Being Open Minded about Gold

[Rick Ferri]

Since March, 2009 the S&P500 is up over 100%. How long will it take for that bubble to burst?

There is no bubble in stocks. The S&P 500 trades based on real corporate earnings, not inflation speculation. Currently, the market is trading at about 15 time trailing 12 month earnings. That's fine. In fact, it's cheap.

Rick Ferri

[brick-house]

rick ferri wrote:

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

Long-term real price of gold

A chart published on www.inflationdata.com is the crux of your argument? Did you also reference their Elliot Wave University to come up with this classic rant against the Permanent (Voodoo) Portfolio?

Rick Ferri quote from August 2009

I am not tooting my own horn here, but 20 years doing research on asset allocation, 5 books in low cost investing and asset allocation, dozens of articles, thousands of correlation studies, after a attaining a CFA, a MS in finance, and a whole bunch of other stuff that I forgot, I really do not need to do 'research' on a portfolio that has 4 simple asset classes.

I call it voodoo because it is. I KNOW what the results are, and know WHY the results WERE that way in the recent past, and WHY it is pure speculation and complete wishful thinking that the results will come anywhere close to those returns in the future. The nation can only come off the gold standard once. It does not happen twice. Good luck!

Rick Ferri

PS. Since you are speculating in returns, here is my speculation. Gold is in a huge bubble due to gold ETF buying by retail investors (dumb money chasing returns and incredible hype in the media). I speculate that gold will drop below 700 per once by 2010, and below 500 per once by 2011.

[Rick Ferri]

I see this conversation is regressing to name calling, so this will be my last post.

My observations were formed years ago and were confirmed by a great book by a great author, The Power of Gold: The History of an Obsession by the late Peter Bernstein. As I said before, early in this conversation, This gold bubble has been created by fear, not fundamentals. Since gold is so easily accessible today through ETFs, it will take longer to come down to a sustainable level than I originally anticipated.

Adiós.

Rick Ferri

[brick-house]

rick ferri quote:

I see this conversation is regressing to name calling, so this will be my last post.

My observations were formed years ago and were confirmed by a great book by a great author, The Power of Gold: The History of an Obsession by the late Peter Bernstein. As I said before, early in this conversation, This gold bubble has been created by fear, not fundamentals. Since gold is so easily accessible today through ETFs, it will take longer to come down to a sustainable level than I originally anticipated.

Adiós.

No name calling here. The name calling is on your part. I have posted your classic rant with documented examples of your name calling (voodoo, dumb money, etc.)

My observations were formed years ago by a great book by a great author, Fail Safe Investing by Harry Browne.

Check out Dr. Bernstein's article for a nuanced argument about and against the Permanent Portfolio.

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

[Wonk]

There are other charts going back 1,000 years and 500-600 is the eye-ball price.

That would be relevant if the money supply in which gold was priced grew only slightly more than the supply of gold during the same span of time. Unfortunately, that's not the case.

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.

So....what you're saying is starting in 2000, gold bugs all over the world decided to band together and create an inflation hoax in order to convince the world to buy more gold? And they've succeeded in fooling the world--including those amazingly efficient markets--for almost 12 years now? And they say gold bugs wear tinfoil hats...

The truth is persistent negative real interest rates create bull markets in gold. Investors don't like negative real rates, so they buy gold. The inflation you don't see in the U.S. has been exported to the rest of the developing world. Countries maintaining dollar pegs recycle trade surpluses back into US federal debt while simultaneously creating new domestic currency in order to maintain the peg and advantageous FX rates for domestic exporters.

Gold has been the means of settling international trade for most of the modern era. We've only been on this experiment for 40 years, where the currency exchanged for goods is not convertible into a tangible store of value. When that will change is anyone's guess, but when it does it will be a tectonic shift, not a gradual and peaceful exchange. What you are witnessing is increasing investor dissatisfaction with the USD as an international store of value and means of settling international trade.

The thing is, gold standards might not be sexy, but they mute the natural boom-bust cycle of malinvestment and cleansing. Ever since we granted monetary policy decisions to the Fed, the boom-bust cycles have been greater in magnitude. The duration of the cycles remains the same: roughly 16-20 years between equity and commodity secular bull markets. We're about halfway to 2/3 through this one, if you're keeping score at home. The end is where we see the fireworks (ie--parabolic top).

