Gold continues to soar!

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willthrill81
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Re: Gold continues to soar!

Post by willthrill81 »

market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
So, to make sure that I'm interpreting this correctly, your model would say that gold's price moves inversely to long-term real interest rates?
“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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market timer
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Re: Gold continues to soar!

Post by market timer »

willthrill81 wrote: Thu Aug 13, 2020 11:12 pm
market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
So, to make sure that I'm interpreting this correctly, your model would say that gold's price moves inversely to long-term real interest rates?
Yes, not a new idea. Well-known economists like Larry Summers, Paul Krugman, and Tyler Cowen have written about this relationship, as I mention here: viewtopic.php?p=5351854#p5351854
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Re: Gold continues to soar!

Post by JBTX »

market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
How exactly do people hoard oil? People consume oil.

With growth in alternative energy, and a seemingly increasingly technologically efficient Fracking, much of it sitting idle at the moment, it is hard to see how oil goes through the roof anytime soon.
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Re: Gold continues to soar!

Post by market timer »

JBTX wrote: Fri Aug 14, 2020 1:14 am
market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
How exactly do people hoard oil? People consume oil.

With growth in alternative energy, and a seemingly increasingly technologically efficient Fracking, much of it sitting idle at the moment, it is hard to see how oil goes through the roof anytime soon.
There are many ways that wealth can be stored in oil. Perhaps the clearest case is if you put yourself in the shoes of Saudi Arabia considering how much oil to pump. If they pump a bit more oil, they'll receive more cash today that can be used to invest in things like Treasury bonds (they hold ~$200B). If Treasury bonds offer higher returns, there is a greater incentive to pump oil today. If Treasury offers lower returns, it makes more sense to keep the oil in the ground--effectively, pumping less is effectively storing wealth in oil.
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Re: Gold continues to soar!

Post by JBTX »

market timer wrote: Fri Aug 14, 2020 3:35 am
JBTX wrote: Fri Aug 14, 2020 1:14 am
market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
How exactly do people hoard oil? People consume oil.

With growth in alternative energy, and a seemingly increasingly technologically efficient Fracking, much of it sitting idle at the moment, it is hard to see how oil goes through the roof anytime soon.
There are many ways that wealth can be stored in oil. Perhaps the clearest case is if you put yourself in the shoes of Saudi Arabia considering how much oil to pump. If they pump a bit more oil, they'll receive more cash today that can be used to invest in things like Treasury bonds (they hold ~$200B). If Treasury bonds offer higher returns, there is a greater incentive to pump oil today. If Treasury offers lower returns, it makes more sense to keep the oil in the ground--effectively, pumping less is effectively storing wealth in oil.
Worldwide old demand, as well as targeting a profitable oil price, are the factors which determine oil supply. The treasury yield in itself has nothing to do with how much oil Saudi pumps.
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Re: Gold continues to soar!

Post by Anon9001 »

Market timer should be correct. The Gold value should not be looked in isolation. When compared to the 13 trillion negative yielding bonds it is fair value. The people in these boards screaming about over-valuation should look properly at the bond bubble. It is astonishing the amount of idiots buying these bonds assuming past is equal to future.
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Re: Gold continues to soar!

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JBTX wrote: Fri Aug 14, 2020 8:41 amWorldwide old demand, as well as targeting a profitable oil price, are the factors which determine oil supply. The treasury yield in itself has nothing to do with how much oil Saudi pumps.
From the end of World War 2 until the end of Bretton Woods in 1971, an ounce of gold bought 12 barrels of oil with hardly any variance (see below). After the US went off the gold standard in 1971, foreign holders of USD assets experienced a loss in value in gold terms over the next few years, with gold rising 400%. Oil exporters in particular, moved to reprice oil in gold terms, which was a key factor in the 1973 oil crisis, when oil spiked by 300% in USD terms.

This is all to say that oil exporters are indeed highly sensitive to the USD store of value. We had a generation with stable commodity prices following WW2 under a gold standard, which has been followed by much higher volatility under the current regime. Oil exporters are in the business of converting below-ground wealth into a more liquid and diversified form via USD bonds and other assets. As the rate of return on these assets declines, the incentive to pump is diminished. Of course, there are other important factors that primarily affect the spot price of crude. Long term crude futures, which I own as part of my portfolio, are much less volatile and are appropriate as a store of wealth. So, you could even say that I'm hoarding oil today.

Gold oil ratio
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Re: Gold continues to soar!

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Can we revisit what's baked into the price of gold? Is it correct to say gold feasibly could be pricing in:
1. An insurance premium against already negative yielding fixed income becoming more deeply negative e.g. a negative Fed Funds rate.
2. An insurance premium against a possible large upswing in inflation brought about by Fed printing.

Both negative yields and high inflation would be a loss for fixed income instruments' ability to maintain value, and would make gold more appealing.

Then again, on second thought, relating to the high inflation scenario, that might cause the Fed to raise rates, which would make gold less appealing than cash? But I thought gold is insurance against high inflation?

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Re: Gold continues to soar!

