pros and cons of gold

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larryswedroe
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pros and cons of gold

Post by larryswedroe »

http://www.cbsnews.com/8301-505123_162- ... -in-gold/?

My review of the paper by ERb and Harvey.

Hope you find it of interest

Larry
steve_14
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Re: pros and cons of gold

Post by steve_14 »

My global TSM portfolio benefits from increases in the price of gold (it owns mining companies), pork bellies, orange juice, oil, and just about any other commodity. I think those who buy gold these days are often suffering from recency bias.
umfundi
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Re: pros and cons of gold

Post by umfundi »

Larry,

Thank you, a very interesting paper. It takes almost every argument about gold you can think of, and looks at the data.

One wonders then, what is the purpose of gold coins issued by government mints? The US Eagle, the Canadian Maple Leaf, the ZA Krugerrand? Don't they at least give some credence to the idea of gold as a legitimate (government accepted) monetary instrument?

Indeed, what is the business case for governments to make such coins? Buy an ounce of gold, mint it into a coin, sell it for the price of an ounce of gold. Why do that? Come to think of it, are gold coins not just a collectible, not any different than jewellery?

Thank you,

Keith
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Verde
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Re: pros and cons of gold

Post by Verde »

As the article is titled ‘The arguments for and against investing in gold’, I think the argument made by Profs. Fama and French should have been included. It is the best argument against gold as an investment as far as I’m concerned. See:
http://www.dimensional.com/famafrench/2 ... folio.html

‘much of the stock of gold is in the form of jewellery and other goods that pay a "consumption dividend." This dividend increases the current price of gold and lowers its expected capital gain return. But an investor who holds gold bullion as a portfolio asset only expects to get the expected capital gain, which does not suffice to compensate for the risk of the asset.’

This argument also applies to residential real estate. Due to the consumption dividend realised by owners of these assets, they are perpetually overpriced from an investor’s perspective.
DualIncomeNoDebt
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Re: pros and cons of gold

Post by DualIncomeNoDebt »

Can someone elaborate further on this "consumption dividend" as it applies to bullion, and to residential real estate? And explain how/why these assets are overpriced from an investor's perspective? Note I've always felt this way intuitively about homes/condos, which are significantly overpriced given the sky-high fees, taxes, transaction costs, and maintenance costs.
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Dinero
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Re: pros and cons of gold

Post by Dinero »

I will jump in and say, before CraigR can, that this analysis considers gold in isolation and not as part of a diversified portfolio.

I think the question that Fama and French were responding to is more interesting than the answer:
Question wrote:Based on spot price data from January 1970 through February 2010, the average return on gold bullion was almost exactly the same as the S&P 500 at 88 basis points per month. Volatility was significantly greater for gold, but since gold prices tended to zig when equity prices zagged over this period, a portfolio composed of 80% stocks and 20% gold (rebalanced annually) had lower volatility than either of its component parts. Doesn't portfolio theory suggest that gold can make a useful contribution?
And isn't "consumption dividend" just another phrase describing demand?
staythecourse
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Re: pros and cons of gold

Post by staythecourse »

The original authors review of gold was pathetic.

Let's look at their comment of gold as a flight to safety (paraphrasing): 1/6th the time it DOESN'T go up when stocks go down 1/6th is 17% oi the time. So the authors don't think gold going up more then 80% of the time when stocks go down is signifcant?

The worse is the facts that their data shows no advantage of gold yet a portfolio consisting of stocks and gold from 1970 to now usually improved on a risk/ return basis IN REAL LIFE. How is that if their analysis shows no usefulness?

The authors next paper should be to analyze if their analysis is correct then why is the real world results different?? What is more important an authors analysis OR what actually happens in real life since gold has come of the gold standard??

CraigR, I am sure, will bring up the good point of NO ONE is advocatiing gold as a stand alone invetment, but has MANY advantages in a diversified portfolio. Proof is in the pudding so just look at the real life results.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
glock19
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Re: pros and cons of gold

Post by glock19 »

There are some points in the article I don't understand. At the same time there is a lot about equities and fixed income I don't understand. What I do understand is that back testing seems shows that if gold is included in a portfolio it will smooth out volatility. It is unlikely that adding gold will ultimately create a asset allocation that will give superior return, but maybe some of us are quite pleased to eliminate some volatility.

