What is going on with Gold price?

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Logan Roy
Posts: 704
Joined: Sun May 29, 2022 10:15 am

Re: What is going on with Gold price?

Post by Logan Roy »

secondopinion wrote: Wed Nov 23, 2022 7:29 pm
Logan Roy wrote: Wed Nov 23, 2022 7:03 pm
secondopinion wrote: Wed Nov 23, 2022 5:36 pm
Logan Roy wrote: Wed Nov 23, 2022 4:36 pm
secondopinion wrote: Wed Nov 23, 2022 3:09 pm

Who says that Treasuries are at negative real yields? They pay a fixed amount of nominal yield; what that nominal yield means in reality is up to the market and Fed. If you mean TIPS, then yes, the purchase power is impaired when bought at a negative yield (but it is fixed in loss); but they are not that way right now. However, will gold fare better against negative-yielding TIPS, let alone the positive-yielding TIPS? I am neutral on the gold debate

Something is not a "greater fool asset" if no one can come up with a significantly better option at that time.
The 10 year yield is 3.7%, and CPI is 7.7%. The market obviously expects inflation to fall, but the market's ability to forecast inflation may be no better than a monkey's. To avoid a loss of purchasing power, one needs inflation to fall a certain amount within a certain timeframe.

Treasuries have spent much of the past 12 years as "greater fool" (we need a better term) assets – as demand for Treasuries on extremely low yields has become a bet on Fed easing, and is likely still to be one. Treasury yields and stock market earnings yields diverged several years ago, and both imply quite different things about the economy, if we believe they're still being assessed on fundamentals.
CPI is just an index that changes over time. It is more likely to drop than increase; it is not a coin flip nor is the "random process" identically distributed at all times. Remember, it is mostly the market's actions that determines if the 10 year yield it will be reasonable in all honesty. Even the Fed has limited control on the currency (hence why they are trying to do something all this time with limited success).

The US had great business and low inflation; that is unusual by most metrics. However, international stocks suffered terribly in comparison (looking 2010-2021: https://www.portfoliovisualizer.com/bac ... ion3_3=100). Note the dollar appreciated as well (https://fred.stlouisfed.org/series/DTWEXBGS) Verdict: US stocks did unusually well and US bonds actually did well versus the rest of the world currencies. Explain how the fundamentals of stocks and bonds suggest a contradiction?

The realism here is that we can run into bad times for US bonds as a tail risk; the market is skewing the risk-return profile, however. As a result, the coin is not equally weighted, but which side do you want? "Greater fool" is hardly relevant here for stocks and treasuries; gold is also pricy. Everything seems pricy; so, what is the wise action?
Well on the ins and outs of fed policy and taming inflation, historically, we haven't tamed high inflation with rates significantly below inflation – as they still are. We've needed a Volcker moment. But with debt where it is today, there may be a cap on rates significantly lower than it was in the early 80s, before damage to the financial system becomes a bigger issue than inflation.

Academics are divided on whether we're behind the curve. Having said that: this is essentially what buying an Option is. It's a bet on it being at a certain level by a certain date. And I don't think anyone would suggest the market (or any of us) know where inflation's going to be a year from now.

Stock and bond fundamentals diverged because stock market valuations implied very high future growth (e.g. buying stocks with <1% earnings yields assumes a lot of growth) while bond market valuations (buying bonds with 1% yields) implies a very high price on protection – i.e. securing a safe 1% over 10 years is a good deal. And the reason for this is that we know, so long as inflation doesn't show up, there's a 'Fed put'. So if the earnings growth isn't there, the Fed will become forced purchasers of bonds. And we've had that dynamic for about 40 years, which has allowed stocks and bond valuations to follow each other up.
You are right that ground would need to be covered, but that does not mean the long shot is doing so. In risk management, buying the put option implies insurance; we do not have it with treasuries. The reality is that controlling inflation is priced in but with a considerable tail risk that it will not. In some regards, the risk-return profile is more like selling a put option rather than buying one. Hence, the likelihoods are to be in favor of inflation being managed. One year or two years, inflation drops, recession, the business cycle starts over, and the prediction is met. If you do not think it will be managed, buy TIPS or something else.

