Being Open Minded about Gold

[tadamsmar]

Ferri took on gold a while back, but there seemed to be a contradiction in his reasoning. I am in favor of a more nuanced approach.

He argued against buying gold now, and I agree with that. But he also railed against the PP investors. At this time the PP investors are, on balance, selling gold. If you believe that gold is overpriced, then selling gold is even better than not buying gold.

In my view:

1. There may be evidence that gold is a good diversifier. For instance, adding a gold allocation to a Trinity-Study-like analysis might show that it reduces the failure rate. I am open to the idea, but I have not look into it much.

2. But, now it not the time to get on the bandwagon.

So, the long time PP investors might have the right general idea about gold, but I am not sure about 25% and the rest of the AA.

But, PP evangelist are a different matter. This is not the time to switch to the PP.

Long term holders of gold OK, current gold evangelists no.

[dryfly]

2. But, now it not the time to get on the bandwagon.

So, the long time PP investors might have the right general idea about gold, but I am not sure about 25% and the rest of the AA.

But, PP evangelist are a different matter. This is not the time to switch to the PP.

Long term holders of gold OK, current gold evangelists no.

So you are saying that one who subscribes to the PP theory must use market timing to successfully implement it? Does this apply to all four components of the PP?

In theory at any point in time one or more components should be doing well while one or more should be in the tank. At what point is it "safe" to invest in the PP?

[Wonk]

Ferri took on gold a while back...

And gold beat him like a red headed stepchild. His call was for $700 gold by 2010 and $500 gold by 2011.

There is plenty of evidence gold is an excellent portfolio diversifier. As long as people don't get dogmatic about the topic, it's an open & shut case.

[Noobvestor]

2. But, now it not the time to get on the bandwagon.

So, the long time PP investors might have the right general idea about gold, but I am not sure about 25% and the rest of the AA.

But, PP evangelist are a different matter. This is not the time to switch to the PP.

Long term holders of gold OK, current gold evangelists no.

So you are saying that one who subscribes to the PP theory must use market timing to successfully implement it? Does this apply to all four components of the PP?

In theory at any point in time one or more components should be doing well while one or more should be in the tank. At what point is it "safe" to invest in the PP?

The problem, as Ferri and others have pointed out, is that fund flows don't lie - and more people buy into the PP when it and/or gold is doing well, then sell back out when it/they aren't. So it isn't a matter of it being a bad time to buy in, IMHO, it's just that many people who *do* buy in now will get out later.

[nisiprius]

Tadasmar, I pretty much agree with everything you said. In the 2007 edition of A Random Walk Down Wall Street Burton Malkiel says, in the "sleeping scale" table, of gold, "Substantial risk. Believed to be a hedge against doomsday and hyperinflation. Can play role in balancing a diversified portfolio, however." 2011 appears to be the same. In the text he grudging acknowledgement that a 5% allocation might not be a bad thing.

William J. Bernstein has a very respectful piece, Wild about Harry, about Browne and the "Permanent Portfolio."

If it weren't for the cable-TV hucksterism and the political-ideological baggage gold carries, it would be just another not-quite-mainstream might-be-something-to-it investment. Unfortunately, it does carry that baggage.

BTW I just deleted a comparison of the Permanent Portfolio mutual fund, PRPFX, with Vanguard Wellesley Income Fund, VWINX, because the data at http://crawlingroad.com/blog/2008/12/22 ... l-returns/ are sufficiently different (better) from PRPFX that it doesn't seem as if PRPFX is a fair proxy for the Permanent Portfolio.

[dumbmoney]

He argued against buying gold now, and I agree with that. But he also railed against the PP investors. At this time the PP investors are, on balance, selling gold.

It's likely that PP investors are net buyers, given that past performance is attracting new investors. Just look at the flows into PRPFX.

[craigr]

All investments that are doing well attract hot money. It's just how things work. It doesn't make an investing strategy that holds gold invalid though. As Wonk said, just don't get dogmatic about any asset. Some people love gold. Some people love stocks. Some people love bonds. It's a good idea to remain very agnostic about these things and keep emotions out of it.

If you have been invested in the Permanent Portfolio you sell an asset back down to 25% when it hits 35% of your allocation. You buy an asset back to 25% when it gets to 15% of your allocation. There is no guesswork involved.

I've heard people saying about gold being too expensive at least since it was $600 an ounce several years ago. Today's price shows, yet again, that NO MARKET can be predicted. Not the stock market. Not the bond market. Not even the gold market.