I am continually amazed that anytime gold is discussed on this forum it quickly evolves into gold as a "stand alone" investment. In other areas of asset allocation we discuss equities and fixed income as components of total portfolio. Would BH's actually recommend anyone placing all of their assets into only one class? Even younger investors are steered away from 100% in equities.

I really have little confidence that anyone can predict the future for gold pricing anymore than one can predict the future for equities/fixed income. So, instead of debating the issues in the article or the future price of gold, why not more debate on whether or not gold can reduce the possibility of portfolio volatility in a good asset allocation plan?
staythecourse
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Re: pros and cons of gold

Post by staythecourse »

glock19 wrote:There are some points in the article I don't understand. At the same time there is a lot about equities and fixed income I don't understand. What I do understand is that back testing seems shows that if gold is included in a portfolio it will smooth out volatility. It is unlikely that adding gold will ultimately create a asset allocation that will give superior return, but maybe some of us are quite pleased to eliminate some volatility.

I am continually amazed that anytime gold is discussed on this forum it quickly evolves into gold as a "stand alone" investment. In other areas of asset allocation we discuss equities and fixed income as components of total portfolio. Would BH's actually recommend anyone placing all of their assets into only one class? Even younger investors are steered away from 100% in equities.

I really have little confidence that anyone can predict the future for gold pricing anymore than one can predict the future for equities/fixed income. So, instead of debating the issues in the article or the future price of gold, why not more debate on whether or not gold can reduce the possibility of portfolio volatility in a good asset allocation plan?
Well said and agree 100%.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: pros and cons of gold

Post by Call_Me_Op »

I am coming to the conclusion that gold is a pure speculative play. For it to pan-out as a good investment long-term (and this includes as a portfolio component), in general you need to buy it below it's long-term post-deregulation inflation-adjusted mean. That's about $750.00 today. This a very fuzzy criterion, but I think there needs to be some way to value any asset and that's the one I see as having some validity. This is not an intrinsic value but is based upon gold's tendency to revert to a constant in real terms.
Last edited by Call_Me_Op on Fri Jul 20, 2012 12:26 pm, edited 1 time in total.
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Re: pros and cons of gold

Post by tadamsmar »

Dinero wrote:I will jump in and say, before CraigR can, that this analysis considers gold in isolation and not as part of a diversified portfolio.

I think the question that Fama and French were responding to is more interesting than the answer:
Question wrote:Based on spot price data from January 1970 through February 2010, the average return on gold bullion was almost exactly the same as the S&P 500 at 88 basis points per month. Volatility was significantly greater for gold, but since gold prices tended to zig when equity prices zagged over this period, a portfolio composed of 80% stocks and 20% gold (rebalanced annually) had lower volatility than either of its component parts. Doesn't portfolio theory suggest that gold can make a useful contribution?
And isn't "consumption dividend" just another phrase describing demand?
No.
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tadamsmar
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Re: pros and cons of gold

Post by tadamsmar »

Verde wrote:As the article is titled ‘The arguments for and against investing in gold’, I think the argument made by Profs. Fama and French should have been included. It is the best argument against gold as an investment as far as I’m concerned. See:
http://www.dimensional.com/famafrench/2 ... folio.html

‘much of the stock of gold is in the form of jewellery and other goods that pay a "consumption dividend." This dividend increases the current price of gold and lowers its expected capital gain return. But an investor who holds gold bullion as a portfolio asset only expects to get the expected capital gain, which does not suffice to compensate for the risk of the asset.’

This argument also applies to residential real estate. Due to the consumption dividend realised by owners of these assets, they are perpetually overpriced from an investor’s perspective.
He said it's an OK investment if you are wearing it. Or, in so many words.
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Noobvestor
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Re: pros and cons of gold

Post by Noobvestor »

staythecourse wrote:Let's look at their comment of gold as a flight to safety (paraphrasing): 1/6th the time it DOESN'T go up when stocks go down 1/6th is 17% oi the time. So the authors don't think gold going up more then 80% of the time when stocks go down is signifcant?
Much as I am a fan, Larry, this point by staythecourse is quite damning. You posit this as the myth to be debunked:
Gold provides safety when markets drop.
Then respond
If this is true, gold should be stable when other asset markets falter. However, we see gold fell in nearly one-sixth of months when stock prices fell. If gold was a true safe haven, then we would expect very few, if any, such observations.
If it *only* fell 1/6 of the time, that's an *amazing* flight to safety rate - it works 5 out of 6 times. 1 in 6 *is* 'very few' in my book.
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hazlitt777
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Re: pros and cons of gold

Post by hazlitt777 »

Thanks Larry for posting your review of this study. I think there have been a lot of great posts in this thread.

