pros and cons of gold

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Epsilon Delta
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Re: pros and cons of gold

Post by Epsilon Delta »

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.
If the coins are inherited the son gets the basis on the day of death (or alternate date if the estate makes that choice). This could be a step up or step down. The father's records are not needed.

If the coins are a gift the sons basis is the fathers basis, unless the father had a loss, in which case it has a duel basis, the fathers basis is used for gains and the value on the date of the gift is used for a loss (in between there is neither a gain nor a loss). The father's records are needed.

The discussion here was about a gift. If it was a gift you can't pretend the father died just because he did not share his records.
****************
By the way the 28% is a maximum, if your ordinary income tax rate is less you pay that rather than the 28%.
umfundi
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Re: pros and cons of gold

Post by umfundi »

rbowling wrote: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
I read, up to one year, it is regular income. Longer term, it is 28%.

One wonders if the IRS watches "Antiques Roadshow". :D

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wshang
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Re: pros and cons of gold

Post by wshang »

umfundi wrote:One wonders if the IRS watches "Antiques Roadshow". :D Keith
Ha, ha, yes, Big Brother is always watching. He even sees the date when Papa handed over that gold coin he hid from Roosevelt to his grandson. :oops:
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Dinero
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Re: pros and cons of gold

Post by Dinero »

umfundi wrote:I read, up to one year, it is regular income. Longer term, it is 28%.
I don't think that is correct. The IRS refers to the 28% rate as being the "maximum" rate, and elsewhere references paying 15% on collectibles if you are in the 10% or 15% bracket.

Otherwise, if you were in the 15% or less bracket, you would have an incentive to take short-term gains on gold to avoid the long term rate.
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Re: pros and cons of gold

Post by plnelson »

Dinero wrote:
umfundi wrote:I read, up to one year, it is regular income. Longer term, it is 28%.
I don't think that is correct. The IRS refers to the 28% rate as being the "maximum" rate, and elsewhere references paying 15% on collectibles if you are in the 10% or 15% bracket.

Otherwise, if you were in the 15% or less bracket, you would have an incentive to take short-term gains on gold to avoid the long term rate.

I don't believe that bullion coins (and bars, etc) and considered "collectibles". That would only be coins with numismatic value.
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Re: pros and cons of gold

Post by plnelson »

We had a thread on Bogleheads about this a month ago and I'll just repeat what I said then.

I've never been a big fan of gold because as an asset it's surrounded by too much "religion" - folklore, mythology, politics, ideology, and just plain emotion. You also have to store it - or trust whoever is holding it for you - and when you sell it you pay outrageous taxes on it. And as an inflation hedge, there's nothing special about it - plenty of other commodities are at least as good. Plus there's TIPS, which are guaranteed and tax-advantaged.

Some people like gold for a "total breakdown of society" scenario. You can never pin them down on what they mean by that to examine their thesis in detail, but I suspect in such a scenario safe water and food would be worth more than gold. And if gold WAS worth something the guy who had it would be a target for whoever had the most guns so he would be relived of it (and/or his life) pretty quickly.

But gold does have one attribute that sets it truly apart from stocks, bonds and other traditional investments. By buying modest amounts of physical bullion (coins, bars, etc) over many years, you can amass quite a significant pile of money that no one has any record of you having. And it's relatively small, portable, and easily liquidated. Now I can't imagine any use for this attribute outside of criminal enterprises and tax evasion, but you have to admit that it sets it apart.
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Dinero
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Re: pros and cons of gold

Post by Dinero »

plnelson wrote:I don't believe that bullion coins (and bars, etc) and considered "collectibles". That would only be coins with numismatic value.
The IRS considers precious metals, whether in numismatic form or not, to be collectibles. The same for precious metal ETFs (e.g. GLD).

