A timely and equanimous article on gold

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Kevin K
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A timely and equanimous article on gold

Post by Kevin K »

[Moved into a new thread from: Gold continues to soar! --admin LadyGeek]

I was sorely tempted to start a new thread entitled "The Final, Definitive Article on Gold for Bogleheads Gold Haters" but I restrained myself for once.

That said, this is a pretty remarkable article by Tyler who runs Portfolio Charts and I hope it will be widely read.

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/
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Kevin K
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A timely and even-handed article on gold

Post by Kevin K »

While gold-bashing (and, of late, an occasional bit of gold promotion) has been a staple on these forums for years clarity of understanding about gold has been rare indeed. This new piece from Portfolio Charts, it seems to me, does an excellent job of answering the questions it poses at its outset:

"For some reason gold often becomes a strangely emotionally-charged topic, and frankly both the gold lovers and haters spread lots of objectively false and misleading information in support of their preferred positions. Unfortunately those flawed arguments are sticky, and gold is so commonly misunderstood that even smart, educated, and otherwise level-headed investors have no idea what they’re talking about. So in honor of the shiny metal again making headlines, I thought I’d consolidate some of the most common questions about gold to help sort the truth from the fiction.

Frequently Asked Questions

Are bullion and miners interchangeable?
Is gold a reliable hedge against inflation?
Why are the long-term returns for gold so low?
Are the gold returns after 1971 repeatable?
Are gold profits really taxed at 28%?
Should I include gold in my own portfolio?"

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/
Last edited by Kevin K on Fri Aug 21, 2020 6:39 pm, edited 1 time in total.
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Re: A timely and equanimous article on gold

Post by Mandalorian »

Kevin K wrote: Fri Aug 21, 2020 2:11 pm While gold-bashing (and, of late, an occasional bit of gold promotion) has been a staple on these forums for years clarity of understanding about gold has been rare indeed. This new piece from Portfolio Charts, it seems to me, does an excellent job of answering the questions it poses at its outset:

"For some reason gold often becomes a strangely emotionally-charged topic, and frankly both the gold lovers and haters spread lots of objectively false and misleading information in support of their preferred positions. Unfortunately those flawed arguments are sticky, and gold is so commonly misunderstood that even smart, educated, and otherwise level-headed investors have no idea what they’re talking about. So in honor of the shiny metal again making headlines, I thought I’d consolidate some of the most common questions about gold to help sort the truth from the fiction.

Frequently Asked Questions

Are bullion and miners interchangeable?
Is gold a reliable hedge against inflation?
Why are the long-term returns for gold so low?
Are the gold returns after 1971 repeatable?
Are gold profits really taxed at 28%?
Should I include gold in my own portfolio?"

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/
Wow I learned a ton from that article. Thanks Kevin for the gem.
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Re: A timely and equanimous article on gold

Post by 000 »

Gold is such a controversial topic because investing in it is viewed as accepting there may be a time institutions fail (e.g. to control inflation).

Many would rather believe that that is impossible and that Gold investing is somehow a subversive act.
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Re: A timely and equanimous article on gold

Post by rockstar »

000 wrote: Fri Aug 21, 2020 7:16 pm Gold is such a controversial topic because investing in it is viewed as accepting there may be a time institutions fail (e.g. to control inflation).

Many would rather believe that's impossible, and that Gold investors are somehow subversive.
Over the last twenty years, gold has outperformed equities. I don't see what's wrong with holding some gold. Here's the info from JP Morgan's deck (slide 66):

https://am.jpmorgan.com/blob-gim/138340 ... M_3Q20.pdf

The question is: why are investors holding lots of near zero yielding bonds when gold has performed so well versus equities? Why aren't investors allocating some percentage to gold?
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Re: A timely and equanimous article on gold

Post by 000 »

rockstar wrote: Fri Aug 21, 2020 7:25 pm Over the last twenty years, gold has outperformed equities. I don't see what's wrong with holding some gold.
I invest in Gold not because of the last twenty years, but because I expect it to provide 0% real and remain uncorrelated with stocks.
rockstar wrote: Fri Aug 21, 2020 7:25 pm The question is: why are investors holding lots of near zero yielding bonds when gold has performed so well versus equities? Why aren't investors allocating some percentage to gold?
I can think of several reasons:
  1. Inertia / stay the course
  2. Belief that past correlations (e.g. LTT) are a fundamental property of markets and will persist
  3. Not recognizing that positive nominal yields can be negative in real terms
  4. Lack of personal experience with serious inflation / currency issues
  5. Unfamiliarity with precious metals
  6. Fear that the Gold market is manipulated
  7. Fear of being viewed as a Gold bug
  8. Fear that buying now would be buying "high"
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Re: A timely and equanimous article on gold

Post by anoop »

000 wrote: Fri Aug 21, 2020 7:36 pm
rockstar wrote: Fri Aug 21, 2020 7:25 pm Over the last twenty years, gold has outperformed equities. I don't see what's wrong with holding some gold.
I invest in Gold not because of the last twenty years, but because I expect it to provide 0% real and remain uncorrelated with stocks.
rockstar wrote: Fri Aug 21, 2020 7:25 pm The question is: why are investors holding lots of near zero yielding bonds when gold has performed so well versus equities? Why aren't investors allocating some percentage to gold?
I can think of several reasons:
  1. Inertia / stay the course
  2. Belief that past correlations (e.g. LTT) are a fundamental property of markets and will persist
  3. Not recognizing that positive nominal yields can be negative in real terms
  4. Lack of personal experience with serious inflation / currency issues
  5. Unfamiliarity with precious metals
  6. Fear that the Gold market is manipulated
  7. Fear of being viewed as a Gold bug
  8. Fear that buying now would be buying "high"
Also --
9. If buying physical, dealing with the lack of liquidity and high commissions and a safe way to store it.
10. If buying paper, believing that the custodian actually has the gold they say they do. (These are not FDIC insured and if an ETF goes belly up because of fraud, no one is going to bail the investor out.)
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Re: A timely and equanimous article on gold