The choice of fundamentals to show divergence are not quite right:

- First, they are far from this now.
- Second, were are no longer in COVID low yields with market highs (and to think 2018 had some yields).
- Third, the dollar has strengthened against other currencies.

And many countries use different techniques to control their currencies for the short- and long-term; it is one of their jobs of having a good currency. Bond buying/selling does this for the long-term.
The comment on stock/bond divergence concerned the past 12 years. I think the inverted yield curve is absolutely still an example of a 'greater fool' (need a better term) trade, in that a sizeable part of the market thinks yields are close to peaking, and the next concern will be recession. So we're buying the longer duration Treasuries and TIPS because there'll be a huge amount of upside if rates start falling again.

And I think the basic principle of trading in this environment will be selling the rips on long duration assets, to buy ultra-short (as cash rates get better), and vice versa when long duration dips. And my model portfolio has 17-18% in gold, to get my overall dollar exposure in the 50% range. I've also added more global inflation-linked bonds. I wouldn't bet against the dollar, but I think there is a sensible balance.
NiceUnparticularMan
Posts: 3899
Joined: Sat Mar 11, 2017 7:51 am

Re: What is going on with Gold price?

Post by NiceUnparticularMan »

seajay wrote: Wed Nov 23, 2022 9:46 am It is variable US dollars that is the randomizer
Paper cash is in fact not subject to the same wild swings in inflation-adjusted value as free-floating gold. It is instead subject to a predictable decline in inflation-adjusted value (I hope no one is expecting it to go up!). What varies is just the inflation rate, but even that tends to be relatively bounded. Like, even the recent spike in annualized inflation is still small in comparison to the sorts of one-year losses that free-floating gold can experience.
house prices/gold ratio for instance, where you might gleam a clearer indication of relative values than if measured on a house/US dollar basis.
The longest somewhat reliable index of housing costs in the U.S. that I know of is the imputed rental of owner-occupied housing component of the CPI series:

https://fred.stlouisfed.org/series/A2013C1A027NBEA

Compared to free-floating gold prices, this of course has been FAR less volatile.

Meaning notwithstanding what some people here seem to be claiming, the cost of housing in the United States in terms of units of free-floating gold has also swung up and down wildly over the years. Much more so than with USD.
Backtest US data using silver then
Backtesting in this way is not a reliable method for forward-looking portfolio design at all. Swapping silver for gold is therefore not helping.
Again that would be currency/US dollars.
Or ability to purchase things like food, housing, and so on. USD are of course just a medium of exchange for these purposes. The point is that free-floating gold could be exchanged to enough USD to buy a lot more real stuff in 1980 than it could in 2000, and then a lot more in 2011, and then a lot less again in 2015, and then a lot more again in 2020, and now a lot less again in 2022 . . . .

I get it is a popular meme that gold buys a consistent amount of real stuff, unlike USD. This is demonstrably false as to free-floating gold, it is actually very inconsistent in how much real stuff it can buy at any given time.

And where it heads next is anyone's guess. Could be a lot more. Could be a lot less. Such is the nature of greater fool assets.
The exact same might be said for stocks, the Dow real price has endured wild swings in real terms
Absolutely. And hopefully, no one is trying to sell people on investing in stocks on the claim they can be sold to buy a consistent amount of real stuff every year. They do not.

The reason to invest in stocks is fundamentally that they are ownership shares in businesses, which in turn own productive assets they intend to operate at a profit in the future, with those profits being returned to stock investors.

The current market prices of those ownership shares changes around a lot, but if you hold them long enough, you will get your share of those profits.