Regarding tax rates on collectible gains, SmartMoney had this to say:
SmartMoney wrote:Net long-term gains from collectibles (stamps, coins, baseball cards and the like) are subject to a 28% maximum rate rather than the usual 15%. To the extent a long-term collectibles gain falls into the 10%, 15% or 25% bracket, it's taxed at that rate.
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Re: pros and cons of gold

Post by umfundi »

plnelson wrote: I don't believe that bullion coins (and bars, etc) and considered "collectibles". That would only be coins with numismatic value.
You could do your own search, but, for example:
First, the IRS considers gold a "collectible" and will tax your capital gains at a 28% rate. This designation includes all forms of gold (other than jewelry), such as:

•All denominations of Gold Bullion coins and numismatic/rare coins;
http://goldnews.bullionvault.com/gold_tax_060320102

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hazlitt777
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Re: pros and cons of gold

Post by hazlitt777 »

plnelson wrote:
Dinero wrote:
umfundi wrote:I read, up to one year, it is regular income. Longer term, it is 28%.
I don't think that is correct. The IRS refers to the 28% rate as being the "maximum" rate, and elsewhere references paying 15% on collectibles if you are in the 10% or 15% bracket.

Otherwise, if you were in the 15% or less bracket, you would have an incentive to take short-term gains on gold to avoid the long term rate.

I don't believe that bullion coins (and bars, etc) and considered "collectibles". That would only be coins with numismatic value.
Bullion coins are considered "collectibles" by the tax code. So not only are numismatic coins taxed as collectibles but so are bullion coins. For investors, it is very important to understand however there is a big difference between purchasing numismatic coins and bullion coins. In the first case, you are not purchasing so much gold, as a work of art. They behave very differently.
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baw703916
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Re: pros and cons of gold

Post by baw703916 »

Here's an odd quirk of the tax code: options on GLD are taxed at a lower rate (23%) than GLD itself.

http://www.investmentnews.com/article/2 ... /305309989
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staythecourse
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Re: pros and cons of gold

Post by staythecourse »

plnelson wrote:We had a thread on Bogleheads about this a month ago and I'll just repeat what I said then.

I've never been a big fan of gold because as an asset it's surrounded by too much "religion" - folklore, mythology, politics, ideology, and just plain emotion. You also have to store it - or trust whoever is holding it for you - and when you sell it you pay outrageous taxes on it. And as an inflation hedge, there's nothing special about it - plenty of other commodities are at least as good. Plus there's TIPS, which are guaranteed and tax-advantaged.

Some people like gold for a "total breakdown of society" scenario. You can never pin them down on what they mean by that to examine their thesis in detail, but I suspect in such a scenario safe water and food would be worth more than gold. And if gold WAS worth something the guy who had it would be a target for whoever had the most guns so he would be relived of it (and/or his life) pretty quickly.

But gold does have one attribute that sets it truly apart from stocks, bonds and other traditional investments. By buying modest amounts of physical bullion (coins, bars, etc) over many years, you can amass quite a significant pile of money that no one has any record of you having. And it's relatively small, portable, and easily liquidated. Now I can't imagine any use for this attribute outside of criminal enterprises and tax evasion, but you have to admit that it sets it apart.
To each their own, but I would say the REASON gold has a role in a portfolio is exactly what you mentioned in the first paragraph. Gold is speculative and its value is driven by supply and demand. The funny thing is stocks are just as driven by supply and demand in the short run. That is what causes the volatility of the stock market is changes in perception of what stocks are worth in the short run.

The reason gold is useful in a porfolio is the speculation of gold is nearly opposite for stocks. When ecnomies are booming everyone wants stocks and when economies are flat they flood to cash and gold. Always have been and always will be.

Erb and Harvey proved the same thing in their attempt to discredit the use of gold as it helped 80% of the time when stocks fell. The biggest proof is forget about theories and papers, but real life. In real life holding gold in a diversified portfolio has improved volatility in most periods since coming of the gold standard.