Post by Pu239 »

And...
11) Fear of scams
12) Income tax disadvantages, sales tax for physical in some states, IRA limitations
13) Fear of confiscation
14) No income production

Despite all that and more, I still like gold.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot
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Re: A timely and equanimous article on gold

Post by am »

Why gold and not silver, platinum, etc? They have etfs as well.
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Re: A timely and equanimous article on gold

Post by boglerdude »

Gold was needed to conduct transactions for centuries. It is no longer needed. Crypto is insult to that injury. It's reasonable to hold some gold as insurance.
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Re: A timely and equanimous article on gold

Post by Noobvestor »

A 'timely' article indeed - posted as gold reaches new all-time highs. Coincidence? I have no beef with gold, or holding a small percentage of it. What bugs me about the gold bugs is that they get more vocal when it's doing well.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: A timely and equanimous article on gold

Post by zaboomafoozarg »

000 wrote: Fri Aug 21, 2020 7:16 pm Gold is such a controversial topic because investing in it is viewed as accepting there may be a time institutions fail (e.g. to control inflation).
Also it was effectively illegal to own for decades.
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Re: A timely and equanimous article on gold

Post by Forester »

Although goldbugs are guilty of focusing on backtests which start in the early 1970s, it's probable that 5%, 15% or so in gold, will markedly improve minimum rolling returns in some market environments. If all one care is about is raw compounding, avoid gold altogether. However in terms of balanced portfolios I don't see a good argument for a 60/40 portfolio versus 60/30/10(gold).
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Re: A timely and equanimous article on gold

Post by Kevin K »

Forester wrote: Sun Aug 23, 2020 8:22 am Although goldbugs are guilty of focusing on backtests which start in the early 1970s, it's probable that 5%, 15% or so in gold, will markedly improve minimum rolling returns in some market environments. If all one care is about is raw compounding, avoid gold altogether. However in terms of balanced portfolios I don't see a good argument for a 60/40 portfolio versus 60/30/10(gold).
Well-said Forester! And that's kind of the point, it seems to me, of the conclusion of the article: gold is a unique diversifier and if you play around with the calculators on Portfolio Charts there are numerous allocations that include stocks, bonds and 10-20% gold that have had markedly-improved rolling returns, lower drawdowns and higher SWR's than all-stock-and-bond portfolios. That said, Tyler is no gold bug and there are plenty of great portfolios featured on the site that don't include any gold or other exotic/controversial assets.
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Re: A timely and equanimous article on gold

Post by KaljuKapitalisti »

Gold definitely provides balance in anyone's portfolio in my view. I personally see gold more as an insurance than a quick way to make buck. Gold has held it's value against S&P since 1971 incredibly well not to even mention the performance against currencies.

I really don't see an argument against holding gold as a part of a balanced portfolio (and other precious metals) especially in this current macro environment with MMT, constant stimulus and whatnot. Keeping 10 % or so in precious metals or other scarce assets seems like a good bet to me.

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Re: A timely and equanimous article on gold

Post by am »

I don’t get why something has to be productive in order to make it a worthwhile investment? To make us feel good? Look at how international has performed. We are looking for uncorrelated positive returns and I do not care if it comes from stocks or quicksand as long as I get them when I need them. Long term we are all dead.
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Re: A timely and equanimous article on gold

Post by Noobvestor »

am wrote: Sun Aug 23, 2020 10:53 am I don’t get why something has to be productive in order to make it a worthwhile investment? To make us feel good? Look at how international has performed. We are looking for uncorrelated positive returns and I do not care if it comes from stocks or quicksand as long as I get them when I need them. Long term we are all dead.
It's my understanding that gold does not have positive expected real returns.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: A timely and equanimous article on gold

Post by am »

Noobvestor wrote: Sun Aug 23, 2020 1:00 pm
am wrote: Sun Aug 23, 2020 10:53 am I don’t get why something has to be productive in order to make it a worthwhile investment? To make us feel good? Look at how international has performed. We are looking for uncorrelated positive returns and I do not care if it comes from stocks or quicksand as long as I get them when I need them. Long term we are all dead.
It's my understanding that gold does not have positive expected real returns.
I don’t care about expected returns. Expected over what time frame? I see positive returns over my asset accumulation Years.
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Re: A timely and equanimous article on gold

Post by Noobvestor »

am wrote: Sun Aug 23, 2020 1:01 pm
Noobvestor wrote: Sun Aug 23, 2020 1:00 pm
am wrote: Sun Aug 23, 2020 10:53 am I don’t get why something has to be productive in order to make it a worthwhile investment? To make us feel good? Look at how international has performed. We are looking for uncorrelated positive returns and I do not care if it comes from stocks or quicksand as long as I get them when I need them. Long term we are all dead.
It's my understanding that gold does not have positive expected real returns.
I don’t care about expected returns. Expected over what time frame? I see positive returns over my asset accumulation Years.
How can you not care about expected returns? If I sell you a bond with a 0% rate, you don't care that it has 0% expected returns? As for gold: it's my understanding that over its long history it has had in the range of 0% real returns, and can be expected to going forward (+/- volatility).

Anyway, you said you are looking for 'positive returns' which I assumed to mean 'positive expected returns.' What else could it mean?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: A timely and equanimous article on gold

Post by am »

Noobvestor wrote: Sun Aug 23, 2020 2:24 pm
am wrote: Sun Aug 23, 2020 1:01 pm
Noobvestor wrote: Sun Aug 23, 2020 1:00 pm
am wrote: Sun Aug 23, 2020 10:53 am I don’t get why something has to be productive in order to make it a worthwhile investment? To make us feel good? Look at how international has performed. We are looking for uncorrelated positive returns and I do not care if it comes from stocks or quicksand as long as I get them when I need them. Long term we are all dead.
It's my understanding that gold does not have positive expected real returns.
I don’t care about expected returns. Expected over what time frame? I see positive returns over my asset accumulation Years.
How can you not care about expected returns? If I sell you a bond with a 0% rate, you don't care that it has 0% expected returns? As for gold: it's my understanding that over its long history it has had in the range of 0% real returns, and can be expected to going forward (+/- volatility).