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Robot Monster wrote: Fri Aug 14, 2020 11:00 am Can we revisit what's baked into the price of gold? Is it correct to say gold feasibly could be pricing in:
1. An insurance premium against already negative yielding fixed income becoming more deeply negative e.g. a negative Fed Funds rate.
2. An insurance premium against a possible large upswing in inflation brought about by Fed printing.

Both negative yields and high inflation would be a loss for fixed income instruments' ability to maintain value, and would make gold more appealing.

Then again, on second thought, relating to the high inflation scenario, that might cause the Fed to raise rates, which would make gold less appealing than cash? But I thought gold is insurance against high inflation?

Hmnn.
Gold did quite well in the high inflationary environment of the 1970s.
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Re: Gold continues to soar!

Post by Robot Monster »

DB2 wrote: Fri Aug 14, 2020 11:04 am
Robot Monster wrote: Fri Aug 14, 2020 11:00 am Can we revisit what's baked into the price of gold? Is it correct to say gold feasibly could be pricing in:
1. An insurance premium against already negative yielding fixed income becoming more deeply negative e.g. a negative Fed Funds rate.
2. An insurance premium against a possible large upswing in inflation brought about by Fed printing.

Both negative yields and high inflation would be a loss for fixed income instruments' ability to maintain value, and would make gold more appealing.

Then again, on second thought, relating to the high inflation scenario, that might cause the Fed to raise rates, which would make gold less appealing than cash? But I thought gold is insurance against high inflation?

Hmnn.
Gold did quite well in the high inflationary environment of the 1970s.
That's true, and the Fed did very much raise rates in that period...ah, but I see years that the rate undershot inflation, which would indeed edge up gold's desirability.
Year--inflation--Fed Funds rate
1974 12.3% 8.00%
1975 6.9% 6.50%
1976 4.9% 4.75%
1977 6.7% 6.50%
https://www.thebalance.com/u-s-inflatio ... d-forecast
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Re: Gold continues to soar!

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Robot Monster wrote: Fri Aug 14, 2020 11:10 am
DB2 wrote: Fri Aug 14, 2020 11:04 am
Robot Monster wrote: Fri Aug 14, 2020 11:00 am Can we revisit what's baked into the price of gold? Is it correct to say gold feasibly could be pricing in:
1. An insurance premium against already negative yielding fixed income becoming more deeply negative e.g. a negative Fed Funds rate.
2. An insurance premium against a possible large upswing in inflation brought about by Fed printing.

Both negative yields and high inflation would be a loss for fixed income instruments' ability to maintain value, and would make gold more appealing.

Then again, on second thought, relating to the high inflation scenario, that might cause the Fed to raise rates, which would make gold less appealing than cash? But I thought gold is insurance against high inflation?

Hmnn.
Gold did quite well in the high inflationary environment of the 1970s.
That's true, and the Fed did very much raise rates in that period...ah, but I see years that the rate undershot inflation, which would indeed edge up gold's desirability.
Year--inflation--Fed Funds rate
1974 12.3% 8.00%
1975 6.9% 6.50%
1976 4.9% 4.75%
1977 6.7% 6.50%
https://www.thebalance.com/u-s-inflatio ... d-forecast
It supports market timer's assertion that gold behaves like a long-term inflation adjusted bond, moving inversely to real interest rates.
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Re: Gold continues to soar!

Post by sleepysurf »

Ben Felix does a (follow-up) deep dive into Gold on the latest Rational Reminder podcast. Interesting in that he says (~47:07 mark) Jack Bogle once advocated a 5% allocation to Gold (at least for endowments), then subsequently cooled on the idea for individual investors.

Audio podcast... https://rationalreminder.ca/podcast/111
YouTube Video version... https://www.youtube.com/watch?v=UDHJh8CXTVQ
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Re: Gold continues to soar!

Post by unclescrooge »

rockstar wrote: Thu Aug 13, 2020 8:59 pm
000 wrote: Thu Aug 13, 2020 8:18 pm
rockstar wrote: Thu Aug 13, 2020 8:16 pm
willthrill81 wrote: Thu Aug 13, 2020 7:50 pm
rockstar wrote: Thu Aug 13, 2020 7:30 pm No clue how to value gold.
I'm a bit puzzled how often that topic comes up. While many here use valuation metrics like CAPE to value stocks, they must admit that such metrics are probably only the roughest sort of guide, certainly a very imperfect future performance. Many others on the forum don't really care about such metrics at all when it comes to stocks. It's interesting then to see the number of folks who are looking for some sort of metric to gauge gold's future returns, but perhaps these are the same people who use valuation metrics for stocks. I personally see gold's long-term performance as being a 'good enough' measure of its long-term future performance, but that's just me.
Let's say I buy some tomorrow. I'll need to figure out when I'll sell it. Given that there isn't a whole lot of information about gold other than miners, I'd have to use some technical to set a floor, so that I can minimize my future losses.