Good luck.

p.s. to Mr. Swedroe and Dr. Bernstein a great study would be to look at correlation coefficients of P/E of stocks vs. gold returns. My guess you would see a low to negative result.
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baw703916
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Re: pros and cons of gold

Post by baw703916 »

staythecourse wrote:p.s. to Mr. Swedroe and Dr. Bernstein a great study would be to look at correlation coefficients of P/E of stocks vs. gold returns. My guess you would see a low to negative result.
Dr. Bernstein has in fact done exactly that.

http://www.efficientfrontier.com/ef/adhoc/gold.htm

Technically, he's considering precious metal equities, not gold itself. But fundamentally, the story is similar.
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plnelson
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Re: pros and cons of gold

Post by plnelson »

umfundi wrote:
plnelson wrote: I don't believe that bullion coins (and bars, etc) and considered "collectibles". That would only be coins with numismatic value.
You could do your own search, but, for example:
First, the IRS considers gold a "collectible" and will tax your capital gains at a 28% rate. This designation includes all forms of gold (other than jewelry), such as:

•All denominations of Gold Bullion coins and numismatic/rare coins;
http://goldnews.bullionvault.com/gold_tax_060320102

Keith

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umfundi
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Re: pros and cons of gold

Post by umfundi »

plnelson wrote:Well, then I sit corrected. Thank you.
I didn't know any of this stuff until a few months ago when I contemplated selling a gold coin I had inherited 20 years ago. These rules sure were a surprise to me. :shock:

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magellan
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Re: pros and cons of gold

Post by magellan »

baw703916 wrote:Here's an odd quirk of the tax code: options on GLD are taxed at a lower rate (23%) than GLD itself.

http://www.investmentnews.com/article/2 ... /305309989
Another quirk is that with both GLD and bullion, you can offset the 28% collectables gain using regular capital losses. I forget all the details and I used Turbo Tax to handle the heavy lifting, but in the end I used up a hefty capital loss carry-forward to rebalance out of GLD. IIRC, the gains on GLD were tax free because of all the tax loss harvesting I had done in the year or two previous.

This is another reason why it can be very worthwhile to use tax software to do a complete mock tax return in November or December. While I was doing this, I poked in the details for a contemplated GLD rebalancing sale, and was amazed that it didn't increase my tax bill at all. After some digging, I realized that the loss carry-forward was cancelling out the collectables gain.

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Re: pros and cons of gold

Post by Bongleur »

Note that the tax treatment is not uniform for all precious metal funds/ETFs. Have to check the fine print.
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Re: pros and cons of gold

Post by hazlitt777 »

rbowling wrote: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
I believe this is correct. For the little people like me, making less than 50,000 a year, I would be taxed at 15% of its apreciated value.
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Re: pros and cons of gold

Post by hazlitt777 »

Epsilon Delta wrote:
The discussion here was about a gift. If it was a gift you can't pretend the father died just because he did not share his records.
****************
By the way the 28% is a maximum, if your ordinary income tax rate is less you pay that rather than the 28%.
That being said, is it also true that parents can gift up to 13,000 annually to their children tax free? In which case, they could give a number of coins to their children yearly and avoid these taxes? Interested in feedback on this and how the paperwork would have to be handled.
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Re: pros and cons of gold

Post by Dinero »

hazlitt77 wrote:That being said, is it also true that parents can gift up to 13,000 annually to their children tax free? In which case, they could give a number of coins to their children yearly and avoid these taxes? Interested in feedback on this and how the paperwork would have to be handled.
Look up a few posts. Your basis is passed on with the gift. So gift limit applies to the market value, but the recipients must pay any capital gains taxes due when they sell, based on your original basis. So you dodge the taxes, your kids do not.