Anyway, you said you are looking for 'positive returns' which I assumed to mean 'positive expected returns.' What else could it mean?
Bonds are predictable. Metals are not over our investing timeframe. Expected return of 0 is great but I’m seeing + returns over the last 15 years.
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Re: A timely and equanimous article on gold

Post by Noobvestor »

am wrote: Sun Aug 23, 2020 4:56 pm
Noobvestor wrote: Sun Aug 23, 2020 2:24 pm
am wrote: Sun Aug 23, 2020 1:01 pm
Noobvestor wrote: Sun Aug 23, 2020 1:00 pm
am wrote: Sun Aug 23, 2020 10:53 am I don’t get why something has to be productive in order to make it a worthwhile investment? To make us feel good? Look at how international has performed. We are looking for uncorrelated positive returns and I do not care if it comes from stocks or quicksand as long as I get them when I need them. Long term we are all dead.
It's my understanding that gold does not have positive expected real returns.
I don’t care about expected returns. Expected over what time frame? I see positive returns over my asset accumulation Years.
How can you not care about expected returns? If I sell you a bond with a 0% rate, you don't care that it has 0% expected returns? As for gold: it's my understanding that over its long history it has had in the range of 0% real returns, and can be expected to going forward (+/- volatility).

Anyway, you said you are looking for 'positive returns' which I assumed to mean 'positive expected returns.' What else could it mean?
Bonds are predictable. Metals are not over our investing timeframe. Expected return of 0 is great but I’m seeing + returns over the last 15 years.
I'm seeing great returns for a lot of asset classes in hindsight, too. That doesn't mean I expect those returns to continue. You're cherry-picking periods as well- gold just recently went above its earlier nominal peak close to a decade ago. So it was down most of the decade (still is in real dollars). Shift that start date and results change. So gold is volatile. So gold goes up and down, but long-term? No expected return that I know of. If you're talking about 'positive returns' only in the past tense and not expected ones going forward, I think we're at an impasse - not actionable.

There's a case to be made that a zero-return investment that is uncorrelated with other assets in your portfolio is worth having, but that's not what you argued - you suggested it has positive real returns. My response is: it depends on the period, and over most of history, it hasn't.

Anyway, out of curiosity to see what you'd written about in the past regarding gold, I found your earliest post on the subject very relatable:
am wrote: Thu Dec 15, 2011 5:07 pm Surprising that hot asset classes always become the focus of discussion on the bogleheads forum. I remember this with emerging markets a few years back also. Is there not a forum out there for performance chasers and get rich quick types?
You posted that back in 2011, when gold was near a high it wouldn't reach again for a decade. So ... yeah, that's basically my feeling right now. Gold is suddenly an asset under discussion ... why? Because it's doing well right now. Strange how little it got talked about in the years between.

In fact your posting history, while anecdotal, supports my point. You posted a bit about gold at its nominal peak nearly a decade ago, then went mostly silent on that front for the next number of years, then picked the topic back up again this year: search.php?st=0&sk=t&sd=d&sr=posts&author_id=3539
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Forester wrote: Sun Aug 23, 2020 8:22 am Although goldbugs are guilty of focusing on backtests which start in the early 1970s, it's probable that 5%, 15% or so in gold, will markedly improve minimum rolling returns in some market environments. If all one care is about is raw compounding, avoid gold altogether. However in terms of balanced portfolios I don't see a good argument for a 60/40 portfolio versus 60/30/10(gold).
You could literally replace gold in this quote with any other investment, and it would still be true. Peanut butter futures, farmland with oak planted on it, horse race betting tickets, a trip to the casino. All of these will markedly improve minimum rolling returns in some market environments.

One thing the gold bugs seem to have in common is that that seem to be incapable of producing valid arguments. Statistically, you should have less confidence that gold improves your portfolio than any existing risk factor (i.e. size, value, low volatility, momentum and many more). I wouldn't be surprised if the confidence intervals on "over weighting apple by 20% improves your portfolio" are better than those in gold.

The linked article makes similar mistakes. He claims that the relation between gold and inflation is "fairly strong", but the chart he used to back up that statement is invalid for that purpose. According to academic literature, the correlation between gold and real rates is nowhere near statistically significant (IIRC, the 95% confidence interval on the correlation is somewhere around (-0.6, 0.3), a ridiculously wide margin). tldr: ignore this article.
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Re: A timely and equanimous article on gold

Post by Pu239 »

Noobvestor - does this apply to gold?

"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot
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Re: A timely and equanimous article on gold

Post by Noobvestor »

Pu239 wrote: Mon Aug 24, 2020 12:38 am Noobvestor - does this apply to gold?

"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
There are obvious limitations to any simplified saying like that. For example, diversifying across all forms of currencies, alt coins, precious metals, global real estate, commodities, venture capital, etc... have frictional costs, management issues, access limitations, taxation complications.

So no, I don't think it applies to gold, which has high buy/sell spreads, is taxed at high rates, involves onerous storage and security requirements, the list goes on. I'm not anti-gold, but I don't think it's an essential component of diversified investment strategy. I'm with the '5% is fine if you really want to' crowd, though I would caution anyone considering gold right now for the first time to beware recency bias now that it's at an all-time high.

