the bottom of this page of its website. It lists collateral held against federal reserve notes. Below is a copy and paste from that portion of the website with my bold/italics on one line added

https://www.federalreserve.gov/releases/h41/current/

Collateral Held against Federal Reserve Notes: Federal Reserve Agents' Accounts
Millions of dollars
Federal Reserve notes and collateral Wednesday
Mar 18, 2020

Federal Reserve notes outstanding 1,967,167
Less: Notes held by F.R. Banks not subject to collateralization 172,142
Federal Reserve notes to be collateralized 1,795,024
Collateral held against Federal Reserve notes 1,795,024
Gold certificate account 11,037
Special drawing rights certificate account 5,200
U.S. Treasury, agency debt, and mortgage-backed securities pledged (1,2) 1,778,788
Other assets pledged 0
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Phineas J. Whoopee
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Re: Gold [why is it dropping?]

Post by Phineas J. Whoopee »

Willmunny wrote: Thu Mar 19, 2020 8:52 pm
Phineas J. Whoopee wrote: Thu Mar 19, 2020 8:16 pm
That's entirely incorrect.

The Fed owns no gold. There are no Treasury gold certificates. The Treasury owns somewhat more than 4,500 tonnes, but it isn't used to back anything anymore. Nixon zapped those goings on in 1971.
Are you sure about that? The fed publishes on its website certain data. Take a look at Item six at the bottom of this page of its website. It lists collateral held against federal reserve notes. Below is a copy and paste from that portion of the website with my bold/italics on one line added

https://www.federalreserve.gov/releases/h41/current/

Collateral Held against Federal Reserve Notes: Federal Reserve Agents' Accounts
Millions of dollars
Federal Reserve notes and collateral Wednesday
Mar 18, 2020

Federal Reserve notes outstanding 1,967,167
Less: Notes held by F.R. Banks not subject to collateralization 172,142
Federal Reserve notes to be collateralized 1,795,024
Collateral held against Federal Reserve notes 1,795,024
Gold certificate account 11,037
Special drawing rights certificate account 5,200
U.S. Treasury, agency debt, and mortgage-backed securities pledged (1,2) 1,778,788
Other assets pledged 0
OK, fair enough, thanks for the reference. I'll go back and strike through my post.

PJW
AlohaJoe
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Re: Gold [why is it dropping?]

Post by AlohaJoe »

ScubaHogg wrote: Thu Mar 19, 2020 3:15 pmwhy did the authors start and end in 1980 and 2000?
Because that's when the strong inflation was. That's what "hedge" means. You don't get to back to random points of time beforehand and include the gains there as part of the "hedge".
ScubaHogg wrote: Thu Mar 19, 2020 3:15 pm But don't you have to look at it in a global context?
Again, that's not what hedge means. Hedge means it works. It didn't work. It didn't hedge.

Gold may be something but it clearly isn't a hedge against inflation.
lws6772
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Re: Gold [why is it dropping?]

Post by lws6772 »

TJSI wrote: Thu Mar 19, 2020 5:22 am I think gold has been replaced by toilet paper. People use to buy gold when there was fear running wild. Now they buy toilet paper.
I am trying to think of a good name for a portfolio that has 25% toilet paper. Suggestions?
Lifecycle Wipe? Or does that sound like crap? :twisted:
So many fish, so little time.
ScubaHogg
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Re: Gold [why is it dropping?]

Post by ScubaHogg »

AlohaJoe wrote: Thu Mar 19, 2020 9:01 pm
ScubaHogg wrote: Thu Mar 19, 2020 3:15 pmwhy did the authors start and end in 1980 and 2000?
Because that's when the strong inflation was. That's what "hedge" means. You don't get to back to random points of time beforehand and include the gains there as part of the "hedge".
ScubaHogg wrote: Thu Mar 19, 2020 3:15 pm But don't you have to look at it in a global context?
Again, that's not what hedge means. Hedge means it works. It didn't work. It didn't hedge.
I don’t think I follow. Even by the authors estimates it maintained 30% of its purchasing power, which is a heck of a lot better than losing 100%. So if hedge means perfectly offset at all times, then there probably isn’t an inflation hedge of any kind.

Picking random points of time is exactly what the authors did by picking Brazil in the 1980-2000 period. Why not Weimar Germany? Why not Zimbabwe in 2007-2008? Why not Venezuela in the last few years?

Finding a data point doesn’t doesn’t definitively prove the case.
“Unexpected Returns dominate the Expected Returns” - Ken French
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