Unless the coins are part of an inheritance, then they receive a stepped-up basis.
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Re: pros and cons of gold

Post by umfundi »

hazlitt777 wrote:
Epsilon Delta wrote:
The discussion here was about a gift. If it was a gift you can't pretend the father died just because he did not share his records.
****************
By the way the 28% is a maximum, if your ordinary income tax rate is less you pay that rather than the 28%.
That being said, is it also true that parents can gift up to 13,000 annually to their children tax free? In which case, they could give a number of coins to their children yearly and avoid these taxes? Interested in feedback on this and how the paperwork would have to be handled.
I am not an expert on this at all. My understanding is you give the basis (the original price), not the current value. The recipient is then responsible for tax based on the original price if the asset is sold. In other words, the basis does not change when you make the gift.

Here's a thought experiment: Let them buy it from you at the current fair market value, and then give them the money. You would owe tax on the appreciation.

This is for gifts to individuals. Gifts (donations) to charities are different.

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Epsilon Delta
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Re: pros and cons of gold

Post by Epsilon Delta »

hazlitt777 wrote:
Epsilon Delta wrote:
The discussion here was about a gift. If it was a gift you can't pretend the father died just because he did not share his records.
That being said, is it also true that parents can gift up to 13,000 annually to their children tax free? In which case, they could give a number of coins to their children yearly and avoid these taxes? Interested in feedback on this and how the paperwork would have to be handled.
To clarify what others have said:

Keeping annual gifts to under $13,000 per year allows the giver to avoid paying gift tax on the value of the gift*. It does not avoid the recipient having to pay capitol gains taxes on any appreciation when the recipient sells the asset. The gift tax and capitol gains tax (a.k.a. income tax) are two different taxes.

* more exactly it avoids the gift affecting the lifetime tax free gift limit.
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Re: pros and cons of gold

Post by hazlitt777 »

Epsilon Delta wrote:
hazlitt777 wrote:
Epsilon Delta wrote:
The discussion here was about a gift. If it was a gift you can't pretend the father died just because he did not share his records.
That being said, is it also true that parents can gift up to 13,000 annually to their children tax free? In which case, they could give a number of coins to their children yearly and avoid these taxes? Interested in feedback on this and how the paperwork would have to be handled.
To clarify what others have said:

Keeping annual gifts to under $13,000 per year allows the giver to avoid paying gift tax on the value of the gift*. It does not avoid the recipient having to pay capitol gains taxes on any appreciation when the recipient sells the asset. The gift tax and capitol gains tax (a.k.a. income tax) are two different taxes.

* more exactly it avoids the gift affecting the lifetime tax free gift limit.
Thanks. Now correct me if I am wrong: Am I understanding you correctly that the appreciation an inheritor would have to pay is only the appreciation from the date the coin is inherited, correct? Say I inherit a coin he paid 400 for, I inherit it when it is worth 1500, and I sell it at 2000, then I am responsible for paying the collectible tax on the 500 gain?
umfundi
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Re: pros and cons of gold

Post by umfundi »

Epsilon Delta wrote: To clarify what others have said:

Keeping annual gifts to under $13,000 per year allows the giver to avoid paying gift tax on the value of the gift*. It does not avoid the recipient having to pay capitol gains taxes on any appreciation when the recipient sells the asset. The gift tax and capitol gains tax (a.k.a. income tax) are two different taxes.

* more exactly it avoids the gift affecting the lifetime tax free gift limit.
So, I have a question. Is the gift tax calculation based on the original basis or on the current value?

For example, 10 years ago I bought a coin for $500. Today it is worth $1000. I now give it to my son. His basis for capital gains if he sells it is $500. But, how much counts towards the $13,000 "limit" for the gift tax?

Thank you,
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Epsilon Delta
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Re: pros and cons of gold

Post by Epsilon Delta »

hazlitt777 wrote:
Thanks. Now correct me if I am wrong: Am I understanding you correctly that the appreciation an inheritor would have to pay is only the appreciation from the date the coin is inherited, correct? Say I inherit a coin he paid 400 for, I inherit it when it is worth 1500, and I sell it at 2000, then I am responsible for paying the collectible tax on the 500 gain?
That's correct.
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Epsilon Delta
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Re: pros and cons of gold

Post by Epsilon Delta »

umfundi wrote:
Epsilon Delta wrote: To clarify what others have said:

Keeping annual gifts to under $13,000 per year allows the giver to avoid paying gift tax on the value of the gift*. It does not avoid the recipient having to pay capitol gains taxes on any appreciation when the recipient sells the asset. The gift tax and capitol gains tax (a.k.a. income tax) are two different taxes.