IMHO, the quote is more usefully applied to low-cost, broad-market, tax-efficient investments like stocks and bonds via index funds. For me personally, it's a mantra to remember to invest globally across these asset classes that make up most of the global market. Implicit in it, though, is a counterpoint: if you have some special insight (i.e. a real, solid, logical, data-driven reason to hold gold) then go for it. Otherwise, diversify and keep it simple. YMMV.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: A timely and equanimous article on gold

Post by Forester »

Uncorrelated wrote: Mon Aug 24, 2020 12:25 am
Forester wrote: Sun Aug 23, 2020 8:22 am Although goldbugs are guilty of focusing on backtests which start in the early 1970s, it's probable that 5%, 15% or so in gold, will markedly improve minimum rolling returns in some market environments. If all one care is about is raw compounding, avoid gold altogether. However in terms of balanced portfolios I don't see a good argument for a 60/40 portfolio versus 60/30/10(gold).
You could literally replace gold in this quote with any other investment, and it would still be true. Peanut butter futures, farmland with oak planted on it, horse race betting tickets, a trip to the casino. All of these will markedly improve minimum rolling returns in some market environments.
Totally absurd argument given that, although a short period of a certain context (gold after Nixon's default), gold had three positive real return decades out of five; two of those decades stocks were negative/flat in real terms; one of those decades bonds were negative and did nothing to salvage the situation.

You're comparing horse betting to a liquid investable, often tax-advantaged (depending upon jurisdiction) asset which governments spend time (a waste of time according to yourself), accumulating & guarding.

One thing the gold bugs seem to have in common is that that seem to be incapable of producing valid arguments. Statistically, you should have less confidence that gold improves your portfolio than any existing risk factor (i.e. size, value, low volatility, momentum and many more). I wouldn't be surprised if the confidence intervals on "over weighting apple by 20% improves your portfolio" are better than those in gold.
My assumption is that (1) the very long term price of gold will keep up with inflation (2) it cannot be created by state decree (3) in some periods it will be oversold amid negative sentiment, in others it will be subject to enthusiasm & mania. Personally I would not use the disproved risk premium mumbo jumbo to decide whether to own some gold.

Objectively I believe, it's foolhardy to hold a US 30/70 portfolio but these folk will get a pat on the back and congratulated for taking on less risk having won the game, whereas another other guy with maybe 10% in gold is crazy, a speculator, should be locked up in an institution.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Forester wrote: Mon Aug 24, 2020 3:16 am
Uncorrelated wrote: Mon Aug 24, 2020 12:25 am
Forester wrote: Sun Aug 23, 2020 8:22 am Although goldbugs are guilty of focusing on backtests which start in the early 1970s, it's probable that 5%, 15% or so in gold, will markedly improve minimum rolling returns in some market environments. If all one care is about is raw compounding, avoid gold altogether. However in terms of balanced portfolios I don't see a good argument for a 60/40 portfolio versus 60/30/10(gold).
You could literally replace gold in this quote with any other investment, and it would still be true. Peanut butter futures, farmland with oak planted on it, horse race betting tickets, a trip to the casino. All of these will markedly improve minimum rolling returns in some market environments.
Totally absurd argument given that, although a short period of a certain context (gold after Nixon's default), gold had three positive real return decades out of five;
Suppose you go to a casino and bet on black. How large do you think the chance is the ball ends on black 3 out of 5 rounds?

Suppose you observe thousands of alternative instruments casino's and play 5 rounds of roulette on each. How large do you think the chance is that one out of those thousands see a positive return more than 3 out of 5 times?
One thing the gold bugs seem to have in common is that that seem to be incapable of producing valid arguments. Statistically, you should have less confidence that gold improves your portfolio than any existing risk factor (i.e. size, value, low volatility, momentum and many more). I wouldn't be surprised if the confidence intervals on "over weighting apple by 20% improves your portfolio" are better than those in gold.
My assumption is that (1) the very long term price of gold will keep up with inflation (2) it cannot be created by state decree (3) in some periods it will be oversold amid negative sentiment, in others it will be subject to enthusiasm & mania. Personally I would not use the disproved risk premium mumbo jumbo to decide whether to own some gold.

Objectively I believe, it's foolhardy to hold a US 30/70 portfolio but these folk will get a pat on the back and congratulated for taking on less risk having won the game, whereas another other guy with maybe 10% in gold is crazy, a speculator, should be locked up in an institution.
Both 1, 2 and 3 are true for at least 20 different investments, most of those investments have a higher expected return than gold. Therefore, these three reasons cannot be used as an argument for gold unless you already exhausted the possibilities of all other risk factors.
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Re: A timely and equanimous article on gold

Post by Forester »

Uncorrelated wrote: Mon Aug 24, 2020 3:31 am
Forester wrote: Mon Aug 24, 2020 3:16 am
Uncorrelated wrote: Mon Aug 24, 2020 12:25 am
Forester wrote: Sun Aug 23, 2020 8:22 am Although goldbugs are guilty of focusing on backtests which start in the early 1970s, it's probable that 5%, 15% or so in gold, will markedly improve minimum rolling returns in some market environments. If all one care is about is raw compounding, avoid gold altogether. However in terms of balanced portfolios I don't see a good argument for a 60/40 portfolio versus 60/30/10(gold).
You could literally replace gold in this quote with any other investment, and it would still be true. Peanut butter futures, farmland with oak planted on it, horse race betting tickets, a trip to the casino. All of these will markedly improve minimum rolling returns in some market environments.
Totally absurd argument given that, although a short period of a certain context (gold after Nixon's default), gold had three positive real return decades out of five;
Suppose you go to a casino and bet on black. How large do you think the chance is the ball ends on black 3 out of 5 rounds?

Suppose you observe thousands of alternative instruments casino's and play 5 rounds of roulette on each. How large do you think the chance is that one out of those thousands see a positive return more than 3 out of 5 times?
One thing the gold bugs seem to have in common is that that seem to be incapable of producing valid arguments. Statistically, you should have less confidence that gold improves your portfolio than any existing risk factor (i.e. size, value, low volatility, momentum and many more). I wouldn't be surprised if the confidence intervals on "over weighting apple by 20% improves your portfolio" are better than those in gold.
My assumption is that (1) the very long term price of gold will keep up with inflation (2) it cannot be created by state decree (3) in some periods it will be oversold amid negative sentiment, in others it will be subject to enthusiasm & mania. Personally I would not use the disproved risk premium mumbo jumbo to decide whether to own some gold.