Ultimately, we have to get our financial and free market system up and running again. Until then, there will tend to be a flight to safety, which includes cash and something that was "cash" not long ago, gold. And collectively as a society we will not get richer till the fundamentals allow us to be comfortable investing in growth again.

I want to contribute this article that shows that central banks are having a flight to gold for this reason as I see it:
http://kingworldnews.com/kingworldnews/ ... _Gold.html

Now this doesn't mean gold is the end all and be all. But I sleep better having a good allocation to it in my portfolio if the big guys are doing it.

And as far as gold being a purely speculative asset...well, just because it doesn't have a cash flow doesn't make it more speculative than say bonds which do have a cash flow. Why? Because who knows what the principle and interest of those bonds...fiat currency, are really worth? Do they have any more "intrinsic value" than gold? Less if anything.

I hope over time people will take a look at the physical properties of gold and come to realize that its unique qualities, tend to make it a very competitive form of money: rarity, difficulty of mining (we add maybe 1-2% to the world supply each year unlike fiat money), great value per unit weight(makes it easy to transport and store), divisibility(unlike artwork you can cut it in half and it is still worth the same), homogenousness (gold is gold unlike diamonds), liquidity, and incredible chemical stability(doesn't rot like tobacco or corrode like base metals.)

My most sincere wish is that people that are interested in gold will apply the principles of simplicity, low cost, buy and hold to this asset as we have to others thanks to the Boglehead philosophy. I also personally prefer the "diversification" which comes with physical ownership in that it is a diversification away from totally paper financial assets.

My ten cents.
Last edited by hazlitt777 on Sun Jul 22, 2012 2:24 pm, edited 1 time in total.
Day9
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Re: pros and cons of gold

Post by Day9 »

Physical Gold is a great way to store value in a compact physical space. You can hold some gold Eagles in your hand and have enough to buy a small house. It is easily hidden from the government. It is a great way to pass on wealth to the next generation without taxes. If we do suffer a collapse and wealth must be transferred from one system to another it would be good to have gold.
I'm just a fan of the person I got my user name from
TSR
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Re: pros and cons of gold

Post by TSR »

Day9 wrote:Physical Gold is a great way to store value in a compact physical space. You can hold some gold Eagles in your hand and have enough to buy a small house. It is easily hidden from the government. It is a great way to pass on wealth to the next generation without taxes. If we do suffer a collapse and wealth must be transferred from one system to another it would be good to have gold.
I am not a particularly good investor or manager of my money, but I am a lawyer who defends people against federal criminal charges. As such, I'm going to go ahead and suggest not doing this. There are mean people out there who consider intentionally hiding taxable income from the IRS to be a federal crime.
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larryswedroe
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Re: pros and cons of gold

Post by larryswedroe »

few comments
I agree that if something does well 5/6 of time it should be considered a pretty good hedge, just as something that has worked about 2/3 of the time has been a somewhat effective hedge (CCF relative to stocks while its 100% with bonds). So that point is valid.

And of course gold works much better in a portfolio than as stand alone

I thought the paper did a pretty good job of laying out the issues so people could make up their own mind, at least being informed

My operating assumption though is that confirmation bias will rule for many, meaning those that like gold will find the things they like and think the others are wrong or just ignore them and vice versa. But at least you have the information

Here is some other thoughts
a) at these prices almost certainly there will be new mines opened and supply increases. Just read about a big one opening
b) virtually all the gold ever mined is available to be sold.

Best wishes
Larry
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Dinero
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Re: pros and cons of gold

Post by Dinero »

Ok, so I Googled "consumption dividend" and ended up at the Fama and French article.

I'm not sure what they are driving at, but the price of gold jewelry, at least in the USA, only bears a slight relationship to the price of the underlying metal. The fabrication costs, mark ups, etc. all make the cost/ounce way high compared to bullion.
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Re: pros and cons of gold

Post by stratton »

Gold is considered a risk free investment in Pakistan.