Obviously, this is why stocks are not greater fool assets, and free-floating gold is. With free-floating gold, there are no such operating profits. You are just hoping someone comes along willing to pay more. With stocks, you can reasonably hope to get your share of those operating profits. So, not the same thing, of course.
Your obvious dislike of gold and repeated "greater fool" proclamation just indicates your personal hatred of gold. Each of dollar, stock, gold and even bonds could be branded as equally "greater fool".
This is a truly unfortunate argument.

I do not hate gold. I like it--I am wearing a gold ring right now!

What I don't like is people promoting investments in free-floating gold based on false premises.

In this case, for the reasons I have explained, it is a false premise that stocks and bonds are "greater fool" assets in the same sense as free-floating gold. Drawing that distinction is not a matter of liking or disliking gold, it is just being accurate about the nature of the investment in question.

And honestly, I find it very curious that people who "like" gold, at least here, mostly don't seem to be willing to discuss it based on true premises. I mean, people invest in speculative assets knowingly all the time. They do that because they think their speculation is valid. And there are a few people here who sometimes take such an attitude about gold, meaning they think they have the ability to speculate on where its price is heading in profitable ways.

So it is not impossible to make an argument for investing in gold which does not require asserting false premises about gold. Of course, I am personally skeptical about the ability of people to profitably speculate in that fashion, but that is ultimately up to the investor to decide.

But I guess because in general that sort of speculation is frowned on here, most people here who "like" gold feel compelled to try to make arguments for investing in gold that sound more like the sorts of arguments that are normally credited here. Unfortunately, that means repeatedly asserting false premises about free-floating gold.

And then if someone like me points that out, the response is I am only saying that because I "dislike" gold. Again, though, all I actually dislike is people promoting investments in gold based on false premises.
Your perceived impossibility to discourage others indicates others opine differently to yourself.
So, economic theory suggests free-floating gold should behave a certain way, a Vanguard study in 2019 found that free-floating gold has behaved in a way consistent with economic theory, and then the "out of sample" data since that study has shown that free-floating gold has behaved in a way consistent with economic theory and that Vanguard study.

Against all this, we have people who simply make unfounded assertions about the nature of free-floating gold, or worse, try to justify those assertions by using data from before gold was free-floating.

You seem to think this is a mere matter of opinion anyway, or perhaps just a matter of deciding whether you "like" or "dislike" gold.

But to me, this is an objective, not subjective, question. Meaning I think we should be trying our best to understand the actual truth of these issues. And when both theory and empirical investigation point to the same conclusion, and there is not a valid argument to the contrary, I don't really think that is just a matter of opinion.
Central Banks holding large amounts of gold is not because they're fooling around to have a laugh
True.

The U.S. central bank, for example, holds a lot of gold because back when there was a USD-gold peg, it needed to.

In theory, it could now dump those gold holdings. But that would be enormously disruptive. And it is not like it needs the revenue.

So, it just keeps holding on to them, because the disruption it would cause to dump them outweighs any plausible benefit.

Same deal with the German central bank, and so on. There are some cases whether central banks of developing countries and such might see gold as actually still serving a purpose, but that reasoning is inapplicable to these large legacy holdings in the developed countries.

Of course, none of this particularly has anything to do with personal investors. None of us are central banks of any kind, and there is no reason to think we should imitate them.

I mean, that would be like looking at airlines, and noticing they tend to invest in a lot of fuel options, airplane leases, and so on. Like yeah, THEY do that, because they are running an airline.

As a personal investor, I have no reason to think I should be imitating that. And the same applies to central bank investments--whatever they are doing is not particularly instructive as to what I should be doing.
I know of families who have passed on generational wealth via land, gold, art, and who wouldn't ever consider buying stocks - seeing them as foolish speculations.
For the record, this is basically what ended the European aristocracy as we knew it before the industrial era. Some of those families saw the way economies were developing, and they pivoted to investing in the new emerging businesses. And in many cases, they remain among the wealthiest families in the world today. Others tried to cling to the old "stores of wealth" from the pre-industrial era, and now they are extinct, or perhaps just owners of paper titles.