But the OP question about gold being a diversifier in a portfolio is the main point. I concluded a long time ago that it is very strong diversifier against certain economic situations compared to stocks and bonds. When used in a balanced and diversified portfolio gold does in fact lower risk and can increase returns when stocks and bonds are doing poorly.

Diversification with rebalancing is one of the only effective tools investors have to protect themselves and I strongly recommend investors use them to full effect. Gold can be part of this equation along with stocks and bonds.

[tadamsmar]

2. But, now it not the time to get on the bandwagon.

So, the long time PP investors might have the right general idea about gold, but I am not sure about 25% and the rest of the AA.

But, PP evangelist are a different matter. This is not the time to switch to the PP.

Long term holders of gold OK, current gold evangelists no.

So you are saying that one who subscribes to the PP theory must use market timing to successfully implement it? Does this apply to all four components of the PP?

In theory at any point in time one or more components should be doing well while one or more should be in the tank. At what point is it "safe" to invest in the PP?

Good point. I thought about that after I posted.

I am advocating market timing. Hmm...

I guess I would have to allocate to gold if I was convinced that it would indeed increase the robustness of my portfolio significantly. I am open to the idea but not convinced. I am certainly not convinced that the PP is the only correct use of gold in an AA.

[Rick Ferri]

Ferri took on gold a while back...

And gold beat him like a red headed stepchild. His call was for $700 gold by 2010 and $500 gold by 2011.

I was early in my prediction. 8)

Over 3000 years of gold prices, there have been many spikes in supply and demand. However, gold prices have ALWAYS fallen back to the same inflation-adjusted price, which is about $600 per once in today's dollars. It's going to take a little longer this time because of the number of people getting involved indirectly through ETFs, which is truly an unbelievable feeding frenzy. ETFs were not available in the past.

Now, you can say this time it's different, but I don't think so.

Rick Ferri


.

[tadamsmar]

He argued against buying gold now, and I agree with that. But he also railed against the PP investors. At this time the PP investors are, on balance, selling gold.

It's likely that PP investors are net buyers, given that past performance is attracting new investors. Just look at the flows into PRPFX.

Good point, you show evidence that PP investors are buying gold on balance because of all the newly minted PP investors that came aboard recently.

I should have said long term PP investors and any other long term investor that rebalances to an AA with gold in the plan. Ferri had nothing good to say about them either, but they would be selling gold on balance. So, the general point that Ferri painted with too broad a brush still stands I think.

[tadamsmar]

Ferri took on gold a while back...

And gold beat him like a red headed stepchild. His call was for $700 gold by 2010 and $500 gold by 2011.

I was early in my prediction. 8)

Over 3000 years of gold prices, there have been many spikes in supply and demand. However, gold prices have ALWAYS fallen back to the same inflation-adjusted price, which is about $600 per once in today's dollars. It's going to take a little longer this time because of the number of people getting involved indirectly through ETFs is truly an unbelievable feeding frenzy. ETFs were not available in the past.

Now, you can say this time it's different, but I don't think so.

Rick Ferri


.

I will grant your point that gold has zero real return, and even negative after the fees and costs. But I am not convinced that this is a slam-dunk argument against having some gold in your AA.

As far as I know, all insurance has a negative expected return and yet insurance is not a bad thing in general. If gold actually shored up stocks and bonds in a Trinity-style analysis, then the insurance might be worth the cost. But maybe there is a better way to acomplish the same goal.

[LH]

I heard a gold 5000 call in like 4-5 years or something on TV.

[Rick Ferri]

Insurance against what? The price is almost triple on the anticipation of inflation. I believe the worst event that can happen to gold buyers is an actual jump in inflation because gold prices will come tumbling down as everyone starts to unwind their insurance hordes.




.

[craigr]

However, gold prices have ALWAYS fallen back to the same inflation-adjusted price, which is about $600 per once in today's dollars.

But this is a Chicken vs. The Egg argument. Gold is only worth what the markets price it in terms of the paper counterpart. So the argument that it is only fairly valued at an inflation adjusted price of $600 assumes that the dollar stays at the current value going forward. The current market prediction is that this is not going to happen though.

At one point the inflation adjusted price was around $20 an ounce. But that is no longer true as the dollar has been inflated. The new inflation adjusted price may work out to be $1000 an ounce in a few years for all we know or higher.

[Rick Ferri]

The $20 was a fixed government price, not a free market price.

Long-term real price of gold

Follow the red line.

In late 1970s-1980, gold surged because there was actual double digit inflation and people didn't see an end to it. That's not happening this time. We have about 2.5% inflation. Gold is going higher on the speculation of inflation, not actual inflation.

.