What's your strategy for selling?
Why not rebalance to a fixed percentage allocation?
The problem is that gold tends to go up for a short period of time and do nothing for longer periods of time. If it drops 50%, I could wait up to a decade before recovering that loss. I'd like a good floor to prevent the long wait. Check out the charts for GLD when it dropped and look at how long it took to recover. It just returned to 2011 levels.
That's all of investing.

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Re: Gold continues to soar!

Post by JBTX »

One problem with this discussion is implies that the price of gold is primarily driven by US Federal reserve policy. However third world demand for gold, which may be driven by many things, can be a bigger factor.
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Re: Gold continues to soar!

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JBTX wrote: Fri Aug 14, 2020 3:14 pm One problem with this discussion is implies that the price of gold is primarily driven by US Federal reserve policy. However third world demand for gold, which may be driven by many things, can be a bigger factor.
That's true, but the historic impact of the U.S. economy (I know not that's not the same as the Federal Reserve, but the Fed doesn't actually set bond yields) on the rest of the world is hard to overstate. For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
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Re: Gold continues to soar!

Post by Forester »

Gold critics in a state of panic, denial and disarray as greatest investor of all time Warren Buffett backs the truck up on Barrick Gold https://www.foxbusiness.com/markets/wa ... r-the-gold
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Re: Gold continues to soar!

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Forester wrote: Fri Aug 14, 2020 5:02 pm Gold critics in a state of panic, denial and disarray as greatest investor of all time Warren Buffett backs the truck up on Barrick Gold https://www.foxbusiness.com/markets/wa ... r-the-gold
I was surprised to see that Buffett had bought Gold miner(s).
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Re: Gold continues to soar!

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Forester wrote: Fri Aug 14, 2020 5:02 pm Gold critics in a state of panic, denial and disarray as greatest investor of all time Warren Buffett backs the truck up on Barrick Gold https://www.foxbusiness.com/markets/wa ... r-the-gold
Berkshire "acquired nearly 21 million shares of Barrick Gold worth $563 million, representing 0.3% of Berkshire's holding." Interesting he choose that one. It's a top holding of Vanguard Global Capital Cycles Fund, and it's the gold miner Jim Cramer often recommends (seems he is a fan of the CEO Mark Bristow).
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Re: Gold continues to soar!

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000 wrote: Fri Aug 14, 2020 5:04 pm
Forester wrote: Fri Aug 14, 2020 5:02 pm Gold critics in a state of panic, denial and disarray as greatest investor of all time Warren Buffett backs the truck up on Barrick Gold https://www.foxbusiness.com/markets/wa ... r-the-gold
I was surprised to see that Buffett had bought Gold miner(s).
So gold is useless, but gold miners are okay? :annoyed
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Re: Gold continues to soar!

Post by rockstar »

I bought GLD today and lost 50bps by close. I went in strong with 50bps holding. I'm off to a great start.
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Re: Gold continues to soar!

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willthrill81 wrote: Fri Aug 14, 2020 3:21 pm
JBTX wrote: Fri Aug 14, 2020 3:14 pm One problem with this discussion is implies that the price of gold is primarily driven by US Federal reserve policy. However third world demand for gold, which may be driven by many things, can be a bigger factor.
That's true, but the historic impact of the U.S. economy (I know not that's not the same as the Federal Reserve, but the Fed doesn't actually set bond yields) on the rest of the world is hard to overstate. For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
I can't find an article I read maybe a decade ago by some emerging market guys on GMO that researched it and found that most of rise of gold post 2000 was due to worldwide consumption and demand trends, not US fed policy. We in our American centric world tend to exaggerate our impact. The vast majority of consumption for gold is in India and China. For many people in those counties that don't have access to financial markets gold is their only available store of value. Gold also has a tremendous cultural influence in India.

Its not to say that fed policy and worldwide monetary policy can't converge, leading to increases in third world demand, but they arent always directly linked.
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Re: Gold continues to soar!

Post by 000 »

I've been doing a little "mining" of my own and found:

Lump Sum 2.5x TIPS vs Gold

Image

DCA 2.5x TIPS vs Gold

Image
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Re: Gold continues to soar!

Post by ohboy! »

000 wrote: Fri Aug 07, 2020 4:09 pm
willthrill81 wrote: Fri Aug 07, 2020 4:01 pm
000 wrote: Fri Aug 07, 2020 3:57 pm
ohboy! wrote: Fri Aug 07, 2020 3:41 pm
JBTX wrote: Fri Aug 07, 2020 2:12 am I agree with soros when he said gold is the ultimate bubble. Its demand is almost exclusively based on the thought that it's price will go up. I just bought some more gold and silver yesterday to get my allocstion up to 5%. I had to bite my lip because the price went up a lot the day before. Nonetheless it has since gone up even more.

The thing about gold or silver is there really is no definable "value", which makes the sky the limit. people are starting to chew on the fact that we seem to have reached QE to infinity and beyond and it is feeding the narrative. Heck I don't like them as investments but I bought in.