So I don't know which families you have in mind. And of course stocks are not the only way of owning shares of productive businesses--you can also own them privately, as many very wealthy families do.

But I am not personally aware of any of the notable wealthy families of the pre-industrial era who successfully made the transition to modern times without pivoting to modern business ownership in some way, whether through stocks or private ownership or both.

And one of the truly great things about modern personal finance is you don't actually need to be able to own your own businesses directly in order to participate in business ownership. And you can do so in a highly diversified way! Private ownership might still have some advantages, but it is definitely a great thing that even ordinary families can invest in business ownership in a diversified way.

And again, I find it truly unfortunate that in your desire to "defend" free-floating gold as an investment, you find it necessary to try to denigrate business ownership. It is definitely risky in ways people should understand. But it is still a great thing to be able to do.
NiceUnparticularMan
Posts: 3899
Joined: Sat Mar 11, 2017 7:51 am

Re: What is going on with Gold price?

Post by NiceUnparticularMan »

seajay wrote: Wed Nov 23, 2022 11:56 am
sureshoe wrote: Wed Nov 23, 2022 10:21 amThe case has always been that gold in and of itself has no intrinsic value, so why buy it? Rehashing arguments that have been had 10000 times, but the data just continues to back it up as a pointless investment. If it didn't "save you" in this recent dip... when would it?
As a diversifier, as its good times can be when other assets are enduring bad times
For the record, when people make arguments like this, it is helpful to be familiar with the roulette wheel analogy.

That analogy goes: suppose you took 10% of your savings each year, walked into a casino, and put it all on Red.

Over time, this "investment" would have "returns" completely uncorrelated with normal assets. Sometimes you would get more lucky than not over some period, and it would seem to have good average returns over longer periods. Other times the opposite.

And therefore, its "good times can be when other assets are enduring bad times" would be a true statement as to this "investment".

Does that make it a good idea? No, as it turns out.

And free-floating gold has been like that. It has been subject to swings in price that are not correlated with other assets. But not in a way that will predictably help. Just like with the roulette wheel, in any given year, or indeed any period of years, it might help, or might hurt. But that doesn't make it predictably helpful in advance.
NiceUnparticularMan
Posts: 3899
Joined: Sat Mar 11, 2017 7:51 am

Re: What is going on with Gold price?

Post by NiceUnparticularMan »

Logan Roy wrote: Wed Nov 23, 2022 12:11 pmWhen anyone buys Treasuries at negative real yields (e.g. today) you're either betting on a greater fool (e.g. the Fed) having to come along and buy them off you, or you're placing a Put option on inflation. Otherwise you're buying something destined to lose purchasing power.
So current real yields on TIPS are positive, of course.

However, the main justifiable reason why one might have bought negative real yield TIPS at the time is you didn't really have a better option for saving at the time. It is true that you were locking in a certain loss of purchasing power over time by doing that, but there was no particular reason to assume that, say, nominal Treasuries were priced any better. And to the extent stocks might have been priced a bit better, you would still be subject to the risk that stocks would have even worse real returns. That being the whole reason stocks are priced better than Treasuries, the risk associated with them.

Unfortunately, then, this seems to me like more of the same sort of reasoning we have been discussing. You are de facto assuming here that if something like TIPS prices have gotten that high, the prices of other assets you favor have not. A better assumption is that if TIPS prices have gotten that high, likely so have the prices of other assets, on a risk-adjusted basis of course.
Which, despite going up and down, gold hasn't done, significantly, over at least 1,200 years.
Again, anyone can go look for themselves at what has happened to the inflation-adjusted price of gold in the free-floating era. It has in fact been subject to wild up and down swings.