[LH]

http://money.msn.com/investment-advice/ ... ydari.aspx

Gold 5000, (and even gold 8000). though they are kinda unclear on the timing, and as they say, timing is everything. : )

LH

[chaz]

Not for me, but...

http://money.msn.com/investment-advice/ ... ?GT1=33036

[LH]

However, gold prices have ALWAYS fallen back to the same inflation-adjusted price, which is about $600 per once in today's dollars.

But this is a Chicken vs. The Egg argument. Gold is only worth what the markets price it in terms of the paper counterpart. So the argument that it is only fairly valued at an inflation adjusted price of $600 assumes that the dollar stays at the current value going forward. The current market prediction is that this is not going to happen though.

At one point the inflation adjusted price was around $20 an ounce. But that is no longer true as the dollar has been inflated. The new inflation adjusted price may work out to be $1000 an ounce in a few years for all we know or higher.

Gold is above its "suit price" is it not? ounce of gold buys a nice suit in roman times, and now. 1500 is a lot for a suit. though I guess, it depends on the suit eh? comes down to a basket of goods really. which is what the cpi adjustment is used for however imperfectly?

[craigr]

The $20 was a fixed government price, not a free market price.

It was a fixed price the market readily accepted up until around 1913 because there was no inflation in the currency up until then save for a couple spikes around some wars (Civil War).

But even then if I were to have asked an economist at the time what an ounce of gold would have been worth he would have said the inflation adjusted price was $20. But eventually the inflation adjusted price went up well beyond this.

And really I may have even thought that the gold price at $600 would be more appropriate a couple years ago. But the rate of govt. spending is making it less likely to me that $600 is the right figure. I don't know if it's $1500, but I am having a harder time believing it is going to go below $600 again based on the current trajectory of things.

[chaz]

Not for me, but...

http://money.msn.com/investment-advice/ ... ?GT1=33036

[craigr]

Gold is above its "suit price" is it not? ounce of gold buys a nice suit in roman times, and now. 1500 is a lot for a suit. though I guess, it depends on the suit eh?

And the markets will work out the price in terms of expectations and what really happens. Right now the markets are expecting higher inflation and this is being priced into gold.

[Rick Ferri]

Gold is above its "suit price" is it not? ounce of gold buys a nice suit in roman times, and now. 1500 is a lot for a suit. though I guess, it depends on the suit eh?

And the markets will work out the price in terms of expectations and what really happens. Right now the markets are expecting higher inflation and this is being priced into gold.

Exactly!

In late 1970s-1980, gold surged because there was actual double digit inflation and people didn't see an end to it. That's not happening this time. We have about 2.5% inflation. Gold is going higher on the speculation of inflation, not actual inflation.

The price of ever thing would have to increase at least 100% to catch up to the price of gold. It's way ahead of itself. BUT, it's easy to buy now. You can do it with one-click through any brokerage firm, and do it in a triple-leverage ETF on margin!

Gold and silver are forming a classic liquidity driven B-U-B-B-L-E-S!

Rick Ferri

[craigr]

The $20 was a fixed government price, not a free market price.

Long-term real price of gold

Follow the red line.

And at any point the 500 adjusted price could be a 1000 adjusted price and the graph shows the same thing. It's the dollar's future value that is the unknown variable in the calculation.

[craigr]

In late 1970s-1980, gold surged because there was actual double digit inflation and people didn't see an end to it. That's not happening this time. We have about 2.5% inflation. Gold is going higher on the speculation of inflation, not actual inflation.

We are in violent agreement. Gold prices can outrun actual inflation. It's one reason I like it as an asset because the rebalance profit potential is there.

But this still doesn't answer the question about whether the markets are correct to assume higher inflation is coming. If they are right, then the higher prices could be warranted.

[Wonk]

Over 3000 years of gold prices, there have been many spikes in supply and demand. However, gold prices have ALWAYS fallen back to the same inflation-adjusted price, which is about $600 per once in today's dollars.

Ok, I'd be very interested to see how you came up with the $600 figure. Please share.

[Rick Ferri]

Craig,

Gold isn't outrunning inflation, it IS inflation! Gold is the inflated asset class today. It's a liquidity driven inflation. Today, anyone with an on-line brokerage account can leverage buy gold and silver ETFs with one click of a mouse. That's a recipe for disaster.

Rich Ferri

[Rick Ferri]

Over 3000 years of gold prices, there have been many spikes in supply and demand. However, gold prices have ALWAYS fallen back to the same inflation-adjusted price, which is about $600 per once in today's dollars.

Ok, I'd be very interested to see how you came up with the $600 figure. Please share.