Do Asset Returns Hedge Against Inflation in Pakistan
This paper attempts to explore an empirical relationship between asset returns and inflation in Pakistan. Using simple Foreign currency, gold, real estate, saving deposits, silver, stock prices, treasury bills, and government securities are considered as asset. To establish the relationship between asset return and inflation the study uses the annual data from 1972 to 2006 using OLS techniques. The empirical results indicate that most of the asset returns are hedged expected inflation. None of the asset returns are hedging unexpected inflation and total inflation. However, the treasury bills and government securities are significant to total and unexpected inflation, but the coefficients are less than one. The stock prices and gold prices neither hedge to total inflation nor expected and unexpected inflation. The reason is that the individuals are used gold for precautionary purpose not for hedging against inflation. For stock prices the reasons may be the people are not interested to invest in risky assets. A matter of fact is that a significant relationship exists between un-expected inflation and assets in various cases but slope coefficients are less than one and therefore are not hedges against inflation. The Pakistani investors are interested in risk free investment and not risky investment.
...and then Buffy staked Edward. The end.
umfundi
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Re: pros and cons of gold

Post by umfundi »

TSR wrote:
Day9 wrote:Physical Gold is a great way to store value in a compact physical space. You can hold some gold Eagles in your hand and have enough to buy a small house. It is easily hidden from the government. It is a great way to pass on wealth to the next generation without taxes. If we do suffer a collapse and wealth must be transferred from one system to another it would be good to have gold.
I am not a particularly good investor or manager of my money, but I am a lawyer who defends people against federal criminal charges. As such, I'm going to go ahead and suggest not doing this. There are mean people out there who consider intentionally hiding taxable income from the IRS to be a federal crime.
I was waiting for that. Guess who's guilty of a crime:

In 1975, you buy ten 1 oz gold coins for $200 each. Total cost is $2,000.
In early 2008, the value is $980 each. You give the ten coins to your adult, married son. Total value is $9,800.
By December of 2008, the value of each coin has dropped to $800. Your son, who is not the gold bug you are, sells the coins for $8,000. Neither of you mentions anything about the coins on your 2008 tax returns.
In 2010, the IRS comes calling. Who do they most wish to speak to?

Keith
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Dinero
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Re: pros and cons of gold

Post by Dinero »

umfundi wrote:In 2010, the IRS comes calling. Who do they most wish to speak to?
Nobody? What was the gift limit in 2008?
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Re: pros and cons of gold

Post by umfundi »

Dinero wrote:
umfundi wrote:In 2010, the IRS comes calling. Who do they most wish to speak to?
Nobody? What was the gift limit in 2008?
$10,000. Maybe it was $12,000. For argument's sake, let's say it was more than $9,800.

Keith
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umfundi
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Re: pros and cons of gold

Post by umfundi »

umfundi wrote:In 1975, you buy ten 1 oz gold coins for $200 each. Total cost is $2,000.
In early 2008, the value is $980 each. You give the ten coins to your adult, married son. Total value is $9,800.
By December of 2008, the value of each coin has dropped to $800. Your son, who is not the gold bug you are, sells the coins for $8,000. Neither of you mentions anything about the coins on your 2008 tax returns.
In 2010, the IRS comes calling. Who do they most wish to speak to?
Keith
Actually, they want to speak to your son. He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000. The basis does not reset for gifts to individuals.
Day9 wrote:It is easily hidden from the government. It is a great way to pass on wealth to the next generation without taxes.
I disagree. In fact, what you propose is a great way to pass on criminal liability to the next generation.

Keith
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Dinero
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Re: pros and cons of gold

Post by Dinero »

umfundi wrote:Actually, they want to speak to your son. He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
What if the son has no other income?
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Re: pros and cons of gold

Post by clevername »

Dinero wrote:
umfundi wrote:Actually, they want to speak to your son. He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
What if the son has no other income?
I was wondering that too. Does the 28% "collectibles" tax apply, or does the son's theoretical 0% income tax rate apply, given that he has no other taxable income and the gold CG is cancelled out by his SD and personal exemption.
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Re: pros and cons of gold

Post by brick-house »

Larry Swedroe wrote:
I agree that if something does well 5/6 of time it should be considered a pretty good hedge, just as something that has worked about 2/3 of the time has been a somewhat effective hedge (CCF relative to stocks while its 100% with bonds). So that point is valid.
article quote:
Gold provides safety when markets drop

If this is true, gold should be stable when other asset markets falter. However, we see gold fell in nearly one-sixth of months when stock prices fell. If gold was a true safe haven, then we would expect very few, if any, such observations.