* more exactly it avoids the gift affecting the lifetime tax free gift limit.
So, I have a question. Is the gift tax calculation based on the original basis or on the current value?

For example, 10 years ago I bought a coin for $500. Today it is worth $1000. I now give it to my son. His basis for capital gains if he sells it is $500. But, how much counts towards the $13,000 "limit" for the gift tax?

Thank you,
Keith
The gift tax is based on the value at the time of the gift. So in your example the current value of $1000 would count to wards the limit.
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craigr
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Re: pros and cons of gold

Post by craigr »

The paper again makes the mistake of looking at the asset in isolation and not in a total portfolio terms. Also, they are very inconsistent as I pointed out in another thread. In particular they state about the era of the gold standard in the US:
"During the first period of full convertibility the inflation rate was close to zero, and during the two subsequent periods the annual inflation rate was in excess of 3% per annum. The rate of inflation in the U.S. has increased over time."
(see Exhibit 7 in their paper)

If the full gold convertibility standard produced inflation rate close to zero as they state then wasn't that an inflation hedge? Yes, it was. It was only after the gold standard ended in various degrees that they note: "...during the two subsequent periods the annual inflation rate was in excess of 3% per annum."

And I agree. But the prior period of 100% gold conversion standard there was no inflation. Some data even shows slight deflation over that entire period.

So if gold was not matching inflation then shouldn't it have shown this tendency over 100+ years? Bretton Woods fell apart in only 40 years when the gold conversion was ended by Rooselvelt in 1933. I find it hard to believe we would have not seen this inflation sooner during the prior 100+ years if gold wasn't doing what it advertised itself to do.

But the whole idea is you don't put 100% of your money in any single asset. Period. You don't put 100% in gold, 100% in stock, 100% in TIPS or 100% in whatever other asset someone suggests. That's a 100% way to get badly burned eventually. So you own some gold along with stocks and bonds because these assets tend to react to much different conditions in the economy. An economy that is bad for stocks and bonds is usually very good for gold bullion.

Personally, I think that precious metals exposure should be bullion and not precious metals equity. In 2008's crash for instance gold bullion was up around +5% where precious metal stocks took punishing losses in excess of -60%. Miners will be affected by bad stock markets but already mined yellow metal may not be. So I'd rather own stocks for stocks and gold for gold. I don't want to mix the two asset groups myself.

Finally this seems to be the Riddle of the Sphinx for many on the subject of gold: If gold is so worthless, why do the people that issue the money hold so much of it? In fact, every major central bank on the planet holds tons of the stuff (and emerging market banks are buyers). You'd think they'd be rid of it all and turn that vault space into a nice wine cellar or something if it had no value. I wonder what they know that everyone else doesn't?

Personally, I feel a little more comfortable owning some of the same assets that the people issuing my money have in their own reserves. No, gold is not a replacement for stocks and bonds. However, gold is a pretty good way to diversify stock and bond risks that is simple and battle tested.
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Re: pros and cons of gold

Post by Bongleur »

>An economy that is bad for stocks and bonds is usually very good for gold bullion.

But that historic data is before the recent era of stratospheric leverage. If stocks & bonds crash & the sellers need to raise cash to close their leveraged positions, selling paper gold that is also leveraged... maybe the price of gold will also crash because of the volume of leveraged selling ???
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craigr
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Re: pros and cons of gold

Post by craigr »

Bongleur wrote:>An economy that is bad for stocks and bonds is usually very good for gold bullion.