Inflation adjusted, on the high end, gold should be trading between $500 and $600 per ounce. That's the price.

http://inflationdata.com/inflation/imag ... _chart.htm
Rick Ferri

[craigr]

Craig,

Gold isn't outrunning inflation, it IS inflation! Gold is the inflated asset class today. It's a liquidity driven inflation. Today, anyone with an on-line brokerage account can leverage buy gold and silver ETFs with one click of a mouse. That's a recipe for disaster.

I understand the argument. But why can't I say the same thing about the stock market? Aren't the low interest rates forcing people back into the market to chase yield when they'd rather have that money somewhere safer? Stock ETFs are just as easy to buy as Gold ETFs.

FWIW. I have had to rebalance twice now out of my gold holdings. If you are using it in a diversified portfolio with rebalancing then gold is really not a problem. If it is your primary investment, you are looking for trouble just as you are by concentrating bets anywhere.

[craigr]

Inflation adjusted, on the high end, gold should be trading between $500 and $600 per ounce. That's today's price assuming inflation isn't as bad going forward as the markets expect.

I fixed that last part for you.

[Wonk]

Inflation adjusted, on the high end, gold should be trading between $500 and $600 per ounce. That's the price.

I see the chart, but what is your start date? 1900? 1934? 1971?

What is your method of adjusting for inflation? I haven't seen anyone, anywhere, make any kind of coherent case for the inflation adjusted gold price at $600. Cash costs alone to mine an ounce are north of $600.

What date and price are you using for your start and what method of inflation adjustment?

[Lbill]

Rick said:

Gold is going higher on the speculation of inflation, not actual inflation.

Source: IS GOLD REALLY AN INFLATION HEDGE? 20 April 2011 by SymmetricInfo

Looks like gold has been anticipating inflation for quite a while now, starting about a decade ago when it clearly began to increase more rapidly than inflation. This looks like a specious and simplistic argument to me. How can anyone purport to know why gold has gone up for this long? I can speculate that there's more going on than that, and my speculations would be just as valid.

[Rick Ferri]

There are other charts going back 1,000 years and 500-600 is the eye-ball price. Gold is not a *new* asset class. There's more information on pricing gold throughout history than any other commodity except perhaps wheat. Why deny it?

I am not saying that gold can't hit it's old inflation adjusted high, but it's all speculation. It's not fundamentals. It won't stick.

[craigr]

There are other charts going back 1,000 years and 500-600 is the eye-ball price. Gold is not a *new* asset class. There's more information on pricing gold throughout history than any other commodity except perhaps wheat. Why deny it?

The debate is whether the 5-600 historic range won't be a 1-2000 range in the future when adjusted for inflation. We don't know.

I think it's great that there is this asset that exists that has been around for thousands of years and has been able to maintain tangible value through the ages. What other asset class has such a history? Sounds like something I'd want to own to diversify my portfolio a little.

[Angst]

As long as people don't get dogmatic about the topic, it's an open & shut case.

I love it!

[FredPeterson]

Perhaps gold is on its way to becoming a "monetary hedge" instead of an "inflation hedge"

[G12]

I am not saying that gold can't hit it's old inflation adjusted high, but it's all speculation. It's not fundamentals. It won't stick.

Isn't it really about fiat currency debasement, rising budget deficits in many developed countries, concerns over various central bank policies and spiking world events rather than assumed hyperinflation? I don't personally know anyone who has said, "I believe or am concerned my personal inflation rate will increase 10% YOY therefore I am buying more gold."

[Default User BR]

Gold is above its "suit price" is it not? ounce of gold buys a nice suit in roman times, and now. 1500 is a lot for a suit. though I guess, it depends on the suit eh?

Devising the "suit signal"? If gold is below the price of nice suit, buy. Above, sell!



Brian

[gotherelate]

Gold is above its "suit price" is it not? ounce of gold buys a nice suit in roman times, and now. 1500 is a lot for a suit. though I guess, it depends on the suit eh?

Devising the "suit signal"? If gold is below the price of nice suit, buy. Above, sell!



Brian

I guess we haven't yet seen what the "big money" traders pay for a nice suit.

[gotherelate]

I don't know how "expensive" relates to "nice", but these figures from the fall of 2005 suggest that the top of the gold market may be a ways off yet.

[Rick Ferri]

There are other charts going back 1,000 years and 500-600 is the eye-ball price. Gold is not a *new* asset class. There's more information on pricing gold throughout history than any other commodity except perhaps wheat. Why deny it?

The debate is whether the 5-600 historic range won't be a 1-2000 range in the future when adjusted for inflation. We don't know.