We'll need to see the gold price near MB and/or FDHBFI before this cycle is through. For instance, back in the 79-80 blow-off, the high gold price covered both U.S. MB as well as FDHBFI. For much of 1980, we were on a de facto gold standard. After confidence had been restored in the dollar, investors moved back into riskier assets such as stocks and bonds. Wash, rinse, repeat.

At the moment the gold price would need to reach about $9700 to cover the U.S. MB and roughly $12,000 to cover federal debt held by foreign investors (central banks only). I'm not saying we will get to those numbers exactly. Frankly, I don't know exactly where the peak will be because it will be determined by future policy decisions, but it's not at $1500, I'll tell you that much. The point is, you will never, ever, see $600 gold again. Yes, I said never. It will never happen. At the moment I see $5,000 as very reasonable, in fact probable--short of a deflationary spiral taking hold.

Also, interesting you mention the Nasdaq. Here's a neat little graphic I just noticed today, comparing the 1980 gold peak, 1999 Nasdaq peak and the current gold bull market. Which one doesn't have a parabolic peak yet?



What you will witness, Rick, is the continued outperformance of gold relative to equities for the next 3-5 years and possibly up to 10. We already have you on the record for $500 gold by 2011. Now you have me on the hook. We'll see who's closer to being right on this one.

[Lbill]

There is no bubble in stocks. The S&P 500 trades based on real corporate earnings, not inflation speculation. Currently, the market is trading at about 15 time trailing 12 month earnings. That's fine. In fact, it's cheap.

It's reassuring to know there's no speculation in the stock market. It will come as no surprise that not every knowledgeable market observer agrees with this view. For example, Shiller's PE/10 is now over 24 which is well over it's average of 16 and is a level only exceeded three times previously - with the unfortunate expected consequences for market returns.

From Shiller's paper

The use of one-year's earnings in the price–earnings ratio is an unfortunate convention, recommended by tradition and convenience rather than any logic. As long ago as 1934, Benjamin Graham and David Dodd, in their now famous textbook Security Analysis, said that for purposes of examining such ratios, one should use an average of earnings of "not less than five years, preferably seven or ten years." (p. 452) Earnings in any one year tend to be affected by short-run considerations, that cannot be expected to continue. In the present time, earnings have suddenly shot up in the last few years, bringing price–earnings ratios down dramatically, but it is doubtful that such sudden changes are meaningful

[tadamsmar]

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

Long-term real price of gold

Follow the red line.

The stock market crashed in 1929, but gold did not shoot up (in real terms) till 1932ish. Why is that? Roosevelt's election?

[tadamsmar]

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?

Cowry shells.

Sounds like something I'd want to own to diversify my portfolio a little.

[tadamsmar]

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."

The real price of gold remained steady during and after the '29 crash and shot in '32 as it became apparent Roosevelt would be elected. Or was it something else? Maybe events in Europe?

[tadamsmar]

I figure every asset in my AA will be in a so-called bubble at one time or another.

The fact that an asset seems to be in a bubble is not a sufficient reason to not have an ongoing allocation to it. You just rebalance.

[tadamsmar]

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."

If all those spectres don't lead to inflation levels that are not already priced into bonds, then what reason is there to flee to gold?

What does the term "fiat currency debasement" mean if it does not mean actual or anticipated inflation?

[tadamsmar]

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.

.

This does not make sense. The mere fact of actual inflation should not lead to a spike in inflation-adjusted gold prices. There must be a belief that bonds prices under-predict future inflation.

Therefore, in 1970-80 gold was going higher on speculation of inflation that was not priced into bonds. Just the same as today.

[FredPeterson]

What you will witness, Rick, is the continued outperformance of gold relative to equities for the next 3-5 years and possibly up to 10. We already have you on the record for $500 gold by 2011. Now you have me on the hook. We'll see who's closer to being right on this one.

I'd rephrase that from "closer to being right" to "not dropping like a brick".

[staythecourse]

I'm not sure why so many folks have trouble understanding how gold works.