It wouldn't shock me to see it go up to $4000-$5000. Or not. I have no clue. Just a hunch.
The demand for facebook or tesla stock isn’t much different. Its not like they pay some good dividend or likely ever will. It’s not like their profits are related to market cap.
Both of these companies have earnings. Gold has none. It is just a metal that sits there.
True, but that's more than can be said of fiat currency these days.
Agreed. Right now Gold and most fiat currencies are looking at slightly negative real returns (assuming storage cost for Gold).

However, in reference to ohboy!'s post, I was trying to communicate that the pricing models of FB or TSLA common stock incorporate an important variable (earnings from productive activity) that is not present in the pricing model of Gold. Of course either or both could be over- or under-valued.
What business is worth an investment of decades of it’s profits with no actual plan to pay investors anything directly?
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Re: Gold continues to soar!

Post by 000 »

ohboy! wrote: Sat Aug 15, 2020 12:32 am What business is worth an investment of decades of it’s profits with no actual plan to pay investors anything directly?
Profit growth?

However, I do agree their valuations are too high for my taste.
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Re: Gold continues to soar!

Post by Forester »

Due to Buffett's influence, institutional portfolios globally will allocate much more to gold (from a low base) and also to gold equities. The fundamentals matter less than the prevailing narrative. Humans are herd-like and will invent reasons for gold to go higher. Gold has had its recent price appreciation even with bonds at ATHs, a bond sell-off would get us north of $2,500.
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Re: Gold continues to soar!

Post by Robot Monster »

000 wrote: Fri Aug 14, 2020 6:55 pm I've been doing a little "mining" of my own and found:

Lump Sum 2.5x TIPS vs Gold

Image

DCA 2.5x TIPS vs Gold

Image
What's going on with the TIPS allocation? What's -150% allocation cash? Apologies if this is obvious to others.
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Re: Gold continues to soar!

Post by Oregano »

willthrill81 wrote: Thu Aug 13, 2020 11:12 pm So, to make sure that I'm interpreting this correctly, your model would say that gold's price moves inversely to long-term real interest rates?
Yes, and long-term TIPS do that, too. PIMCO 15+ Year US TIPS ETF (LTPZ) is up 20% this year. I'm not implying gold and TIPS are the same thing because they're certainly not, but a meaningful portion of their returns are from the same underlying source.
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Re: Gold continues to soar!

Post by unclescrooge »

Robot Monster wrote: Sat Aug 15, 2020 8:28 am
000 wrote: Fri Aug 14, 2020 6:55 pm I've been doing a little "mining" of my own and found:

Lump Sum 2.5x TIPS vs Gold

Image

DCA 2.5x TIPS vs Gold

Image
What's going on with the TIPS allocation? What's -150% allocation cash? Apologies if this is obvious to others.
The TIPs allocation is leveraged. The portfolio has a 250% allocation to TIPs, and is thus short 150% cash, (that's a proxy for a loan).
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Re: Gold continues to soar!

Post by finite_difference »

JBTX wrote: Fri Aug 14, 2020 8:41 am
market timer wrote: Fri Aug 14, 2020 3:35 am
JBTX wrote: Fri Aug 14, 2020 1:14 am
market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
How exactly do people hoard oil? People consume oil.

With growth in alternative energy, and a seemingly increasingly technologically efficient Fracking, much of it sitting idle at the moment, it is hard to see how oil goes through the roof anytime soon.
There are many ways that wealth can be stored in oil. Perhaps the clearest case is if you put yourself in the shoes of Saudi Arabia considering how much oil to pump. If they pump a bit more oil, they'll receive more cash today that can be used to invest in things like Treasury bonds (they hold ~$200B). If Treasury bonds offer higher returns, there is a greater incentive to pump oil today. If Treasury offers lower returns, it makes more sense to keep the oil in the ground--effectively, pumping less is effectively storing wealth in oil.
Worldwide old demand, as well as targeting a profitable oil price, are the factors which determine oil supply. The treasury yield in itself has nothing to do with how much oil Saudi pumps.
I thought market_timer made a good point here. It does make more sense to pump more oil when you can invest the money in something else that has a good return and is diversified. When the price of oil is low, pumping more oil is not just about putting others out of business because you may be able to do it cheaper than them.

Definitely a rather complex problem to model though considering the geopolitics involved. Electric cars should help even the playing field because electricity can be made (almost) anywhere. Although maybe then the geopolitical issue will be the rare earth materials used in battery production!
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Re: Gold continues to soar!

Post by willthrill81 »

finite_difference wrote: Sat Aug 15, 2020 11:06 amElectric cars should help even the playing field because electricity can be made (almost) anywhere. Although maybe then the geopolitical issue will be the rare earth materials used in battery production!
I don't want to derail the thread, but one of the problems with electric cars is the additional load that they would place on our already strained power grids if they are widely adopted. So far, many of the adopters have also invested in solar panels, which largely offsets this strain, but the average American isn't going to invest tens of thousands of dollars in solar panels to power their vehicle. And your point about rare earth metals also applies to solar panels themselves, which I've heard one energy chemist refer to as a veritable 'witch's brew'.
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Re: Gold continues to soar!