Objectively I believe, it's foolhardy to hold a US 30/70 portfolio but these folk will get a pat on the back and congratulated for taking on less risk having won the game, whereas another other guy with maybe 10% in gold is crazy, a speculator, should be locked up in an institution.
Both 1, 2 and 3 are true for at least 20 different investments, most of those investments have a higher expected return than gold. Therefore, these three reasons cannot be used as an argument for gold unless you already exhausted the possibilities of all other risk factors.
You'll have to name these investments then. The reason gold worked (in the past, perhaps never again), to boost minimum rolling returns is because it has no rate of return which can be held against it. Gold gets bid up when risky assets like stocks & bonds, with their uncertain future returns, sell off.

In the context of an already equity-heavy portfolio; the higher return these 20 investments have, maybe the less interested I am. Perhaps I want the other thing which has government employees with rifles guarding it, yet I'm told is worthless.
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Re: A timely and equanimous article on gold

Post by halfnine »

Noobvestor wrote: Sun Aug 23, 2020 9:58 pm ... Gold is suddenly an asset under discussion ... why? Because it's doing well right now. Strange how little it got talked about in the years between...
The gold threads have certainly increased but so do other threads when they are doing well. However, gold has certainly been discussed on this forum throughout the years as well as other alternatives. However, these threads typically get hijacked by a vocal minority and the threads closed which limits ongoing discussion and the prevelence in which the threads are seen. With the recent surge in gold... I don't know...maybe the vocal minority are choosing to be quiet and are letting the threads properly run their course.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Forester wrote: Mon Aug 24, 2020 3:41 am You'll have to name these investments then.
Equity, HmL, SmB, RmW, CmA, momentum, low volatility, minimum volatility, real estate, quality, bab, cryptocurrencies, corporate bonds, TIPS, options betting, default premium, silver, cattle, corn, commodities in general, alternative investments such as LENDX.
The reason gold worked (in the past, perhaps never again), to boost minimum rolling returns is because it has no rate of return which can be held against it.
:oops:


Gold gets bid up when risky assets like stocks & bonds, with their uncertain future returns, sell off.
The "evidence" for this observation fails all statistical tests. Out of the first four investments mentioned in the list above, two are statistically significant negative (t-stat 4.4 and 6) when regressed against global market returns.

Let's be honest: there are alternative investments with lower risk, higher return and lower correlation with equities than gold, there is no place for gold in any data-driven or evidence-based portfolio. If you want to use an alternative facts based portfolio (or perhaps if you want to bribe your way out of the country), you can use gold, but then you can't use any of the arguments above because they don't work.
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Re: A timely and equanimous article on gold

Post by Forester »

Uncorrelated wrote: Mon Aug 24, 2020 5:24 am
Forester wrote: Mon Aug 24, 2020 3:41 am You'll have to name these investments then.
Equity, HmL, SmB, RmW, CmA, momentum, low volatility, minimum volatility, real estate, quality, bab, cryptocurrencies, corporate bonds, TIPS, options betting, default premium, silver, cattle, corn, commodities in general, alternative investments such as LENDX.
Equities... corporate bonds... how will these perform in a stagflationary environment. Silver might be fine, both gold & silver are in the commodities realm. How does one invest in commodities; CTAs? Simpler to own some gold and/or silver, some miners, maybe a general value tilt too which encompasses resource stocks. As for LENDX and the like, what's the cost of carrying these, are they liquid? Have TIPs been truly tested and aren't TIPs a case of the fox guarding the chickens.

The "evidence" for this observation fails all statistical tests. Out of the first four investments mentioned in the list above, two are statistically significant negative (t-stat 4.4 and 6) when regressed against global market returns.

Let's be honest: there are alternative investments with lower risk, higher return and lower correlation with equities than gold,
Which ones? Without naming something from a Swedroe book which has existed for 5 minutes and costs 2% a year. What might stand a chance of holding its own when both equities and stocks are struggling.
there is no place for gold in any data-driven or evidence-based portfolio. If you want to use an alternative facts based portfolio (or perhaps if you want to bribe your way out of the country), you can use gold, but then you can't use any of the arguments above because they don't work.
There isn't enough data to create a totally evidence-driven portfolio and even if there was, investors have different preferences. If all an investor cares about is the highest compounded number on a thirty year horizon, they should avoid gold. On the little data we have, including gold & gold equities has a reasonable chance of boosting minimum rolling returns by a meaningful amount, the next time there is lost decade for large cap stocks & bonds.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Forester wrote: Mon Aug 24, 2020 6:53 am Equities... corporate bonds... how will these perform in a stagflationary environment. Silver might be fine, both gold & silver are in the commodities realm. How does one invest in commodities; CTAs? Simpler to own some gold and/or silver, some miners, maybe a general value tilt too which encompasses resource stocks. As for LENDX and the like, what's the cost of carrying these, are they liquid? Have TIPs been truly tested and aren't TIPs a case of the fox guarding the chickens.
Your criteria was "markedly improve minimum returns in some market environments" and not "do well in a stagflationary environement". That is moving the goalpoasts. The evidence that gold does well in a stagflationary environement is extremely weak, probably weaker than the evidence for value (some papers provide evidence that value has a lower duration than growth, which would result in positive returns in a slagflation environment. Although evidence is weak, it's far stronger than that for gold).

If you really want to pick an asset that does well in stagflation, buy the only instrument with a guaranteed negative correlation with inflation: negative bonds.
Which ones? Without naming something from a Swedroe book which has existed for 5 minutes and costs 2% a year. What might stand a chance of holding its own when both equities and stocks are struggling.
For instance, HmL, CmA and RmW. You can gain exposure to these risk factors at low cost with (for example) VFMF, IJS, AVDV, AVUS.