Gold is NOT an inflation hedge. Pure and simple, as it is poorly correlated with CPI. Mind you stocks are not correlated either with inflation. Stocks are termed long term inflation hedges because over a period of years the return on stocks are high enough to provide real returns over the rates of inflation over the same time period, but not because of some correlation to inflation itself.

When will gold go up then?
1. Crises hedge
2. Currency hege against the U.S. dollar

Pure and simple.

Gold as far as I'm concerned did not go up in the 70's because of an inflation hedge. The 2 oil shocks in that decade which help cause the inflation surge was the crises to spur fleeing to gold.

Harry Browne said it great in one of his books which have held up through time, which I'm paraphrasing: "When a crises occurs the world will flee to the stability of the U.S. dollar (i'm assuming cash and LTGB) unless the crises involves anxiety regarding the U.S. itself then people will flee to gold.

No surprise every crises the tried and true safe haven investments are: Cash, LTGB, and gold.

Good luck.

[Lbill]

Gold as far as I'm concerned did not go up in the 70's because of an inflation hedge.

I agree. Inflation is only one factor related to currency debasement. Gold is a good hedge for rising inflationary expectations. What's ignored by Rick and others is that steady state inflationary expectations won't provoke changes in the price of gold. For gold to have risen seven-fold over the last decade based on inflation alone, inflationary expectations would have to been accelerating at a high rate over that period of time. How that could have happened to gold investors, while savvy bond investors kept buying bonds at lower and lower interest rates, is a complete mystery to me. The argument that gold is in a bubble because gold buyers have somehow been selectively flimflammed by inflation hype is the real hoax.

[Nate270]

Excellent post by the OP. I agree with Rick in that gold is a terrible asset to buy now. But I think alot of people here are missing the point that its addition to an overall portfolio can decrease risk while increasing returns. I personally have to own something with such a low correlation to other asset classes. Most people who view it like this are selling right now and will be buying when the sharp pullback someday comes. RTM drives all of our lazy portfolios, why would it be any different with gold?

[matt]

There is no bubble in stocks. The S&P 500 trades based on real corporate earnings, not inflation speculation.

That is incorrect. The S&P 500 trades based on speculation of future earnings, not past earnings.

Currently, the market is trading at about 15 time trailing 12 month earnings. That's fine. In fact, it's cheap.

That's the same thing you said in 2007. 2006 earnings of the S&P 500 were $82, but plunged to $15 in 2008. Taking the average actual earnings from 2007 through 2010 as well as 2011 estimates, it is only $61 per year. So, earnings over a 5-year period came in 25% below the 2006 earnings level, which understates just how bad that outlook was because it is implied that earnings would actually increase each year. So your "market is cheap based on last years earnings" view back then missed the mark by what, 50%?

Given that your valuation method for stocks obviously didn't work back then, what makes it more reliable today? And what does that say about the reliability of your valuation methods for any other asset?

[tadamsmar]

I'm not sure why so many folks have trouble understanding how gold works.

Gold is NOT an inflation hedge. Pure and simple, as it is poorly correlated with CPI. Mind you stocks are not correlated either with inflation. Stocks are termed long term inflation hedges because over a period of years the return on stocks are high enough to provide real returns over the rates of inflation over the same time period, but not because of some correlation to inflation itself.

When will gold go up then?
1. Crises hedge
2. Currency hege against the U.S. dollar

Pure and simple.

Gold as far as I'm concerned did not go up in the 70's because of an inflation hedge. The 2 oil shocks in that decade which help cause the inflation surge was the crises to spur fleeing to gold.

Harry Browne said it great in one of his books which have held up through time, which I'm paraphrasing: "When a crises occurs the world will flee to the stability of the U.S. dollar (i'm assuming cash and LTGB) unless the crises involves anxiety regarding the U.S. itself then people will flee to gold.

No surprise every crises the tried and true safe haven investments are: Cash, LTGB, and gold.

Good luck.

You seem to think there is a difference between inflation and debasement of the currency of last resort.

What, exactly, is that difference?

[FredPeterson]

Inflation = velocity of a debased currency

Ton of money has been "printed", the currency is being debased. But its all locked up in speculative assets and thus is not doing anything to Real Inflation figures (yet?)