Post by Robot Monster »

How 'bout that Barrick Gold, eh? +11%. Thank you, Jimmy Buffett!

Gold itself +2.3%.
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Re: Gold continues to soar!

Post by Forester »

What I am dreading... the inevitable news articles in 2021/2023 etc, when Uncle Warren exits gold. Down big the following day!
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Re: Gold continues to soar!

Post by 000 »

Forester wrote: Mon Aug 17, 2020 2:02 pm What I am dreading... the inevitable news articles in 2021/2023 etc, when Uncle Warren exits gold. Down big the following day!
Actually, I think Warren has become a contrary signal, i.e. exiting airlines signalled the near bottom in March.
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Re: Gold continues to soar!

Post by Valuethinker »

market timer wrote: Fri Aug 14, 2020 9:21 am
JBTX wrote: Fri Aug 14, 2020 8:41 amWorldwide old demand, as well as targeting a profitable oil price, are the factors which determine oil supply. The treasury yield in itself has nothing to do with how much oil Saudi pumps.
From the end of World War 2 until the end of Bretton Woods in 1971, an ounce of gold bought 12 barrels of oil with hardly any variance (see below). After the US went off the gold standard in 1971, foreign holders of USD assets experienced a loss in value in gold terms over the next few years, with gold rising 400%. Oil exporters in particular, moved to reprice oil in gold terms, which was a key factor in the 1973 oil crisis, when oil spiked by 300% in USD terms.

This is all to say that oil exporters are indeed highly sensitive to the USD store of value. We had a generation with stable commodity prices following WW2 under a gold standard, which has been followed by much higher volatility under the current regime. Oil exporters are in the business of converting below-ground wealth into a more liquid and diversified form via USD bonds and other assets. As the rate of return on these assets declines, the incentive to pump is diminished. Of course, there are other important factors that primarily affect the spot price of crude. Long term crude futures, which I own as part of my portfolio, are much less volatile and are appropriate as a store of wealth. So, you could even say that I'm hoarding oil today.

Gold oil ratio
Image
The flat part of your chart is when the price of gold was fixed!

And the domestic price of oil was also mostly fixed. Eisenhower brought in a tariff to protect domestic producers.

The world price of oil was largely fixed by a cartel. The 7 Sisters. They dictated what third world oil producers would receive for their oil.

When the democratically elected Prime Minister of Iran objected, nationalised the oil industry and raised prices, the British secret service induced the CIA to stage a coup and put the Shah of Iran back on his throne. The fuse was lit for the seizure of power by the Ayatollah Komheini 25 years later.

Read Daniel Yergin's The Prize for a well written survey of these events.

(I am, to be honest, surprised that an economist would not know them)
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Re: Gold continues to soar!

Post by Valuethinker »

willthrill81 wrote: Sat Aug 15, 2020 12:19 pm
finite_difference wrote: Sat Aug 15, 2020 11:06 amElectric cars should help even the playing field because electricity can be made (almost) anywhere. Although maybe then the geopolitical issue will be the rare earth materials used in battery production!
I don't want to derail the thread, but one of the problems with electric cars is the additional load that they would place on our already strained power grids if they are widely adopted. So far, many of the adopters have also invested in solar panels, which largely offsets this strain, but the average American isn't going to invest tens of thousands of dollars in solar panels to power their vehicle. And your point about rare earth metals also applies to solar panels themselves, which I've heard one energy chemist refer to as a veritable 'witch's brew'.
Not really.

There are time of day issues. It would be very expensive to bolster the electricity distribution system if we all charge our cars between 4 pm and 8 pm (in January in England and July in North America).

But the total demand to charge 100m electric cars to 35 kWh each? That's manageable. Also remember sunrise & sunset are not at the same time across North America.

For low cost it will be charged either late at night or when the wind is blowing &/or when the sun is shining. Electric power at the wholesale level will be 0 or negative price, then.

There is already a UK supplier that pays customers to use power on weekends, from balancing payments made by the grid operator.
Last edited by Valuethinker on Mon Aug 17, 2020 4:26 pm, edited 1 time in total.
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Re: Gold continues to soar!

Post by Valuethinker »

finite_difference wrote: Sat Aug 15, 2020 11:06 am
JBTX wrote: Fri Aug 14, 2020 8:41 am
market timer wrote: Fri Aug 14, 2020 3:35 am
JBTX wrote: Fri Aug 14, 2020 1:14 am
market timer wrote: Thu Aug 06, 2020 9:18 pm Based on my fair value model that treats gold as a long term inflation adjusted bond, gold is still catching up to the tremendous decline in long term real yields. Fair value is $2109 vs. spot price of $2068, given 30-year real interest rates of -0.48%.

The decline in real interest rates has gone beyond what I thought we'd ever see. Gold can be thought of as a canary in the coal mine of commodity inflation. If people start hoarding commodities like oil, rather than just precious metals, in response to the poor returns offered by bonds, we would finally see low rates leading to inflation.

Image
How exactly do people hoard oil? People consume oil.

