Americans Turn to Gold Over Stocks

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baw703916
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Post by baw703916 » Thu Sep 08, 2011 12:01 am

Gumby wrote: http://online.wsj.com/article/SB1000142 ... nal_report

Quote from the article:
Ms. Lester’s group identified another set of circumstances that could lead to losses in TIPS: interest rates rising but inflation falling. Between July 1980 and July 1981, interest rates rose to about 15% from 10% while the CPI fell to 10% from 14%. The result: a“perfect storm” that could have sent TIPS down by about 20%.
Sounds very speculative to me.
If this means that (hypothetically) you could have bought TIPS at 5% real yield--time to back up the truck!!
Most of my posts assume no behavioral errors.

Valuethinker
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Post by Valuethinker » Thu Sep 08, 2011 3:24 am

Gumby wrote:Ah... Thanks for clarifying. So IF I hold the TIPS to maturity (a big IF), at worst it might be defined as a poor investment.
Yes.

However the TIPS yield calculation assumes coupons are reinvested at the same real rate-- which is almost certain not to be true. (that's true of nominal yield to maturity as well).

Note TIPS have a unique protection (amongst the RRBs) in terms of redeeming at 100 even if deflation has lowered the CPI below 100 in that time.

Thus a TIPS bought at 100, or near, is as close to a one way bet as financial markets allow:

- credit risk is minimal
- your real return is 'locked in' subject to caveat above
- you can't lose money, nominally

Valuethinker
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Post by Valuethinker » Thu Sep 08, 2011 3:27 am

Gumby wrote:
tludwig23 wrote:True, gold is also used as insurance. However, if I buy $10,000 in gold today, it may be worth much more, or much less than $10,000 in ten years, whether or not there was inflation. Thus it really isn't very good insurance, however it MAY be a good investment.

If I buy a 10-year, $10,000 TIPS bond today, I may have to pay $10,800 for it, but I can guarantee that it will be worth $10,000 (in 2011 dollars) in 10 years. So as insurance, it is actually insurance. There is little potential upside, but little potential downside (unless forced to sell before maturity). Better insurance, but certainly not an investment which will yield much.
http://online.wsj.com/article/SB1000142 ... nal_report

Quote from the article:
Ms. Lester’s group identified another set of circumstances that could lead to losses in TIPS: interest rates rising but inflation falling. Between July 1980 and July 1981, interest rates rose to about 15% from 10% while the CPI fell to 10% from 14%. The result: a“perfect storm” that could have sent TIPS down by about 20%.
Sounds very speculative to me.
Worst case scenario. Once in the past 80 years.

In the 1930s, you would have had a 25% fall in value, say, with deflation, but the redeem at 100 feature would have protected you.

TIPS are *much* more volatile than theory would predict. Suggesting that illiquidity plus their use as collateral in derivative transactions (it's possible to use them to create a pure view on the direction of inflation, I think) makes them relatively volatile.

So if you don't hold to maturity then you do have this volatility risk, which does not arise so much out of interest rate changes, but out of the market's changing views on inflation and other circumstances.

That is a problem with TIPS funds against holding individual TIPS, but for many investors, the former still seems preferrable to the latter.

hsv_climber
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Post by hsv_climber » Thu Sep 08, 2011 9:38 am

After reading the above posts from Valuethinker it is pretty clear to see how I-Bonds are superior to TIPS and all other bonds in general...

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JDInvestor
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Post by JDInvestor » Thu Sep 08, 2011 9:42 am

hsv_climber wrote:After reading the above posts from Valuethinker it is pretty clear to see how I-Bonds are superior to TIPS and all other bonds in general...
Except the enormous hassle in obtaining them and the yearly limits (which may decrease with the end of paper bonds). I'm a new investor and they work great for me, but anybody with a sizable portfolio would see I Bonds as little more than a drop in the bucket. In investing the potential magnitude of your investment matters as much as the rate of return, or else funds based on finding loose change in parking lots would be all the rage ;)

hsv_climber
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Post by hsv_climber » Thu Sep 08, 2011 9:49 am

JDInvestor wrote: Except the enormous hassle in obtaining them and the yearly limits (which may decrease with the end of paper bonds). I'm a new investor and they work great for me, but anybody with a sizable portfolio would see I Bonds as little more than a drop in the bucket. In investing the potential magnitude of your investment matters as much as the rate of return, or else funds based on finding loose change in parking lots would be all the rage ;)
What is the hassle?
It takes less than 2 min. to buy them electronically and 1 visit to the bank to buy the paper version.

Gumby
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Post by Gumby » Thu Sep 08, 2011 11:11 pm

hsv_climber wrote:
JDInvestor wrote: Except the enormous hassle in obtaining them and the yearly limits (which may decrease with the end of paper bonds). I'm a new investor and they work great for me, but anybody with a sizable portfolio would see I Bonds as little more than a drop in the bucket. In investing the potential magnitude of your investment matters as much as the rate of return, or else funds based on finding loose change in parking lots would be all the rage ;)
What is the hassle?
It takes less than 2 min. to buy them electronically and 1 visit to the bank to buy the paper version.
You don't even need to go to the bank anymore. You can print out the paper I-Bonds form online and just mail your form and check directly to the Treasury:

https://www.savingsbondsdirect.gov/otc/bondOrder.html

jack1719
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Post by jack1719 » Mon Sep 12, 2011 9:35 am

Here's how gold works. The US Dollar is the #1 currency in the world. Dollars are accepted everywhere, and are held everywhere. They are very safe and are relatively stable. Gold is the #2 currency in the world. When people all over the world get nervous about holding dollars (whether it be from the devaluing of the dollar, a currency crisis, a debt crisis, wars or civil unrest, etc) people exchange those dollars for more gold. That's really all there is to it. Some of its rational, some of its not. But, that's what generally happens. If more and more people continue to get nervous about the state of the global economy, and the dollar, the price of gold will go up. If things turn around and get better, the price will go down.

The fed has vowed to not raise interest rates for 2 years(till 2013 at least) so that is basically keeping a hard foot down on the dollar..I am gonna keep beating you down move,and it keeps gold going up for another 2 years(at least)..

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