[staythecourse]

I'm not sure why so many folks have trouble understanding how gold works.

Gold is NOT an inflation hedge. Pure and simple, as it is poorly correlated with CPI. Mind you stocks are not correlated either with inflation. Stocks are termed long term inflation hedges because over a period of years the return on stocks are high enough to provide real returns over the rates of inflation over the same time period, but not because of some correlation to inflation itself.

When will gold go up then?
1. Crises hedge
2. Currency hege against the U.S. dollar

Pure and simple.

Gold as far as I'm concerned did not go up in the 70's because of an inflation hedge. The 2 oil shocks in that decade which help cause the inflation surge was the crises to spur fleeing to gold.

Harry Browne said it great in one of his books which have held up through time, which I'm paraphrasing: "When a crises occurs the world will flee to the stability of the U.S. dollar (i'm assuming cash and LTGB) unless the crises involves anxiety regarding the U.S. itself then people will flee to gold.

No surprise every crises the tried and true safe haven investments are: Cash, LTGB, and gold.

Good luck.

You seem to think there is a difference between inflation and debasement of the currency of last resort.

What, exactly, is that difference?

You can have devaluation of the dollar and not have price inflation. There have been times when the dollar devalued (like now) and not had noticeable changes in inflation. Isn't there another thread currently on showing how much the dollar has devalued in the last several years and as far as I have seen the CPI (price inflation) has not increased (if anything it is below it's average of 3% and change).

This would explain Gold going up now with inflation low still low.

Good luck.

[Morgthorak]

It's also just fun to buy and collect gold and silver coins. Sometimes it's not always about "investing." You gotta have a little fun too and coins are neat. 8)

[Lbill]

Currency debasement literally meant that the intrinsic value of monetary coinage was reduced in various ways. In Rome, emperors steadily debased the denarius (a silver coin) from a standard of 78.5% to 50% fine; the emperor Caracalla reduced the weight of the aureus (a gold coin) from 45 to 50 to the Roman pound. They also coined aes (a copper coin) from a bronze alloy with a heavy lead admixture. Of course, the same thing has been done in current times with coinage - when is the last time you saw a silver or gold coin in circulation? It's a lot easier to debase paper currency. Here's what happened to the dollar after the gold standard was abandoned in 1971.


Source: Wikipedia

As you can see, the almighty buck has gone essentially nowhere since it bottomed out in 1980, and has been enjoying another leg down since 2001 (which isn't shown on this graph). We're so used to thinking of the price of gold in dollars, perhaps we should think of the price of dollars (with no intrinsic value) in gold (with intrinsic value). After the gold standard was abandoned in the 1970s, not coincidentally the price of oil and other commodities increased (in dollars) but the average price remained fairly constant denominated in gold.

[craigr]

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."

The real price of gold remained steady during and after the '29 crash and shot in '32 as it became apparent Roosevelt would be elected. Or was it something else? Maybe events in Europe?

Roosevelt seized all the gold and then raised the official price from around 20 to 35 an ounce. It was a bad plan that solved nothing. He was trying to create inflation to prop up prices.

[jmourik]

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.

Imagine what could happen if you could do this with stocks or bonds!

[jmourik]

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.

This made me smile. I'm reading Harry Browne's book "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World" at the moment. The 1987 version. So the above quote sounds eerily familiar...
Yikes, I just realize that book is half my age...

[Noobvestor]

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.

This made me smile. I'm reading Harry Browne's book "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World" at the moment. The 1987 version. So the above quote sounds eerily familiar...
Yikes, I just realize that book is half my age...

I'm not a permanent-bull on gold, but ... ETFs have changed the game permanently, have they not? By making the gold/silver option more accessible to the masses than it has been in the history of humankind (i.e. free of storage/tax issues, if one holds it in a retirement account via ETF), why would we expect gold to ever level out at previous points again?

[linenfort]

I have to agree with dryfly.

tadamsmar, for a pp investor there is no bandwagon. People who recently adopted the pp strategy, just like long-time holders, are not simply buying gold. As you know, they're buying gold and stocks and long-term treasuries.