With growth in alternative energy, and a seemingly increasingly technologically efficient Fracking, much of it sitting idle at the moment, it is hard to see how oil goes through the roof anytime soon.
There are many ways that wealth can be stored in oil. Perhaps the clearest case is if you put yourself in the shoes of Saudi Arabia considering how much oil to pump. If they pump a bit more oil, they'll receive more cash today that can be used to invest in things like Treasury bonds (they hold ~$200B). If Treasury bonds offer higher returns, there is a greater incentive to pump oil today. If Treasury offers lower returns, it makes more sense to keep the oil in the ground--effectively, pumping less is effectively storing wealth in oil.
Worldwide old demand, as well as targeting a profitable oil price, are the factors which determine oil supply. The treasury yield in itself has nothing to do with how much oil Saudi pumps.
I thought market_timer made a good point here. It does make more sense to pump more oil when you can invest the money in something else that has a good return and is diversified. When the price of oil is low, pumping more oil is not just about putting others out of business because you may be able to do it cheaper than them.

Definitely a rather complex problem to model though considering the geopolitics involved. Electric cars should help even the playing field because electricity can be made (almost) anywhere. Although maybe then the geopolitical issue will be the rare earth materials used in battery production!
The Saudis can see the way this is going.

Peak demand is no longer a theoretical possibility.

Thus the flotation of a stake in Aramco, the world's largest oil producer.

Trade future oil revenues off against proceeds from equity sales now.

The Dieter Helm book "Burn Out: the endgame for fossil fuels" sketches out what is going on for energy consumers, producers, energy companies and energy exporting countries in a very clear and readable way. Helm is careful not to specify a timetable because that is the hardest bit to forecast.
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Re: Gold continues to soar!

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JBTX wrote: Fri Aug 14, 2020 6:15 pm
willthrill81 wrote: Fri Aug 14, 2020 3:21 pm
JBTX wrote: Fri Aug 14, 2020 3:14 pm One problem with this discussion is implies that the price of gold is primarily driven by US Federal reserve policy. However third world demand for gold, which may be driven by many things, can be a bigger factor.
That's true, but the historic impact of the U.S. economy (I know not that's not the same as the Federal Reserve, but the Fed doesn't actually set bond yields) on the rest of the world is hard to overstate. For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
I can't find an article I read maybe a decade ago by some emerging market guys on GMO that researched it and found that most of rise of gold post 2000 was due to worldwide consumption and demand trends, not US fed policy. We in our American centric world tend to exaggerate our impact. The vast majority of consumption for gold is in India and China. For many people in those counties that don't have access to financial markets gold is their only available store of value. Gold also has a tremendous cultural influence in India.

Its not to say that fed policy and worldwide monetary policy can't converge, leading to increases in third world demand, but they arent always directly linked.
Apparently Indian retail demand, the largest single source of demand for gold (for jewelry) has dropped off a cliff. Just stopped.

Iranian demand will continue as a form of black market in a country w soaring inflation.

The big new source of demand has been hold ETFs. That is what has come into the market big time.

That and some Central Banks facing the possibility of US trade actions such as China and Russia. Rebalance away from USD assets towards gold.

The holding cost of gold in a negative interest rate world is very low.
Last edited by Valuethinker on Mon Aug 17, 2020 4:32 pm, edited 1 time in total.
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Re: Gold continues to soar!

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willthrill81 wrote: Fri Aug 14, 2020 3:21 pm For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
Wait, actually? Do you recall where you read that?
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Gold continues to soar!

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Steve Reading wrote: Mon Aug 17, 2020 5:38 pm
willthrill81 wrote: Fri Aug 14, 2020 3:21 pm For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
Wait, actually? Do you recall where you read that?
From Philosophical Economics.
If we use U.S. economic data as a filter to time foreign securities, the performance turns out to be excellent. But if we use economic data from the foreign countries themselves, then the strategy ends up underperforming a simple unfiltered trend-following strategy. Among other things, this tells us something that we could probably have already deduced from observation: the health of our economy and our equity markets is more relevant to the performance of foreign equity markets than the health of their own economies. This is especially true with respect to large downward moves–the well-known global “crises” that drag all markets down in unison, and that make trend-following a historically profitable strategy.
http://www.philosophicaleconomics.com/2016/02/uetrend/
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Gold continues to soar!

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willthrill81 wrote: Mon Aug 17, 2020 5:42 pm
Steve Reading wrote: Mon Aug 17, 2020 5:38 pm
willthrill81 wrote: Fri Aug 14, 2020 3:21 pm For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
Wait, actually? Do you recall where you read that?
From Philosophical Economics.
If we use U.S. economic data as a filter to time foreign securities, the performance turns out to be excellent. But if we use economic data from the foreign countries themselves, then the strategy ends up underperforming a simple unfiltered trend-following strategy. Among other things, this tells us something that we could probably have already deduced from observation: the health of our economy and our equity markets is more relevant to the performance of foreign equity markets than the health of their own economies. This is especially true with respect to large downward moves–the well-known global “crises” that drag all markets down in unison, and that make trend-following a historically profitable strategy.
http://www.philosophicaleconomics.com/2016/02/uetrend/
Umh I guess I was hoping there would be some data to back that claim. I guess we're just kinda supposed to take the author's word for it. It's not even clear which countries the author refers to (all foreign countries we have employment data of?). It's not even clear who the author is lol.
Either way, thanks and sorry for the small thread derail!
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Gold continues to soar!