But that historic data is before the recent era of stratospheric leverage. If stocks & bonds crash & the sellers need to raise cash to close their leveraged positions, selling paper gold that is also leveraged... maybe the price of gold will also crash because of the volume of leveraged selling ???
Anything could happen. I would also point out that historic data has these same risks for stocks and bonds as well. But I'm always thinking about where capital flows will happen in each case. If stocks are crashing where is the money going? Bonds? Gold? Mattresses? Same for the other markets. A bad gold market usually means the capital is flowing to assets investors think will have better returns. Maybe stocks? Maybe bonds? Don't know. But I feel more comfortable owning a variety of assets with risks that do not so closely overlap.

I always want to own an asset that investors want to buy when the time is right. Someone buying gold is doing it for much different reasons than someone who is buying nominal bonds for instance. I'm not interested in speculating on reasons why certain decisions are being made as a group in the market. What I want to do is own something they want when the time is right so I can sell it to them and buy what it is they currently don't think has as much value. But only by owning a variety of assets (like gold along with stocks and bonds) can this kind of action take place.
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Re: pros and cons of gold

Post by magellan »

Bongleur wrote:But that historic data is before the recent era of stratospheric leverage. If stocks & bonds crash & the sellers need to raise cash to close their leveraged positions, selling paper gold that is also leveraged... maybe the price of gold will also crash because of the volume of leveraged selling ???
IMO, folks expect way too much of diversification. During a deleveraging cycle, investments are mostly divided between risky and risk-free assets. Aside from how your portfolio is built along those lines, diversification can't save or even help you. Sure, you need to have enough risk-free assets to cover expenses and rebalancing, even in the worst of times. But IMO, it's a mistake to look for assets that will zig enough to offset the inevitable portfolio zag that will happen during a systemic panic.

I think about diversification in terms of economic cycles of five to ten years or more. That's where diversification can really shine. Over this time frame, economic factors can impact different asset classes in meaningfully different ways, unrelated to liquidity or flight-to-safety factors. Building a portfolio that captures these different and often opposing forces and puts them to work generating returns is what diversification means to me.

Jim
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staythecourse
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Re: pros and cons of gold

Post by staythecourse »

craigr wrote:
Bongleur wrote:>An economy that is bad for stocks and bonds is usually very good for gold bullion.

But that historic data is before the recent era of stratospheric leverage. If stocks & bonds crash & the sellers need to raise cash to close their leveraged positions, selling paper gold that is also leveraged... maybe the price of gold will also crash because of the volume of leveraged selling ???
Anything could happen. I would also point out that historic data has these same risks for stocks and bonds as well. But I'm always thinking about where capital flows will happen in each case. If stocks are crashing where is the money going? Bonds? Gold? Mattresses? Same for the other markets. A bad gold market usually means the capital is flowing to assets investors think will have better returns. Maybe stocks? Maybe bonds? Don't know. But I feel more comfortable owning a variety of assets with risks that do not so closely overlap.

I always want to own an asset that investors want to buy when the time is right. Someone buying gold is doing it for much different reasons than someone who is buying nominal bonds for instance. I'm not interested in speculating on reasons why certain decisions are being made as a group in the market. What I want to do is own something they want when the time is right so I can sell it to them and buy what it is they currently don't think has as much value. But only by owning a variety of assets (like gold along with stocks and bonds) can this kind of action take place.
I will always think of one sentence that Harry Browne wrote in his book "Best Laid Plans..." that has stood the test of time. Paraphrasing: "when there is stress in the market money will flow to the U.S. dollar unless there is anxiety in the dollar then it will flow to the reserve currency in the world and that is gold".

Some combination of cash, LTGB, and gold has saved every stock portfolio through history (at least as long as LTGB were not capped and gold came of the gold standard). The problem I see is not finding assets to protect against stock losses (that is easy) it is trying to get folks to hold those assets knowing it will underperform other assets before a stress occurs which bids up the prices of these "protective" assets.