If, you're already at or near a 100% stock allocation, I can see where the idea of buying gold at $1530+ would make you queasy. Nor would it seem like a wise idea if the price of an ounce dropped to $1200 tomorrow. A lot of investors would just be waiting for it to fall further.

...
I'm reading Harry Browne's book "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World" at the moment. The 1987 version. So the above quote sounds eerily familiar...
Yikes, I just realize that book is half my age...

I'm reading the same book this week. Many of the concepts are timeless and fresh, but I'm trying to get the image of Harry's collar and beard out of my mind's eye. :lol:
(Author photo, inside flap)

[HomerJ]

I figure every asset in my AA will be in a so-called bubble at one time or another.

The fact that an asset seems to be in a bubble is not a sufficient reason to not have an ongoing allocation to it. You just rebalance.

Well said!

[fnord123]

Is "age in bonds" an investment strategy people are comfortable with? If so, they should just do it - don't put it off because some expert says bonds are overpriced. I would argue the same logic applies to other investment strategies, including the Permanent Portfolio, and its individual components, including gold, and market timing picks by experts such as Rick Ferri.

A true Boglehead picks an investment strategy that make sense to them, sticks with it, and ignores the market timers.

[rmelv]

Is "age in bonds" an investment strategy people are comfortable with? If so, they should just do it - don't put it off because some expert says bonds are overpriced. I would argue the same logic applies to other investment strategies, including the Permanent Portfolio, and its individual components, including gold, and market timing picks by experts such as Rick Ferri.

A true Boglehead picks an investment strategy that make sense to them, sticks with it, and ignores the market timers.

+1

I am comfortable holding gold as part of my asset allocation. If it drops 50% I will buy, hold, and rebalance.

If you are not comfortable buying more gold when/if it drops significantly in value then buy all means DO NOT BUY IT.

Gold doesn't have to be a market timing decision, I find it ironic how Rick tries to turn it into one.

[Rodc]

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

I love it!

Yeah, interesting combination. Not quite an oxymoron, but close.

[Rodc]

I have to say I have never been a market timer, unless one wants to count rebalancing.

But as Bogle points out, every now and again things are so crazy in some market you just can't ignore it. Maybe once or twice in a life time.

Gold sure looks like a classic bubble. Could it possibly be "different this time"? Sure. Is it likely? Could it be I could get in and ride the wave and get out before it crashes on the beach of reality? Maybe, but again, likely?

Count me out on starting to buy gold now. No way, no how. If that makes me a market timer, so be it.

[fnord123]

Gold sure looks like a classic bubble. Could it possibly be "different this time"? Sure. Is it likely? Could it be I could get in and ride the wave and get out before it crashes on the beach of reality? Maybe, but again, likely?

Count me out on starting to buy gold now. No way, no how. If that makes me a market timer, so be it.

US debt, if you count obligations like medicare and SS, is over 150% GDP. No country has every had that and not defaulted. Think this time is different? If not, make sure not to buy any TIPS or treasuries (or FDIC-insured instruments, for that matter).

The stock market, according to the cyclically adjusted PE, is > 43% overvalued - the other four times in history this happened stocks were a terrible place to be. Think this time is different? If not, make sure not to buy any stocks.

If we are going to be market timing bubbles, what's left to invest in for the bubble averse boglehead?

[tadamsmar]

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

I love it!

Yeah, interesting combination. Not quite an oxymoron, but close.

Don't get dogmatic on me, just accept my dogma.

[jmbkb4]

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


.

ha. ha.

Sounds like you were heroically off. It would be hard to be "more off" if someone tried to be so.

So why should we believe you now???


:roll:

[jmbkb4]

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.

Imagine what could happen if you could do this with stocks or bonds!

good point jmourik.

perhaps ferri can offer some stock predictions, so I'll know what to SHORT

[Rodc]

If we are going to be market timing bubbles, what's left to invest in for the bubble averse boglehead?

As I said: "I would not start now".

That is entirely different from keeping with a plan started years ago.

If I bought into PP back when gold was not so high, I would find it rational to stick with the plan which would have me selling into the bubble.

But you really want to avoid getting swept up in bubble hysteria and buying into a bubble.

Two very different things.

If you are a new investor you it may make sense to just start with an allocation to all assets. Even if some are in bubble territory generally beginners are starting with small sums and over time things will sort out.