You do realize your saying, "This time it's different".



.

[bhmlurker]

If gold truly reflects inflation in USD, wouldn't gold price relative to a non-inflating, non-USD currency remain relatively stable? According to goldprice.org, here's the gold price %changes for 1 and 5 yr for each currency:

INR 31% 134%
USD 31% 138%
CNY 24% 92%
GBP 22% 157%
ZAR 20% 160%
EUR 20% 103%
SGD 18% 85%
JPY 14% 69%

Looks like gold price is higher in virtually all currencies, even in JPY which is deflationary. Perhaps gold price increase in JPY can be a proxy for global speculation.

[Rick Ferri]

If gold truly reflects inflation in USD, wouldn't gold price relative to a non-inflating, non-USD currency remain relatively stable?

Looks like gold price is higher in virtually all currencies, even in JPY which is deflationary. Perhaps gold price increase in JPY can be a proxy for global speculation.

Gold is in a world-wide asset bubble. The fall is going to be brutal.

Rick Ferri

[fredflinstone]

This thread has inspired me to change my tagline. Credit goes to some other commenter whose name I can't recall. (He said essentially the same thing several weeks ago.)

[Lbill]

Gold is in a world-wide asset bubble. The fall is going to be brutal.

Thank heaven that there's such low risk in stocks and bonds right now.
The last time gold was in a bubble in 1981, the interest rate on the 10-year treasury was 15% and stocks were in the toilet. I'm not worrying about the brutal fall in gold until a parabolic blow-off and (a) stocks are in the toilet and (b) interest rates are a lot higher than they are now. That's what it will take for government monetary authorities to regain any credibility - just like the last time. Way too soon to be hollering "fire."

[Rick Ferri]

The last time gold was in a bubble in 1981, the interest rate on the 10-year treasury was 15% and stocks were in the toilet. "

Thats the reason gold bubbled - real, honest to goodness double-digit inflation! Where's that inflation now? Nowhere. For the past 10 years we've been told by the gold bugs that hyper-inflation is coming. Where is it? It's all speculation. Gold has gone higher on a hoax. :roll:

Rick Ferri

[slowmoney]

Check out this link:

"Absolutely this serves as a warning that ‘buyers should beware’ in any market that makes stratospheric or parabolic moves, especially when trading leveraged positions."

http://www.cnbc.com/id/42726288

There is even an ad for silver by Scottsdale Silver next to the article!!

Did inflation go down by 11% in past 24 hours?

[Lbill]

Rick - you'd think that gold investors would have caught on to the hoax after 10 years of being misled. Maybe they're as easily fooled as stockbugs have been for the last 12 years.

[craigr]

There are other charts going back 1,000 years and 500-600 is the eye-ball price. Gold is not a *new* asset class. There's more information on pricing gold throughout history than any other commodity except perhaps wheat. Why deny it?

The debate is whether the 5-600 historic range won't be a 1-2000 range in the future when adjusted for inflation. We don't know.

You do realize your saying, "This time it's different".



.

I don't utter those four words. It's like saying Beetlejuice three times.

We will only know the future inflation adjusted price of gold in dollars when that future gets here. We can't look at today's price and extrapolate forwards because the direction of the dollar has been to inflate and not remain the same price since we broke the gold standard.

This isn't an argument that today's price is right or wrong. Looking at a chart and saying that gold should be X based on inflation adjustments cannot possibly take into account future unknown inflation that could happen going forward.

Now is that future price $500 as you suggested before? Without getting political, I find that less and less likely due to various policy decisions. Now is it $1500? I don't know that either. Maybe it's right down the middle. But the markets think something is going to happen and that's why the price is being run up. IMO.

[Rick Ferri]

Rick - you'd think that gold investors would have caught on to the hoax after 10 years of being misled. Maybe they're as easily fooled as stockbugs have been for the last 12 years.

It takes a while for some bubbles to burst. Look at the tech stocks in the late 1990s when they were trading a 100 times expected future revenue. It was the new paradigm, if you recall that phrase. Remember this, "You can't value these companies using brick and mortar methods. Those are antiquated formulas that don't work anymore." LOL

Rick Ferri

[Lbill]

Since March, 2009 the S&P500 is up over 100%. How long will it take for that bubble to burst? I don't think gold has been driven up by idiot investors who have been boondoggled for a decade by an inflation hoax. I think gold has been driven up by all the "shazam" money sloshing around looking for a return. All asset classes are in a "bubble", IMO. If the monetary base is decreased, then it will come out of stocks, bonds, commodities, gold and everything else. No place to hide, Kemo Sabe.