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

Post by staythecourse »

magellan wrote:
Bongleur wrote:But that historic data is before the recent era of stratospheric leverage. If stocks & bonds crash & the sellers need to raise cash to close their leveraged positions, selling paper gold that is also leveraged... maybe the price of gold will also crash because of the volume of leveraged selling ???
IMO, folks expect way too much of diversification. During a deleveraging cycle, investments are mostly divided between risky and risk-free assets. Aside from how your portfolio is built along those lines, diversification can't save or even help you. Sure, you need to have enough risk-free assets to cover expenses and rebalancing, even in the worst of times. But IMO, it's a mistake to look for assets that will zig enough to offset the inevitable portfolio zag that will happen during a systemic panic.

I think about diversification in terms of economic cycles of five to ten years or more. That's where diversification can really shine. Over this time frame, economic factors can impact different asset classes in meaningfully different ways, unrelated to liquidity of flight-to-safety factors. Building a portfolio that captures these differences and puts them to work is what diversification means to me.

Jim
Kudos for realizing things that most (including professionals) don't get.

Many authors, including Gibson and Darst, have published in their books the autocorrelation/ serial correlation of different asset classes from one year to another. The results are ZERO correlation for every asset class except small positive correlation of Tbills. So we should know that any correlation of one asset class to another on any given year is unpredictable and likely zero. So why do folks always compare short term correlations like this paper which looks at MONTHLY correlations.

Correlations change as economic periods change and NOT some meaningless period of time from x to y.

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

Post by Bongleur »

>A bad gold market usually means the capital is flowing to assets investors think will have better returns.

But in a highly leveraged world as is currently the case, extraordinary amounts of cash must be raised to close leveraged "risk on" positions. Everyone is selling the few good assets (gold, US Govt Bonds) at the same time, so the price might just crash instead of rise.
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craigr
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Re: pros and cons of gold

Post by craigr »

Bongleur wrote:>A bad gold market usually means the capital is flowing to assets investors think will have better returns.

But in a highly leveraged world as is currently the case, extraordinary amounts of cash must be raised to close leveraged "risk on" positions. Everyone is selling the few good assets (gold, US Govt Bonds) at the same time, so the price might just crash instead of rise.
I really try to stay neutral on market narratives and corner cases. For every one possible extreme scenario there are countless other less extreme ones that are far more likely and something nobody expected to happen. And again, if they are closing out these positions then what happens to the prices of the assets to where the money flows?

Yes I agree that a lot of unprecedented things are going on today (US Treasury long-term bond yields just hit a recent new low it seems). But because of the unpredictable nature of these events I want to diversify. Part of that diversification should be gold in a portfolio along with other assets.
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kikie
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Re: pros and cons of gold

Post by kikie »

can someone explain, this phrase "we would expect very few, if any, such observations" ; is there a statistical correlation that could be done ? and let us says its 0.80 ; as 5/6 seems to imply ; is he saying he expects it to be 100% ;
I'm thinking very few assets classes are that predictably correlated, in fact, i thought one of the main things about gold, is that it diversifying, Because it's not correlated with other assets classes, so perhaps the argument is mute either way?



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.




staythecourse wrote: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.
Those who know do not speak; those who speak do not know.
Valuethinker
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Re: pros and cons of gold

Post by Valuethinker »

larryswedroe wrote: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
Interestingly American Barrick, the biggest producer, is *cutting back* capital spending. Shareholders are worried about the high costs of new mines. This does not seem to be an isolated example.
b) virtually all the gold ever mined is available to be sold.

Best wishes
Larry
And yet it sits there, hoarded.

My own thought is that without a rise in real interest rates (and there is no sign of that yet), political instability (Eurozone, Iran etc.) will give gold quite a good run yet.

But if you bought at USD 350 you are on c. 5x your money. If you buy now, you could maybe make 50% on your money, maybe 100%.
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