[Noobvestor]

If we are going to be market timing bubbles, what's left to invest in for the bubble averse boglehead?

As I said: "I would not start now".

That is entirely different from keeping with a plan started years ago.

If I bought into PP back when gold was not so high, I would find it rational to stick with the plan which would have me selling into the bubble.

But you really want to avoid getting swept up in bubble hysteria and buying into a bubble.

Two very different things.

If you are a new investor you it may make sense to just start with an allocation to all assets. Even if some are in bubble territory generally beginners are starting with small sums and over time things will sort out.

+1

It's all fine and good to have a PP allocation, but you have to determine for yourself: am I one of the (many many) people buying into this now because gold has gone nuts, and/or can I hang onto it for the long haul? Thankfully, yes, for those just starting out, a 70% drop in gold won't kill their portfolio, and might even be a good lesson - I just hope they buy more if/when it happens

[tadamsmar]

If we are going to be market timing bubbles, what's left to invest in for the bubble averse boglehead?

As I said: "I would not start now".

That is entirely different from keeping with a plan started years ago.

If I bought into PP back when gold was not so high, I would find it rational to stick with the plan which would have me selling into the bubble.

But you really want to avoid getting swept up in bubble hysteria and buying into a bubble.

Two very different things.

If you are a new investor you it may make sense to just start with an allocation to all assets. Even if some are in bubble territory generally beginners are starting with small sums and over time things will sort out.

Jill has been in the PP for decades. Jack just sold out of age in bonds yesterday and bought into the PP, but prices have not moved much so he could reverse his decision with little harm.

Jack and Jill both have identical holdings, same total nest egg allocated to exactly the same investments.

According to your logic, Jill should stay the course, but Jack made the wrong decision so he should reverse it while he can.

Two different things

PS: I got zinged for logic similar to yours earlier in this thread.

[Noobvestor]

If we are going to be market timing bubbles, what's left to invest in for the bubble averse boglehead?

As I said: "I would not start now".

That is entirely different from keeping with a plan started years ago.

If I bought into PP back when gold was not so high, I would find it rational to stick with the plan which would have me selling into the bubble.

But you really want to avoid getting swept up in bubble hysteria and buying into a bubble.

Two very different things.

If you are a new investor you it may make sense to just start with an allocation to all assets. Even if some are in bubble territory generally beginners are starting with small sums and over time things will sort out.

Jill has been in the PP for decades. Jack just sold out of age in bonds yesterday and bought into the PP, but prices have not moved much so he could reverse his decision with little harm.

Jack and Jill both have identical holdings, same total nest egg allocated to exactly the same investments.

According to your logic, Jill should stay the course, but Jack made the wrong decision so he should revere it while he can.

Two different things

PS: I got zinged for logic similar to yours earlier in this thread.

As they say, there are two points to consider: when you buy and when you sell. I don't think RodC is saying buying in now is *necessarily* a mistake, but if you are swept into the bubble, then bail again later, well, again, it's that sell point that matters most. My read on his statement, and my personal opinion, is that the odds are some high percentage of PP subscribers today are getting in for the wrong reasons, thus unlikely to stay the course over time. /2 cents - Rod can correct me if I misrepresented his view.

The key problem I see with your rebuttal is the idea of 'reversing his decision' - that is precisely what good asset allocation seeks to avoid, no?

[Ed 2]

Since March, 2009 the S&P500 is up over 100%. How long will it take for that bubble to burst?

There is no bubble in stocks. The S&P 500 trades based on real corporate earnings, not inflation speculation. Currently, the market is trading at about 15 time trailing 12 month earnings. That's fine. In fact, it's cheap.

Rick Ferri

+1

Period 1982-2007 (25 years)
Gold- 3%
S&P 500-11%

[Chet]

There is no bubble in stocks. The S&P 500 trades based on real corporate earnings, not inflation speculation. Currently, the market is trading at about 15 time trailing 12 month earnings. That's fine. In fact, it's cheap.

Rick Ferri

+1

Ed, you're an easy grader.

The twelve month trailing P/E of the S&P 500 is 17.6 (GAAP), compared to a historical normal range of 10-20, and 8 at the bottom of the most recent secular bear market (years 1980-1982). See first chart, third panel.