I sense a strong hint of market timing in your statements.
There isn't enough data to create a totally evidence-driven portfolio and even if there was, investors have different preferences. If all an investor cares about is the highest compounded number on a thirty year horizon, they should avoid gold. On the little data we have, including gold & gold equities has a reasonable chance of boosting minimum rolling returns by a meaningful amount, the next time there is lost decade for large cap stocks & bonds.
Of course there is enough data to create an evidence-driven portfolio. The statistical confidence that peanut butter futures have a positive return is higher than the statistical confidence gold has a positive return. If all else is equal than you would be stupid to use gold. What else do you want to use to select your portfolio? A fair dice roll? Ask the tooth fairy?

The optimal portfolio depends on the risk aversion of the individual (for example see this topic for a case involving one-dimensional risk preferences). So far, there has been zero evidence that there are risk preferences which would result in gold being part of the optimal portfolio.

Whether gold has a reasonable chance to increase returns by a meaningful amount isn't relevant. What matters is whether gold is part of the optimal portfolio for your specific risk preferences. This requires a comparison between all possible assets. If you think gold is a good pick, you can start by showing (with statistical methods) that gold has higher risk adjusted returns or lower correlation than HmL and then repeating the same thing for all instruments I mentioned.
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Re: A timely and equanimous article on gold

Post by Forester »

Uncorrelated wrote: Mon Aug 24, 2020 7:33 am
Forester wrote: Mon Aug 24, 2020 6:53 am Equities... corporate bonds... how will these perform in a stagflationary environment. Silver might be fine, both gold & silver are in the commodities realm. How does one invest in commodities; CTAs? Simpler to own some gold and/or silver, some miners, maybe a general value tilt too which encompasses resource stocks. As for LENDX and the like, what's the cost of carrying these, are they liquid? Have TIPs been truly tested and aren't TIPs a case of the fox guarding the chickens.
Your criteria was "markedly improve minimum returns in some market environments" and not "do well in a stagflationary environement". That is moving the goalpoasts. The evidence that gold does well in a stagflationary environement is extremely weak, probably weaker than the evidence for value (some papers provide evidence that value has a lower duration than growth, which would result in positive returns in a slagflation environment. Although evidence is weak, it's far stronger than that for gold).

If you really want to pick an asset that does well in stagflation, buy the only instrument with a guaranteed negative correlation with inflation: negative bonds.
Which ones? Without naming something from a Swedroe book which has existed for 5 minutes and costs 2% a year. What might stand a chance of holding its own when both equities and stocks are struggling.
For instance, HmL, CmA and RmW. You can gain exposure to these risk factors at low cost with (for example) VFMF, IJS, AVDV, AVUS.

I sense a strong hint of market timing in your statements.
There isn't enough data to create a totally evidence-driven portfolio and even if there was, investors have different preferences. If all an investor cares about is the highest compounded number on a thirty year horizon, they should avoid gold. On the little data we have, including gold & gold equities has a reasonable chance of boosting minimum rolling returns by a meaningful amount, the next time there is lost decade for large cap stocks & bonds.
Of course there is enough data to create an evidence-driven portfolio. The statistical confidence that peanut butter futures have a positive return is higher than the statistical confidence gold has a positive return. If all else is equal than you would be stupid to use gold. What else do you want to use to select your portfolio? A fair dice roll? Ask the tooth fairy?

The optimal portfolio depends on the risk aversion of the individual (for example see this topic for a case involving one-dimensional risk preferences). So far, there has been zero evidence that there are risk preferences which would result in gold being part of the optimal portfolio.

Whether gold has a reasonable chance to increase returns by a meaningful amount isn't relevant. What matters is whether gold is part of the optimal portfolio for your specific risk preferences. This requires a comparison between all possible assets. If you think gold is a good pick, you can start by showing (with statistical methods) that gold has higher risk adjusted returns or lower correlation than HmL and then repeating the same thing for all instruments I mentioned.
Here's "stupid gold":

1973-1981 Real returns
US large cap -3.92%
US 10yr bond -5.08%
US 60/40 -4.05%

Gold +13.02%

2000-2010 Real returns
US large cap -3.38%
US 10yr bond +3.92%
US 60/40 -0.04%
Gold +11.40%

That's not even including a few percent in gold equities either. Two of the last five decades a small allocation to gold provided substantially smoother returns, justifying my statement on improving portfolio performance in some environments.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Forester wrote: Mon Aug 24, 2020 2:17 pm
Here's "stupid gold":

1973-1981 Real returns
US large cap -3.92%
US 10yr bond -5.08%
US 60/40 -4.05%

Gold +13.02%

2000-2010 Real returns
US large cap -3.38%
US 10yr bond +3.92%
US 60/40 -0.04%
Gold +11.40%

That's not even including a few percent in gold equities either. Two of the last five decades a small allocation to gold provided substantially smoother returns, justifying my statement on improving portfolio performance in some environments.
Those figures are statistically insignificant. Despite that and the fact you went out of your way to cherry pick the periods with the highest gold returns, gold (in both time periods) still offered worse risk adjusted returns than SmB and HmL according to Ken French FF5 dataset.