Bottom line: Gold may not be a reliable safe haven asset during periods of financial market stress
Nice demonstration of confirmation bias... :beer If gold is a "pretty good hedge", why not correct the article?
You don't need no gypsy to tell you why- Greg Allman
umfundi
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Re: pros and cons of gold

Post by umfundi »

clevername wrote:
Dinero wrote:
umfundi wrote:Actually, they want to speak to your son. He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
What if the son has no other income?
I was wondering that too. Does the 28% "collectibles" tax apply, or does the son's theoretical 0% income tax rate apply, given that he has no other taxable income and the gold CG is cancelled out by his SD and personal exemption.
That's a different question. The son has to declare the capital gain. The tax on that gain is what it is.

I said "married adult son" to imply that he has taxable circumstances in addition to the gain from the sale of the coins.

And, yes, the 28% tax applies. Lower CG rates do not apply.

Keith
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umfundi
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Re: pros and cons of gold

Post by umfundi »

umfundi wrote:
clevername wrote:
Dinero wrote:
umfundi wrote:Actually, they want to speak to your son. He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
What if the son has no other income?
I was wondering that too. Does the 28% "collectibles" tax apply, or does the son's theoretical 0% income tax rate apply, given that he has no other taxable income and the gold CG is cancelled out by his SD and personal exemption.
That's a different question. The son has to declare the capital gain. The tax on that gain is what it is.

I said "married adult son" to imply that he has taxable circumstances in addition to the gain from the sale of the coins.

And, yes, the 28% tax applies. Lower CG rates do not apply for gold coins.

Keith
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umfundi
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Re: pros and cons of gold

Post by umfundi »

brick-house wrote:Larry Swedroe wrote:
I agree that if something does well 5/6 of time it should be considered a pretty good hedge, just as something that has worked about 2/3 of the time has been a somewhat effective hedge (CCF relative to stocks while its 100% with bonds). So that point is valid.
article quote:
Gold provides safety when markets drop

If this is true, gold should be stable when other asset markets falter. However, we see gold fell in nearly one-sixth of months when stock prices fell. If gold was a true safe haven, then we would expect very few, if any, such observations.

Bottom line: Gold may not be a reliable safe haven asset during periods of financial market stress
Nice demonstration of confirmation bias... :beer If gold is a "pretty good hedge", why not correct the article?
Why not just report the correlation coefficient?

Keith
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Re: pros and cons of gold

Post by Bongleur »

>He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
>

But your son has no idea what the basis of the gift was. Nobody gave him a figure. His only recourse is market price on the day of receipt.
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Re: pros and cons of gold

Post by brick-house »

umfundi wrote:
Why not just report the correlation coefficient?
For annual returns from 1964 -2009 per William Bernstein's article Wild About Harry:

Gold had a -0.16 correlation with stocks

http://www.efficientfrontier.com/ef/0adhoc/harry.htm
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umfundi
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Re: pros and cons of gold

Post by umfundi »

brick-house wrote:umfundi wrote:
Why not just report the correlation coefficient?
For annual returns from 1964 -2009 per William Bernstein's article Wild About Harry:

Gold had a -0.16 correlation with stocks

http://www.efficientfrontier.com/ef/0adhoc/harry.htm
Negative is good!

Low positive is what you might best hope to find, in most cases.

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umfundi
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Re: pros and cons of gold

Post by umfundi »

Bongleur wrote:>He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
>

But your son has no idea what the basis of the gift was. Nobody gave him a figure. His only recourse is market price on the day of receipt.
No, the intent is:
Physical Gold is a great way to store value in a compact physical space. It is easily hidden from the government. It is a great way to pass on wealth to the next generation without taxes.
My point is, simply, if you give an appreciated asset to an individual, you are also giving the tax basis and the future tax (and possible criminal) liability.

The IRS may, or may not, believe that the dog ate your son's homework, and that you have no records.

Keith
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Re: pros and cons of gold

Post by Epsilon Delta »

Bongleur wrote:>He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
>

But your son has no idea what the basis of the gift was. Nobody gave him a figure. His only recourse is market price on the day of receipt.
If he does not have records his recourse is to use zero basis. If he has inadequate records, such as knowing just the year of acquisition, he can use a worst case (lowest value) estimate of his basis to the extent his records support it. He does not have recourse to making things up.
staythecourse
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Re: pros and cons of gold

Post by staythecourse »

I don't mean to harp and it is not meant toward Mr. Swedroe who just wrote a review of the original authors paper (Erb and Harvey), but I do not think the comments about 1/6th not being strong evidence is NOT only a sign of confirmation bias but is a direct sign of trying to twist the facts to present them in the manner they wanted.