Not as bad as 10 years ago, but still much closer to overvalued that to cheap.

The S&P 500 dividend yield is a paltry 1.7%, relative to a historic normal range of 3%-6% (first chart, fourth panel). I prefer the dividend metric since it is grounded in reality: the company really has to cut a check. And by this metric, grossly overvalued.

[FredPeterson]

+1

Period 1982-2007 (25 years)
Gold- 3%
S&P 500-11%

Past performance does not guarantee future performance!

[Ed 2]

+1

Period 1982-2007 (25 years)
Gold- 3%
S&P 500-11%

Past performance does not guarantee future performance!

OK, look and compare past 100 years performance of the Total Stock Market vs Gold or anything else!!!!!! It would tell you something.
I prefer invest into real economy for the next 25 years, NOT to horse buggies, orange pills,pig tails or bags of rice. My overall portfolio gave me better and steady return for past 10 years than if I would speculate on chasing hot commodities 8)

[Rick Ferri]

There is no bubble in stocks. The S&P 500 trades based on real corporate earnings, not inflation speculation. Currently, the market is trading at about 15 time trailing 12 month earnings. That's fine. In fact, it's cheap.

Rick Ferri

+1

Ed, you're an easy grader.

The twelve month trailing P/E of the S&P 500 is 17.6 (GAAP), compared to a historical normal range of 10-20, and 8 at the bottom of the most recent secular bear market (years 1980-1982). See first chart, third panel.

Not as bad as 10 years ago, but still much closer to overvalued that to cheap.

The S&P 500 dividend yield is a paltry 1.7%, relative to a historic normal range of 3%-6% (first chart, fourth panel). I prefer the dividend metric since it is grounded in reality: the company really has to cut a check. And by this metric, grossly overvalued.

There's a good chance S&P 500 earnings will hit $100 in 2011. That would put the market at 13.5 PE based on todays price, 14 PE based on 1400, and 15 PE based on 1500.

When asked at this week's news conference for a sign that QE2 was working, Ben Bernenke said "the stock market has moved up." Higher stock prices means accelerated GDP growth through 2014, and it's one of the Feds main indicators that job growth will pick up. The Fed wants corporate earnings to grow and the stock market to grow because that creates jobs.

When asked about commodities prices, Bernenke repeated said low inflation is the Feds top priority. Low inflation (1.7%-2.0%) will cause the dollar to stabilize and eventually rally, and this will drive commodity prices down (including oil, gold and silver).

Gold bugs will bash the Fed on this board continuously, but smart investors don't fight the Fed.

Rick Ferri

[Ed 2]

Gold bugs will bash the Fed on this board continuously, but smart investors don't fight the Fed.

Rick Ferri

Absolutely. Its been proven already with someone online- invest- smarty pants [ not gonna mention who] in our forum who suggested to short the market some time ago.

[fnord123]

When asked about commodities prices, Bernenke repeated said low inflation is the Feds top priority. Low inflation (1.7%-2.0%) will cause the dollar to stabilize and eventually rally, and this will drive commodity prices down (including oil, gold and silver).

According to the data I've seen, CPI and gold are not really correlated since the 1970s - e.g. http://pragcap.com/is-gold-really-an-inflation-hedge

What data do you base your premise on that low inflation (even if the prediction is correct) will lead to gold prices going down?

Gold bugs will bash the Fed on this board continuously, but smart investors don't fight the Fed.

Lots of people oppose the Federal Reserve's recent actions, including people who think gold has value in a portfolio and those do not. More importantly, your sentence makes no sense as an argument against gold - the price of gold since the Fed has started taking extraordinary actions has risen significantly. Don't fight the Fed indeed!

[Raging Mage]

Perhaps my approach to gold is simplistic, but for me, all I have to apply is the "sleep test". Will I be able to sleep at night if I add gold to my portfolio? Definitely not, because I'd be scared to death of buying it after its huge run over the past decade, and if it does start to drop significantly, I don't think I'd have the stomach to buy or rebalance into an asset that doesn't generate earnings or interest. (Being bombarded by gold ads on TV isn't helping my state of mind, either.)