Give me some statistically significant facts about gold, then we'll talk.
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Re: A timely and equanimous article on gold

Post by Kevin K »

[/quote]
Let's be honest: there are alternative investments with lower risk, higher return and lower correlation with equities than gold, there is no place for gold in any data-driven or evidence-based portfolio. If you want to use an alternative facts based portfolio (or perhaps if you want to bribe your way out of the country), you can use gold, but then you can't use any of the arguments above because they don't work.
[/quote]

You keep harping on gold having no expected rate of return while tossing out a list of alternative assets you say would do as well or better without looking at the ACTUAL return of portfolios containing a modest allocation to gold. There are several articles on this on the Portfolio Charts site, as well as calculators that make it easy to compare real returns over any time frame you choose. Here's one such article that seems to be relevant to this discussion since it shows how robustly defensive a bunch of well-known allocation are during recessions:

https://portfoliocharts.com/2019/08/20/ ... vestments/

Now of course there's no way to test most of the exotica you offer as alternatives to gold (AQR, TIPs, negative bonds, etc.) because there's not enough data to include them. Meanwhile one of the most robust allocations in that article is Larry Swedroe's, which has no gold at all. But if you're willing to give small cap, value and EM stocks a pass you could also allow that a precious metal with thousands of years of use as a storehouse of value and proven value in the most robustly defensive, high SWR, low draw-down allocations we know of might make sense for some investors.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Kevin K wrote: Mon Aug 24, 2020 3:50 pm You keep harping on gold having no expected rate of return while tossing out a list of alternative assets you say would do as well or better without looking at the ACTUAL return of portfolios containing a modest allocation to gold. There are several articles on this on the Portfolio Charts site, as well as calculators that make it easy to compare real returns over any time frame you choose. Here's one such article that seems to be relevant to this discussion since it shows how robustly defensive a bunch of well-known allocation are during recessions:

https://portfoliocharts.com/2019/08/20/ ... vestments/
I'm well aware of that. The problem is that that isn't statistically significant. According to my calculations, it'll take approximately 200 years before gold's return becomes statistically significant. The confidence intervals on gold are so bad, you should have less confidence in "gold expected return > 0" than "tesla expected return > sp500".

You might be wondering how it's possible that we need to wait 200 years for gold returns to become statistically significant. I'm glad you asked. The required number of samples to become statistically significant is dependent on the sharpe ratio squared. The sharpe ratio of gold is [Offensive term removed by moderator oldcomputerguy] poor, over the last 40 years it is pretty much equal to zero. HmL, on the other hand, has such a high sharpe ratio that is statistically significant in 3 out of 4 geographic regions after just 22 years of data.

I'm not saying you should invest in value. I'm saying that statistically, you should have very, very low confidence that gold has a positive expected return or negative correlation. There are also a bunch of assets that we have good to great confidence in that they offer a positive expected return, negative correlation, or both. From that point of view, it makes absolutely zero sense to invest in gold.
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Re: A timely and equanimous article on gold

Post by 000 »

Uncorrelated wrote: Mon Aug 24, 2020 3:28 pm Those figures are statistically insignificant. Despite that and the fact you went out of your way to cherry pick the periods with the highest gold returns, gold (in both time periods) still offered worse risk adjusted returns than SmB and HmL according to Ken French FF5 dataset.

Give me some statistically significant facts about gold, then we'll talk.
Gold is not equity, so the comparison to factor jargon is pointless.

Gold is a currency. It may not be a currency you want to hold. It may not be a currency forever. But it has been and is a currency. That is all.
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Re: A timely and equanimous article on gold

Post by whodidntante »

Uncorrelated wrote: Mon Aug 24, 2020 4:37 pm
Kevin K wrote: Mon Aug 24, 2020 3:50 pm You keep harping on gold having no expected rate of return while tossing out a list of alternative assets you say would do as well or better without looking at the ACTUAL return of portfolios containing a modest allocation to gold. There are several articles on this on the Portfolio Charts site, as well as calculators that make it easy to compare real returns over any time frame you choose. Here's one such article that seems to be relevant to this discussion since it shows how robustly defensive a bunch of well-known allocation are during recessions:

https://portfoliocharts.com/2019/08/20/ ... vestments/
I'm well aware of that. The problem is that that isn't statistically significant. According to my calculations, it'll take approximately 200 years before gold's return becomes statistically significant. The confidence intervals on gold are so bad, you should have less confidence in "gold expected return > 0" than "tesla expected return > sp500".

You might be wondering how it's possible that we need to wait 200 years for gold returns to become statistically significant. I'm glad you asked. The required number of samples to become statistically significant is dependent on the sharpe ratio squared. The sharpe ratio of gold is [Offensive term removed by moderator oldcomputerguy] poor, over the last 40 years it is pretty much equal to zero. HmL, on the other hand, has such a high sharpe ratio that is statistically significant in 3 out of 4 geographic regions after just 22 years of data.

I'm not saying you should invest in value. I'm saying that statistically, you should have very, very low confidence that gold has a positive expected return or negative correlation. There are also a bunch of assets that we have good to great confidence in that they offer a positive expected return, negative correlation, or both. From that point of view, it makes absolutely zero sense to invest in gold.
User name checks out. :happy
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Re: A timely and equanimous article on gold

Post by Steve Reading »

Literally anyone: "Gold is a useful asset for portfolios"
*Uncorrelated has entered the chat*
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Re: A timely and equanimous article on gold

Post by Pu239 »

000 wrote: Mon Aug 24, 2020 4:39 pm
Gold is a currency. It may not be a currency you want to hold. It may not be a currency forever. But it has been and is a currency. That is all.
Yet another reason why some investors might shun gold.
Between the idea And the reality...Between the motion And the act...Falls the Shadow - T. S. Eliot
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Re: A timely and equanimous article on gold

Post by StormShadow »

Have to admit that I've been harping on the gold bugs for a while.... but FWIW, I'd much rather have gold than bitcoin. :beer
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Re: A timely and equanimous article on gold

Post by Forester »

Steve Reading wrote: Mon Aug 24, 2020 4:59 pm Literally anyone: "Gold is a useful asset for portfolios"
*Uncorrelated has entered the chat*
It's a case of heads I win, tails you lose. The cost of carrying gold & gold equities is not really felt when blue chip large cap equities are buoyant.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

Uhh yeah.

Just to be clear, I don't have a problem with gold. I have a problem with bad arguments. And it just turns out the evidence for gold is so weak that data-driven arguments just don't work.
Forester wrote: Tue Aug 25, 2020 3:19 am
Steve Reading wrote: Mon Aug 24, 2020 4:59 pm Literally anyone: "Gold is a useful asset for portfolios"
*Uncorrelated has entered the chat*
It's a case of heads I win, tails you lose.
I think you meant to write "if tails I lose", since Steve doesn't even play.