And again, there was no particular reason to assume gold was somehow immune to the high asset prices reflected in things like negative TIPS yields. Indeed, the behavior of gold prices since then seems like pretty compelling evidence that gold was in fact subject to the same sort of "asset price inflation".
And as factories rely on energy and raw materials, there's always going to be a greater fool in a factory owner. And if that factory needs the cost of energy to be within a certain range (a problem across European factories at the moment) to operate profitably, the guy selling those real assets has the power in that relationship. So the wise factory owner may decide to own enough in commodity futures (or a big underground oil tank), such that a transient bump in commodity prices won't wipe out their business.
None of what you described has anything to do with "greater fool" theory, but you are quite right about how the operating profits of business owners are typically subject to the market prices of necessary materials, and how business owners often hedge those prices.

Now, if, say, you own shares in a company, you also then de facto own shares not only in its productive assets, but also in its hedges. So it is not actually a bad working assumption that to the extent it makes sense to hedge your businesses, they have already done it for you.

Still, there is SOME evidence that investing in something like a diversified commodities future fund MIGHT be helpful for personal investors worried about unexpected inflation. That was the conclusion of the 2019 Vanguard white paper I have referenced, and it proved predictive of what happened recently.

Gold, though, is a uniquely bad way of trying to do that, again because its market price is so far away from its intrinsic value. Personally, I don't have a problem if gold is buried somewhere in a diversified commodities basket. But Vanguard's research showed gold alone should not be taken as a reasonable substitute for such a basket, and indeed what happened since that paper was published has illustrated that point as well.
We've been in a 40 year bull market for financial assets, with falling commodity prices, over which financial assets (bonds) have reached record valuations. We can't predict the future, but we do know what's happened, and it follows a conventional understanding of debt cycles.
One of the problem in this area is telling the difference between "cycles" and structural changes. Big picture, interest rates have been steadily declining over centuries. So what we have been experiencing globally in recent decades is not necessarily a "cycle", it could be just more of that.

That said, again, if you want to do something like invest in a diversified basket of commodities futures, that might be a reasonable hedge over it being more of a cycle than a structural change. Of course this was a popular idea at one point, then it generated poor returns (a consequence of the continuation of that "bull market" you referenced), and it became very unpopular. And just recently, it would finally have paid off--sort of. It still wouldn't score all that well as a long term strategy, but again who knows if this is just a blip in a structural change, or the beginning of a new "cycle".

But to reiterate, buying something like gold is not a substitute for such a strategy.
secondopinion
Posts: 3077
Joined: Wed Dec 02, 2020 1:18 pm

Re: What is going on with Gold price?

Post by secondopinion »

Logan Roy wrote: Wed Nov 23, 2022 7:44 pm
secondopinion wrote: Wed Nov 23, 2022 7:29 pm
Logan Roy wrote: Wed Nov 23, 2022 7:03 pm
secondopinion wrote: Wed Nov 23, 2022 5:36 pm
Logan Roy wrote: Wed Nov 23, 2022 4:36 pm

The 10 year yield is 3.7%, and CPI is 7.7%. The market obviously expects inflation to fall, but the market's ability to forecast inflation may be no better than a monkey's. To avoid a loss of purchasing power, one needs inflation to fall a certain amount within a certain timeframe.

Treasuries have spent much of the past 12 years as "greater fool" (we need a better term) assets – as demand for Treasuries on extremely low yields has become a bet on Fed easing, and is likely still to be one. Treasury yields and stock market earnings yields diverged several years ago, and both imply quite different things about the economy, if we believe they're still being assessed on fundamentals.
CPI is just an index that changes over time. It is more likely to drop than increase; it is not a coin flip nor is the "random process" identically distributed at all times. Remember, it is mostly the market's actions that determines if the 10 year yield it will be reasonable in all honesty. Even the Fed has limited control on the currency (hence why they are trying to do something all this time with limited success).