Sure, I could lose out on a huge run--perhaps the past ten years are only the start of it. On the other hand, I could dodge a nasty bubble, or worse, the next "Dutch tulip craze". Frankly, I have no idea what will happen, and I'd rather not play that game when so many investors have "made it to Dublin" with simple stock/bond portfolios that exclude allocations to precious metals.

Sometimes the "right answers" to one's investment concerns aren't found in academic research!

[fnord123]

Perhaps my approach to gold is simplistic, but for me, all I have to apply is the "sleep test".

This isn't simplistic at all - being comfortable with one's investment strategy is extremely important, as it increases the likelihood of sticking with it rather than panic selling at the worst possible time. That being said, let's look at the data.

Stipulate gold is in a bubble, as several folks have said, and consider the Permanent Portfolio's 25% gold allocation (which is the most I've seen anyone seriously advocate in this thread). Here's the return on gold and on the overall portfolio, for the worst years in terms of gold losses:

Code: Select all

Year   TSM	ST Bonds	LT Bonds	Gold   PP Returns
1975   38.7     7.9     9.2       -22.7     8.3
1981   -3.7	 18.9     1.9       -32.8    -3.9
1984    4.5    12.8     15.5      -20.2     3.2
1997   31.0     6.4     13.9      -21.5     7.5

So, in the worst years for gold in the last four decades, in each of which gold lost 20% or more in a single year, the worst year for the overall PP was -3.9%, and all other years showed positive returns.

Now let's compare that against the worst years for a 50%/50% LT bonds/total stock market portfolio:

Code: Select all

Year   TSM    LT Bonds    Returns
1973  -18.1    -1.1         -9.6
1974  -27.2     4.4        -11.4
1994   -0.2    -7.0         -3.6
2001  -11.0     4.3         -3.6

Having 25% gold in a portfolio, even in the worst possible years, comes out as a lot less scary when one uses data rather than goes by one's gut. This isn't meant to be critical of people using their gut - comfort is really important in an investment strategy. That being said, if folks want to dismiss gold from being held in any portfolio only because it doesn't feel right, then they should admit that this is a right brain/feelings/opinion issue, not a matter of logic or rational argument, as the data shows that at least some investment strategies work very well with significant gold holdings.

Data source: http://crawlingroad.com/blog/2008/12/22 ... /#more-299

[tadamsmar]

If we are going to be market timing bubbles, what's left to invest in for the bubble averse boglehead?

As I said: "I would not start now".

That is entirely different from keeping with a plan started years ago.

If I bought into PP back when gold was not so high, I would find it rational to stick with the plan which would have me selling into the bubble.

But you really want to avoid getting swept up in bubble hysteria and buying into a bubble.

Two very different things.

If you are a new investor you it may make sense to just start with an allocation to all assets. Even if some are in bubble territory generally beginners are starting with small sums and over time things will sort out.

Jill has been in the PP for decades. Jack just sold out of age in bonds yesterday and bought into the PP, but prices have not moved much so he could reverse his decision with little harm.

Jack and Jill both have identical holdings, same total nest egg allocated to exactly the same investments.

According to your logic, Jill should stay the course, but Jack made the wrong decision so he should revere it while he can.

Two different things

PS: I got zinged for logic similar to yours earlier in this thread.

As they say, there are two points to consider: when you buy and when you sell. I don't think RodC is saying buying in now is *necessarily* a mistake, but if you are swept into the bubble, then bail again later, well, again, it's that sell point that matters most. My read on his statement, and my personal opinion, is that the odds are some high percentage of PP subscribers today are getting in for the wrong reasons, thus unlikely to stay the course over time. /2 cents - Rod can correct me if I misrepresented his view.

The key problem I see with your rebuttal is the idea of 'reversing his decision' - that is precisely what good asset allocation seeks to avoid, no?

I think you are jumping the gun.

I did not say that Jack made the wrong decision and needs to reverse it. Rodc implied that Jill made the right decision, or at least an OK decision, and her AA is identical to Jack's. Rodc seems forced to admit that Jack did not make the wrong decision.

So, you can't just assume that Jack made the wrong decision and then start deducing things from that premise. You first need to show that Jack made the wrong decision.