If that's the way you like to gamble just go to a casino.
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Re: A timely and equanimous article on gold

Post by GRP »

Some people are so foolish that even when you bring them to water when dying of dehydration they will not drink.

The gold haters hide behind an edifice of highfalutin language and statistics when all they need is a little reading of history to understand why gold is a necessary part of any diversified portfolio.

Uncorrelated is the investment equivalent of Deepak Chopra -- subjecting anyone who will listen to word salad that is totally meaningless. Go ahead and ignore gold if you want. It's your (or rather your wealth's) funeral.
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Re: A timely and equanimous article on gold

Post by Forester »

Uncorrelated preferred alternative asset: ticker symbol COSTLOT, a peer-to-peer fund he read about in a Swedroe book which lends money to teenage entrepreneurs. Initial charge of 5% and the annual management fee is 2.75%, if an investor wants to withdraw money he has to play a round of golf with the fund manager and buy him a beer afterwards.

Vs obscure, stupid gold with thousands of years of pedigree, liquid & cheap to hold (or some physically also if one likes), made an appreciable difference in two periods since the Nixon default, and which the government guards with M1 Abrams tanks.
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Re: A timely and equanimous article on gold

Post by AlohaJoe »

GRP wrote: Tue Aug 25, 2020 4:25 am Uncorrelated is the investment equivalent of Deepak Chopra -- subjecting anyone who will listen to word salad that is totally meaningless. Go ahead and ignore gold if you want. It's your (or rather your wealth's) funeral.
Forester wrote: Tue Aug 25, 2020 6:10 am Uncorrelated preferred alternative asset: ticker symbol COSTLOT, a peer-to-peer fund he read about in a Swedroe book which lends money to teenage entrepreneurs. Initial charge of 5% and the annual management fee is 2.75%, if an investor wants to withdraw money he has to play a round of golf with the fund manager and buy him a beer afterwards.
Multiple ad hominem attacks from gold defenders is not a great look for their position.

I understood what Uncorrelated posted. If you didn't, that doesn't make it word salad.
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Re: A timely and equanimous article on gold

Post by petulant »

Uncorrelated, I am concerned that your application of models has some conceptual flaws. What you are saying is that an asset or factor can have such high returns with low volatility (Sharpe ratio) in a short amount of time that it becomes statistically significant and therefore we update our expectations for the future based on the data. It seems to me that there must be an unrealistic assumption in that kind of thinking, like i.i.d. returns, because often very high returns in a short amount of time lead to mean reversion, not an eternal premium.

I am also concerned that the list of alternatives was identified without any review of correlation to stocks and bonds. While I understand that was not on the list of qualifiers that Forester identified, that is really what's going on here. The theoretical argument for gold is that it performs well in particular environments that hurt a traditional stock/bond portfolio, such as periods with high inflation and political instability.
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Re: A timely and equanimous article on gold

Post by oldcomputerguy »

The posts in this thread are starting to get a bit contentious. As a reminder, see General Etiquette:
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones. Discussions are about issues, not people. If you disagree with an idea, go ahead and marshal all your forces against it. But do not confuse ideas with the person posting them. At all times we must conduct ourselves in a respectful manner to other posters.
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Re: A timely and equanimous article on gold

Post by Uncorrelated »

petulant wrote: Tue Aug 25, 2020 6:38 am Uncorrelated, I am concerned that your application of models has some conceptual flaws. What you are saying is that an asset or factor can have such high returns with low volatility (Sharpe ratio) in a short amount of time that it becomes statistically significant and therefore we update our expectations for the future based on the data. It seems to me that there must be an unrealistic assumption in that kind of thinking, like i.i.d. returns, because often very high returns in a short amount of time lead to mean reversion, not an eternal premium.

I am also concerned that the list of alternatives was identified without any review of correlation to stocks and bonds. While I understand that was not on the list of qualifiers that Forester identified, that is really what's going on here. The theoretical argument for gold is that it performs well in particular environments that hurt a traditional stock/bond portfolio, such as periods with high inflation and political instability.
With mean reversion, are you referring to the golfer argument? Well, of course you are right that there is a high probability that assets (gold, factors, US equity) will mean revert due to various reasons (overfitting, survivorship bias, incorrectly specified statistical tests, dumb luck). But this applies to all assets. If all else is equal, then an asset with a higher statistical confidence is a better choice.

Of course there are more arguments that should be considered. Some factors have strong statistical evidence but have implausible explanations attached to them (i.e. momentum). Some assets are the opposite (gold, apparently).

As for gold role in instable environments, I hear you, the problem is that the evidence for that argument is of very low (statistically speaking) quality. It's a belief based argument (as in tooth fairy), not an evidence based one, the statistical confidence is far too poor for that.
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Re: A timely and equanimous article on gold

Post by Steve Reading »

Forester wrote: Tue Aug 25, 2020 6:10 am Uncorrelated preferred alternative asset: ticker symbol COSTLOT, a peer-to-peer fund he read about in a Swedroe book which lends money to teenage entrepreneurs. Initial charge of 5% and the annual management fee is 2.75%, if an investor wants to withdraw money he has to play a round of golf with the fund manager and buy him a beer afterwards.

Vs obscure, stupid gold with thousands of years of pedigree, liquid & cheap to hold (or some physically also if one likes), made an appreciable difference in two periods since the Nixon default, and which the government guards with M1 Abrams tanks.
A strawman argument within a false dichotomy?

That's a bold strategy, cotton. Let's see if it pays off.
GRP wrote: Tue Aug 25, 2020 4:25 am Some people are so foolish that even when you bring them to water when dying of dehydration they will not drink.
No joke, I thought your post would be pro-Uncorrelated based on that sentence :mrgreen:
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