The US had great business and low inflation; that is unusual by most metrics. However, international stocks suffered terribly in comparison (looking 2010-2021: https://www.portfoliovisualizer.com/bac ... ion3_3=100). Note the dollar appreciated as well (https://fred.stlouisfed.org/series/DTWEXBGS) Verdict: US stocks did unusually well and US bonds actually did well versus the rest of the world currencies. Explain how the fundamentals of stocks and bonds suggest a contradiction?

The realism here is that we can run into bad times for US bonds as a tail risk; the market is skewing the risk-return profile, however. As a result, the coin is not equally weighted, but which side do you want? "Greater fool" is hardly relevant here for stocks and treasuries; gold is also pricy. Everything seems pricy; so, what is the wise action?
Well on the ins and outs of fed policy and taming inflation, historically, we haven't tamed high inflation with rates significantly below inflation – as they still are. We've needed a Volcker moment. But with debt where it is today, there may be a cap on rates significantly lower than it was in the early 80s, before damage to the financial system becomes a bigger issue than inflation.

Academics are divided on whether we're behind the curve. Having said that: this is essentially what buying an Option is. It's a bet on it being at a certain level by a certain date. And I don't think anyone would suggest the market (or any of us) know where inflation's going to be a year from now.

Stock and bond fundamentals diverged because stock market valuations implied very high future growth (e.g. buying stocks with <1% earnings yields assumes a lot of growth) while bond market valuations (buying bonds with 1% yields) implies a very high price on protection – i.e. securing a safe 1% over 10 years is a good deal. And the reason for this is that we know, so long as inflation doesn't show up, there's a 'Fed put'. So if the earnings growth isn't there, the Fed will become forced purchasers of bonds. And we've had that dynamic for about 40 years, which has allowed stocks and bond valuations to follow each other up.
You are right that ground would need to be covered, but that does not mean the long shot is doing so. In risk management, buying the put option implies insurance; we do not have it with treasuries. The reality is that controlling inflation is priced in but with a considerable tail risk that it will not. In some regards, the risk-return profile is more like selling a put option rather than buying one. Hence, the likelihoods are to be in favor of inflation being managed. One year or two years, inflation drops, recession, the business cycle starts over, and the prediction is met. If you do not think it will be managed, buy TIPS or something else.

The choice of fundamentals to show divergence are not quite right:

- First, they are far from this now.
- Second, were are no longer in COVID low yields with market highs (and to think 2018 had some yields).
- Third, the dollar has strengthened against other currencies.

And many countries use different techniques to control their currencies for the short- and long-term; it is one of their jobs of having a good currency. Bond buying/selling does this for the long-term.
The comment on stock/bond divergence concerned the past 12 years. I think the inverted yield curve is absolutely still an example of a 'greater fool' (need a better term) trade, in that a sizeable part of the market thinks yields are close to peaking, and the next concern will be recession. So we're buying the longer duration Treasuries and TIPS because there'll be a huge amount of upside if rates start falling again.

And I think the basic principle of trading in this environment will be selling the rips on long duration assets, to buy ultra-short (as cash rates get better), and vice versa when long duration dips. And my model portfolio has 17-18% in gold, to get my overall dollar exposure in the 50% range. I've also added more global inflation-linked bonds. I wouldn't bet against the dollar, but I think there is a sensible balance.
Umm, most people buy the long duration bonds to duration match their liabilities; for example, pensions buy these to hedge their risks by matching their liabilities. If anything is wrong, people are comparatively paying for safety to insure their long-term nominal returns. But what is the “risk-free” choice depends strongly on the investment timeframe and the liabilities they have to meet.

And what is the huge upside here? Unless one is considerably leveraged, they are not going to double their money or anything like that.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Logan Roy
Posts: 704
Joined: Sun May 29, 2022 10:15 am

Re: What is going on with Gold price?