The fact they tried to intentionally twist the facts to their advantage makes me doubt the whole paper objective nature of analyzing gold's value. How many other aspects of gold did they measure as an investment did they leave off because it did not fit their anti-gold view point??

On a lighter side... Do Erb and Harvey do all their papers together? It seems they are spoken so often together like peanut butter and jelly. :D

Good luck.
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Re: pros and cons of gold

Post by wshang »

Given that the natural history of all fiat currency is eventual bust and that gold has always been valued throughout time, where is the confusion?

Gold is clearly a storehouse of value - one outside of a government's easy grasp. For those of us who are not in accumulation mode, gold is an excellent way to transfer and store wealth, while recognizing it does not have the ease of zipping electrons to credit virtual accounts "in the cloud."
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Re: pros and cons of gold

Post by Average Investor »

Great thread.

I have about 7% of my portfolio in GLD, http://www.marketwatch.com/investing/fund/gld courtesy of my soon to be ex-FA. He bought it to smooth out the portfolio. It has done pretty well overall though right now not nearly as high as it was last fall. FWIW, today when TSM dropped 1.02%, GLD climbed 0.19%. :|

Assuming I decide to keep it, should I consider it part of my equity or bond allocation? It's really neither in my mind.

Thanks.
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staythecourse
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Re: pros and cons of gold

Post by staythecourse »

Daniel J wrote:Great thread.

I have about 7% of my portfolio in GLD, http://www.marketwatch.com/investing/fund/gld courtesy of my soon to be ex-FA. He bought it to smooth out the portfolio. It has done pretty well overall though right now not nearly as high as it was last fall. FWIW, today when TSM dropped 1.02%, GLD climbed 0.19%. :|

Assuming I decide to keep it, should I consider it part of my equity or bond allocation? It's really neither in my mind.

Thanks.
Gold fits under the superasset class of alternative investments. The superasset classes are: stocks/ bonds/ cash/ alternative investments. If your looking for asset allocation placement it is easiest to consider assets as either princpal stable vs. principal volatile. In that case it would be stock/ alternative investments vs. bonds/ cash.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Average Investor
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Re: pros and cons of gold

Post by Average Investor »

staythecourse wrote:
Gold fits under the superasset class of alternative investments. The superasset classes are: stocks/ bonds/ cash/ alternative investments. If your looking for asset allocation placement it is easiest to consider assets as either princpal stable vs. principal volatile. In that case it would be stock/ alternative investments vs. bonds/ cash.

Good luck.
Thanks!
Tomorrow never knows.
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Dinero
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Re: pros and cons of gold

Post by Dinero »

umfundi wrote:My point is, simply, if you give an appreciated asset to an individual, you are also giving the tax basis and the future tax (and possible criminal) liability.
Except as an inheritance :happy
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Re: pros and cons of gold

Post by rmelvey »

Most investment professionals trash gold early on in their career without giving it a careful look. They fear contradicting themselves, so they continue to bash it even as they discover what it does in a diversified portfolio.

When you look at what matters to investors, portfolio performance, gold is a good choice. A portfolio of gold, government bonds, and stocks has had superior risk adjusted returns compared with traditional stock/bond portfolios. That is what matters. I don't care if it does well during times of inflation or not, I care what it does relative to stocks and bonds. I have not seen a paper empirically dismiss this part of gold's returns because they can't.
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Re: pros and cons of gold

Post by NoRoboGuy »

rmelvey wrote:Most investment professionals trash gold early on in their career without giving it a careful look. They fear contradicting themselves, so they continue to bash it even as they discover what it does in a diversified portfolio.