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Steve Reading wrote: Mon Aug 17, 2020 5:53 pm
willthrill81 wrote: Mon Aug 17, 2020 5:42 pm
Steve Reading wrote: Mon Aug 17, 2020 5:38 pm
willthrill81 wrote: Fri Aug 14, 2020 3:21 pm For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
Wait, actually? Do you recall where you read that?
From Philosophical Economics.
If we use U.S. economic data as a filter to time foreign securities, the performance turns out to be excellent. But if we use economic data from the foreign countries themselves, then the strategy ends up underperforming a simple unfiltered trend-following strategy. Among other things, this tells us something that we could probably have already deduced from observation: the health of our economy and our equity markets is more relevant to the performance of foreign equity markets than the health of their own economies. This is especially true with respect to large downward moves–the well-known global “crises” that drag all markets down in unison, and that make trend-following a historically profitable strategy.
http://www.philosophicaleconomics.com/2016/02/uetrend/
Umh I guess I was hoping there would be some data to back that claim. I guess we're just kinda supposed to take the author's word for it. It's not even clear which countries the author refers to (all foreign countries we have employment data of?). It's not even clear who the author is lol.
Either way, thanks and sorry for the small thread derail!
Most of the issues you bring up are in the rest of the post, which is very lengthy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Gold continues to soar!

Post by Steve Reading »

willthrill81 wrote: Mon Aug 17, 2020 5:58 pm
Steve Reading wrote: Mon Aug 17, 2020 5:53 pm
willthrill81 wrote: Mon Aug 17, 2020 5:42 pm
Steve Reading wrote: Mon Aug 17, 2020 5:38 pm
willthrill81 wrote: Fri Aug 14, 2020 3:21 pm For instance, the U.S. unemployment rate has been much more predictive of the rest of the world's stocks than their own unemployment rates.
Wait, actually? Do you recall where you read that?
From Philosophical Economics.
If we use U.S. economic data as a filter to time foreign securities, the performance turns out to be excellent. But if we use economic data from the foreign countries themselves, then the strategy ends up underperforming a simple unfiltered trend-following strategy. Among other things, this tells us something that we could probably have already deduced from observation: the health of our economy and our equity markets is more relevant to the performance of foreign equity markets than the health of their own economies. This is especially true with respect to large downward moves–the well-known global “crises” that drag all markets down in unison, and that make trend-following a historically profitable strategy.
http://www.philosophicaleconomics.com/2016/02/uetrend/
Umh I guess I was hoping there would be some data to back that claim. I guess we're just kinda supposed to take the author's word for it. It's not even clear which countries the author refers to (all foreign countries we have employment data of?). It's not even clear who the author is lol.
Either way, thanks and sorry for the small thread derail!
Most of the issues you bring up are in the rest of the post, which is very lengthy.
I couldn't find what foreign countries the author is referring to in that post section, anywhere in the rest of the post. The post seems like a simple implementation of moving averages with a recession indicator (similar to what you do) but it's all S&P 500. I would find it unlikely for US UR to have more predictive power for Brazilian equities than Brazil UR but that seems to be the implication of the last two paragraphs if I'm not mistaken.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Gold continues to soar!

Post by willthrill81 »

Steve Reading wrote: Mon Aug 17, 2020 6:08 pm
willthrill81 wrote: Mon Aug 17, 2020 5:58 pm
Steve Reading wrote: Mon Aug 17, 2020 5:53 pm
willthrill81 wrote: Mon Aug 17, 2020 5:42 pm
Steve Reading wrote: Mon Aug 17, 2020 5:38 pm

Wait, actually? Do you recall where you read that?
From Philosophical Economics.
If we use U.S. economic data as a filter to time foreign securities, the performance turns out to be excellent. But if we use economic data from the foreign countries themselves, then the strategy ends up underperforming a simple unfiltered trend-following strategy. Among other things, this tells us something that we could probably have already deduced from observation: the health of our economy and our equity markets is more relevant to the performance of foreign equity markets than the health of their own economies. This is especially true with respect to large downward moves–the well-known global “crises” that drag all markets down in unison, and that make trend-following a historically profitable strategy.
http://www.philosophicaleconomics.com/2016/02/uetrend/
Umh I guess I was hoping there would be some data to back that claim. I guess we're just kinda supposed to take the author's word for it. It's not even clear which countries the author refers to (all foreign countries we have employment data of?). It's not even clear who the author is lol.
Either way, thanks and sorry for the small thread derail!
Most of the issues you bring up are in the rest of the post, which is very lengthy.
I couldn't find what foreign countries the author is referring to in that post section, anywhere in the rest of the post. The post seems like a simple implementation of moving averages with a recession indicator (similar to what you do) but it's all S&P 500. I would find it unlikely for US UR to have more predictive power for Brazilian equities than Brazil UR but that seems to be the implication of the last two paragraphs if I'm not mistaken.
I believe that the post was referring to ex-U.S. in total, not individual countries.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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Re: Gold continues to soar!