Post by Logan Roy »

secondopinion wrote: Thu Nov 24, 2022 10:37 am
Logan Roy wrote: Wed Nov 23, 2022 7:44 pm
secondopinion wrote: Wed Nov 23, 2022 7:29 pm
Logan Roy wrote: Wed Nov 23, 2022 7:03 pm
secondopinion wrote: Wed Nov 23, 2022 5:36 pm

CPI is just an index that changes over time. It is more likely to drop than increase; it is not a coin flip nor is the "random process" identically distributed at all times. Remember, it is mostly the market's actions that determines if the 10 year yield it will be reasonable in all honesty. Even the Fed has limited control on the currency (hence why they are trying to do something all this time with limited success).

The US had great business and low inflation; that is unusual by most metrics. However, international stocks suffered terribly in comparison (looking 2010-2021: https://www.portfoliovisualizer.com/bac ... ion3_3=100). Note the dollar appreciated as well (https://fred.stlouisfed.org/series/DTWEXBGS) Verdict: US stocks did unusually well and US bonds actually did well versus the rest of the world currencies. Explain how the fundamentals of stocks and bonds suggest a contradiction?

The realism here is that we can run into bad times for US bonds as a tail risk; the market is skewing the risk-return profile, however. As a result, the coin is not equally weighted, but which side do you want? "Greater fool" is hardly relevant here for stocks and treasuries; gold is also pricy. Everything seems pricy; so, what is the wise action?
Well on the ins and outs of fed policy and taming inflation, historically, we haven't tamed high inflation with rates significantly below inflation – as they still are. We've needed a Volcker moment. But with debt where it is today, there may be a cap on rates significantly lower than it was in the early 80s, before damage to the financial system becomes a bigger issue than inflation.

Academics are divided on whether we're behind the curve. Having said that: this is essentially what buying an Option is. It's a bet on it being at a certain level by a certain date. And I don't think anyone would suggest the market (or any of us) know where inflation's going to be a year from now.

Stock and bond fundamentals diverged because stock market valuations implied very high future growth (e.g. buying stocks with <1% earnings yields assumes a lot of growth) while bond market valuations (buying bonds with 1% yields) implies a very high price on protection – i.e. securing a safe 1% over 10 years is a good deal. And the reason for this is that we know, so long as inflation doesn't show up, there's a 'Fed put'. So if the earnings growth isn't there, the Fed will become forced purchasers of bonds. And we've had that dynamic for about 40 years, which has allowed stocks and bond valuations to follow each other up.
You are right that ground would need to be covered, but that does not mean the long shot is doing so. In risk management, buying the put option implies insurance; we do not have it with treasuries. The reality is that controlling inflation is priced in but with a considerable tail risk that it will not. In some regards, the risk-return profile is more like selling a put option rather than buying one. Hence, the likelihoods are to be in favor of inflation being managed. One year or two years, inflation drops, recession, the business cycle starts over, and the prediction is met. If you do not think it will be managed, buy TIPS or something else.

The choice of fundamentals to show divergence are not quite right:

- First, they are far from this now.
- Second, were are no longer in COVID low yields with market highs (and to think 2018 had some yields).
- Third, the dollar has strengthened against other currencies.

And many countries use different techniques to control their currencies for the short- and long-term; it is one of their jobs of having a good currency. Bond buying/selling does this for the long-term.
The comment on stock/bond divergence concerned the past 12 years. I think the inverted yield curve is absolutely still an example of a 'greater fool' (need a better term) trade, in that a sizeable part of the market thinks yields are close to peaking, and the next concern will be recession. So we're buying the longer duration Treasuries and TIPS because there'll be a huge amount of upside if rates start falling again.