When you look at what matters to investors, portfolio performance, gold is a good choice. A portfolio of gold, government bonds, and stocks has had superior risk adjusted returns compared with traditional stock/bond portfolios. That is what matters. I don't care if it does well during times of inflation or not, I care what it does relative to stocks and bonds. I have not seen a paper empirically dismiss this part of gold's returns because they can't.
Speculative returns, sometimes. Real returns, never. Gold cannot produce anything in and of itself.
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Re: pros and cons of gold

Post by clevername »

Dinero wrote:
umfundi wrote:My point is, simply, if you give an appreciated asset to an individual, you are also giving the tax basis and the future tax (and possible criminal) liability.
Except as an inheritance :happy
That was going to be my next question re:umfundi's hypothetical scenario. Would the cost basis of the son's inherited good not reset to the cmv, $9800 in this case, upon inheriting it? I was under the impression all inherited assets were treated this way unless gold is different.
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rmelvey
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Re: pros and cons of gold

Post by rmelvey »

louis c wrote:
Speculative returns, sometimes. Real returns, never. Gold cannot produce anything in and of itself.
Those speculative returns tend to be highest when stocks and bonds are not performing very well, making it a good hedge.

With a health insurance contract you are speculating that you will get sick, the insurance company is speculating that you won't. A health insurance contract does not produce anything. Your speculation about your health prospects tend to pay off right when you need them most, when you get sick.
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Re: pros and cons of gold

Post by umfundi »

clevername wrote:
Dinero wrote:
umfundi wrote:My point is, simply, if you give an appreciated asset to an individual, you are also giving the tax basis and the future tax (and possible criminal) liability.
Except as an inheritance :happy
That was going to be my next question re:umfundi's hypothetical scenario. Would the cost basis of the son's inherited good not reset to the cmv, $9800 in this case, upon inheriting it? I was under the impression all inherited assets were treated this way unless gold is different.
Yes.

The coins are part of the estate, and if the estate is less than $1,000,000 (or depending on Bush's tax cuts) the estate pays no tax. The basis value for the son is reset to $9,800. If he then sells them for $8,000 he has a $1,800 capital loss.

One downside is that coins are (usually) collectibles, and any gain is taxed at 28%. There is no lower rate for long term gains.

The idea of having gold coins to avoid taxes is not a very good one.

Keith
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Bill Bernstein
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The Gold Rorschach

Post by Bill Bernstein »

I've had some experience with the public discourse on gold, and the vehemence of how people react to it fascinates me. It's kind of like the subject has a direct connection to some deep, dark part of our limbic systems.

On the one side are the folks who say it's a lousy investment because its price is so high and it, shudder, actually goes down occasionally when stocks do.

On the other hand are folks who natter on about the evils of paper, fiat currency that inevitably depreciates to zero, and point out how well it's done in the past decade.

Both points of view tell you more about the person making the argument than about the merits of the case.

I'm pretty happy with an asset that will stay flat or go up over 80% of the time that stocks fall. Yes, its price is high, but assuming that it will mean revert implies some faith that it will mean revert. I think that it will, but I wouldn't bet the farm on it.

Fiat currency that inevitably depreciates to zero? Get over it. Unless you're stashing your money under the mattress, it's not a problem: in the long run, the credit markets do a superb job of keeping up with inflation. (The one exception being 1920s German/recent Zimbabwean inflation. But short of that, say, the modern-era Brazilian, French, or Israeli-style variety, bills do just fine, thank you.)

And, indeed, gold has done well the past 10 years. The past 30? Not so much, especially precious metals equity.

I do think it's a tad overpriced, and however much of a contribution it made to your portfolio ten years ago, it should contribute less now at these much higher prices. And never very much, in any case. My biggest regret is that Vanguard polluted the precious metals mining stocks in VGPMX with the producers of baser materials that correlate much more highly with industrial common stocks.

And if you don't own any PME or yellow metal, you'll do just fine too.

(You say you didn't own any ten years ago but you do now? Oh my. You have a much bigger problem.)

Bill
Last edited by Bill Bernstein on Sat Jul 21, 2012 1:14 pm, edited 1 time in total.
staythecourse
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Re: pros and cons of gold

Post by staythecourse »

wbern wrote:Having had some experience with the public discourse on gold, it the vehemence of how people react to it fascinates me. It's kind of like the subject has a direct connection to some deep, dark part of our limbic systems.

On the one side are the folks who say it's a lousy investment because its price is so high and it, shudder, actually goes down occasionally when stocks do.

On the other hand are folks who natter on about the evils of paper, fiat currency that inevitably depreciates to zero, and point out how well it's done in the past decade.

Both points of view tell you more about the person making the argument than about the merits of the case.

I'm pretty happy with an asset that will stay flat or go up over 80% of the time that stocks fall. Yes, its price is high, but assuming that it will mean revert implies some faith that it will mean revert. I think that it will, but I wouldn't be the farm on it.