Post by rockstar »

Feeling good about my GLD purchase on Friday. Up almost 2 points. But I made a mistake. I bought it in my taxable, not my IRA. I'll have to fill in the rest of the position in my IRA to bring me to 5%. Not a fan of the tax man.
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Re: Gold continues to soar!

Post by 000 »

rockstar wrote: Mon Aug 17, 2020 6:51 pm Feeling good about my GLD purchase on Friday. Up almost 2 points. But I made a mistake. I bought it in my taxable, not my IRA. I'll have to fill in the rest of the position in my IRA to bring me to 5%. Not a fan of the tax man.
Why is that a mistake? Gold ETF in taxable is tax-deferred (other than the small sells the fund throws off for expenses) until I sell. No dividends.

I guess rebalancing has a tax cost though.

What are the rules on Gold ETFs in IRA or 401(k)? I seem to remember there was some concern about this.
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Re: Gold continues to soar!

Post by market timer »

Valuethinker wrote: Mon Aug 17, 2020 4:05 pm
market timer wrote: Fri Aug 14, 2020 9:21 am
JBTX wrote: Fri Aug 14, 2020 8:41 amWorldwide old demand, as well as targeting a profitable oil price, are the factors which determine oil supply. The treasury yield in itself has nothing to do with how much oil Saudi pumps.
From the end of World War 2 until the end of Bretton Woods in 1971, an ounce of gold bought 12 barrels of oil with hardly any variance (see below). After the US went off the gold standard in 1971, foreign holders of USD assets experienced a loss in value in gold terms over the next few years, with gold rising 400%. Oil exporters in particular, moved to reprice oil in gold terms, which was a key factor in the 1973 oil crisis, when oil spiked by 300% in USD terms.

This is all to say that oil exporters are indeed highly sensitive to the USD store of value. We had a generation with stable commodity prices following WW2 under a gold standard, which has been followed by much higher volatility under the current regime. Oil exporters are in the business of converting below-ground wealth into a more liquid and diversified form via USD bonds and other assets. As the rate of return on these assets declines, the incentive to pump is diminished. Of course, there are other important factors that primarily affect the spot price of crude. Long term crude futures, which I own as part of my portfolio, are much less volatile and are appropriate as a store of wealth. So, you could even say that I'm hoarding oil today.

Gold oil ratio
Image
The flat part of your chart is when the price of gold was fixed!

And the domestic price of oil was also mostly fixed. Eisenhower brought in a tariff to protect domestic producers.

The world price of oil was largely fixed by a cartel. The 7 Sisters. They dictated what third world oil producers would receive for their oil.

When the democratically elected Prime Minister of Iran objected, nationalised the oil industry and raised prices, the British secret service induced the CIA to stage a coup and put the Shah of Iran back on his throne. The fuse was lit for the seizure of power by the Ayatollah Komheini 25 years later.

Read Daniel Yergin's The Prize for a well written survey of these events.

(I am, to be honest, surprised that an economist would not know them)
Valuethinker, all I'm doing is describing Hotelling's Theory: https://www.investopedia.com/terms/h/ho ... theory.asp

The basic idea is that the decision to pump oil depends on real interest rates. There are many other factors that determine oil prices, but I just want to emphasize that all commodities (gold, oil, etc.) can serve as an alternative store of value. When I think of what might cause central banks to reverse course on the current policy of lower and more negative interest rates, I keep coming back to commodity inflation (particularly in things like oil that are consumed) that could cause a regime change.
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Re: Gold continues to soar!

Post by Destiple »

Has anyone tried DCA into gold ETF over 5 yrs or longer?
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Re: Gold continues to soar!

Post by LadyGeek »

FYI - Destiple is requesting portfolio help here: [Where can I invest my cash?]

Destiple, Welcome! I recommend you focus on the guidance provided in your portfolio thread. DCA'ing into gold would not be a good approach for someone just starting out.
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Re: Gold continues to soar!

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Destiple wrote: Tue Aug 18, 2020 11:58 am Has anyone tried DCA into gold ETF over 5 yrs or longer?
No. Five years is a long, long time to DCA. And Gold will be equally volatile at the end of the DCA as during it.
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Re: Gold continues to soar!

Post by willthrill81 »

000 wrote: Tue Aug 18, 2020 3:09 pm
Destiple wrote: Tue Aug 18, 2020 11:58 am Has anyone tried DCA into gold ETF over 5 yrs or longer?
No. Five years is a long, long time to DCA. And Gold will be equally volatile at the end of the DCA as during it.
Yep. If you want to own it, then buy it. Otherwise, don't.
“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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