Fiat currency inevitably depreciating to zero? Get over it. Unless you're stashing your money in a mattress, it's not a problem: in the long run, the credit markets do a superb job of keeping up with inflation. (The one exception being 1920s German/recent Zimbabwean inflation. But short of that, say, modern-era Brazilian, French, or Israeli-style hyperinflation, bills do just fine, thank you.

Indeed, it has done well the past 10 years. The past 30? Not so much.

I do think it's a tad overpriced, and however much of a contribution it made to your portfolio ten years ago, you should have less of it now. And never very much, in any case.

And if you don't own any, you'll do just fine too.

Bill
Thanks for the input Dr. Bernstein.

As many of us know, but sometimes seem to forget, each subasset and superasset class has their advantages and disadvantages. No one says stocks, bonds, cash... my baseball card collection has no risks. It is these unique risks that make a subasset or superasset class worth holding in a portfolio. The whole reason gold reacts so different from everything else is its unique risk profile. Just like how farmland or renting out your basement would add different risks to your portfolio. Isn't that the purpose of holding a diversified portfolio is to counterbalance the different risks of each component of the portfolio so the risk of the portfolio as a whole is less then the weighted average of its components?

As craigR has often said, which I agree, I am ambivalent about gold. I just see a unique set of risk and return characteristics that do NOT move in sync with other traditional fiinancial paper assets. Like craigR I would be very HAPPY to have gold go in the tank for a long drought like the 80's and 90's because that would mean we have positive real interest rates in the 0-5/6% range where stocks have classically dominated.

I forget who said it, maybe even one one of the esteemed writers participating on this thread, paraphrasing, "You are not trully diversified unless you are holding an asset that you are not trully comfortable with." That is what I and am sure many holders of gold believe.

Good luck.
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Re: pros and cons of gold

Post by Bongleur »

Epsilon Delta wrote:
Bongleur wrote:>He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
>

But your son has no idea what the basis of the gift was. Nobody gave him a figure. His only recourse is market price on the day of receipt.
If he does not have records his recourse is to use zero basis. If he has inadequate records, such as knowing just the year of acquisition, he can use a worst case (lowest value) estimate of his basis to the extent his records support it. He does not have recourse to making things up.
If you inherit stock or a mutual fund or ETF, your basis is the price on the day of death. Why should a physical coin be treated differently than GLD ???

***
Are non-numistmatic coins "collectables?" Never can remember where the criteria for the 28% vs tax bracket valuation are spelled out.
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umfundi
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Re: pros and cons of gold

Post by umfundi »

Bongleur wrote:
Epsilon Delta wrote:
Bongleur wrote:>He is liable for $6,000 in undeclared capital gains. When you gave him the appreciated asset, you gave him your basis of $2,000.
>

But your son has no idea what the basis of the gift was. Nobody gave him a figure. His only recourse is market price on the day of receipt.
If he does not have records his recourse is to use zero basis. If he has inadequate records, such as knowing just the year of acquisition, he can use a worst case (lowest value) estimate of his basis to the extent his records support it. He does not have recourse to making things up.
If you inherit stock or a mutual fund or ETF, your basis is the price on the day of death. Why should a physical coin be treated differently than GLD ???

***
Are non-numistmatic coins "collectables?" Never can remember where the criteria for the 28% vs tax bracket valuation are spelled out.
Bongleur,

You are confusing a few issues:

If you give (to an individual while you are alive) an appreciated asset, you are giving the original basis and the future tax liability. The value on the day of the gift has nothing to do with it.

If you will an appreciated asset to an individual, your estate pays the taxes and the basis is reset to the current value determined in the settlement of the estate. Which may not exactly be the value on the date of death or the date of transfer.

Gold bullion, coins or not, is generally a collectible. The tax on gains (more than 1 year) is 28%. I have read that the tax treatment of politically unfavored coins like the ZA Kruger Rand is different than, say, the American Eagle, but I don't really know.

Best wishes,

Keith
Last edited by umfundi on Sat Jul 21, 2012 10:10 pm, edited 1 time in total.
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rbowling
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Re: pros and cons of gold

Post by rbowling »

A lot of people seem to be messing up the tax rate on collectibles. As I understand it, the 28% rate is the maximum. Collectibles are taxed as regular income up to a maximum 28% rate.

See here: http://en.m.wikipedia.org/wiki/Income_t ... #section_4
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