And I think the basic principle of trading in this environment will be selling the rips on long duration assets, to buy ultra-short (as cash rates get better), and vice versa when long duration dips. And my model portfolio has 17-18% in gold, to get my overall dollar exposure in the 50% range. I've also added more global inflation-linked bonds. I wouldn't bet against the dollar, but I think there is a sensible balance.
Umm, most people buy the long duration bonds to duration match their liabilities; for example, pensions buy these to hedge their risks by matching their liabilities. If anything is wrong, people are comparatively paying for safety to insure their long-term nominal returns. But what is the “risk-free” choice depends strongly on the investment timeframe and the liabilities they have to meet.

And what is the huge upside here? Unless one is considerably leveraged, they are not going to double their money or anything like that.
10+ year TIPS ETFs should be down about 50% since this time a year ago. So it wouldn't take much of a reversal in the macro picture to roughly double your money, esp. on the 2044s. We recently had a rally much like that on long-dated inflation-linked gilts.

The yield curve is controlled and made efficient by bond traders. So there's a lot of information on forecasting inflation and recession going into bond pricing.
Logan Roy
Posts: 704
Joined: Sun May 29, 2022 10:15 am

Re: What is going on with Gold price?

Post by Logan Roy »

NiceUnparticularMan wrote: Thu Nov 24, 2022 10:27 am
Logan Roy wrote: Wed Nov 23, 2022 12:11 pmWhen anyone buys Treasuries at negative real yields (e.g. today) you're either betting on a greater fool (e.g. the Fed) having to come along and buy them off you, or you're placing a Put option on inflation. Otherwise you're buying something destined to lose purchasing power.
However, the main justifiable reason why one might have bought negative real yield TIPS at the time is you didn't really have a better option for saving at the time. It is true that you were locking in a certain loss of purchasing power over time by doing that, but there was no particular reason to assume that, say, nominal Treasuries were priced any better. And to the extent stocks might have been priced a bit better, you would still be subject to the risk that stocks would have even worse real returns. That being the whole reason stocks are priced better than Treasuries, the risk associated with them.

Unfortunately, then, this seems to me like more of the same sort of reasoning we have been discussing. You are de facto assuming here that if something like TIPS prices have gotten that high, the prices of other assets you favor have not. A better assumption is that if TIPS prices have gotten that high, likely so have the prices of other assets, on a risk-adjusted basis of course.
I don't think so. When you've got negative yields, as an investor, it makes much more sense to go ultra short duration. When you're presented with negative real yields, an investor doesn't think: I need to secure these for the next 20 years. A trader can think that. But a trader is expecting to sell.

And as factories rely on energy and raw materials, there's always going to be a greater fool in a factory owner. And if that factory needs the cost of energy to be within a certain range (a problem across European factories at the moment) to operate profitably, the guy selling those real assets has the power in that relationship. So the wise factory owner may decide to own enough in commodity futures (or a big underground oil tank), such that a transient bump in commodity prices won't wipe out their business.
None of what you described has anything to do with "greater fool" theory, but you are quite right about how the operating profits of business owners are typically subject to the market prices of necessary materials, and how business owners often hedge those prices.

Now, if, say, you own shares in a company, you also then de facto own shares not only in its productive assets, but also in its hedges. So it is not actually a bad working assumption that to the extent it makes sense to hedge your businesses, they have already done it for you.

Still, there is SOME evidence that investing in something like a diversified commodities future fund MIGHT be helpful for personal investors worried about unexpected inflation. That was the conclusion of the 2019 Vanguard white paper I have referenced, and it proved predictive of what happened recently.

Gold, though, is a uniquely bad way of trying to do that, again because its market price is so far away from its intrinsic value. Personally, I don't have a problem if gold is buried somewhere in a diversified commodities basket. But Vanguard's research showed gold alone should not be taken as a reasonable substitute for such a basket, and indeed what happened since that paper was published has illustrated that point as well.
What it has to do with "greater fool theory" is that all productive assets, and the whole economy, are ultimately buyers of real assets. And of course if the businesses you own are fully hedged against inflation and price spikes, you'd already own those assets. But as we've seen in Europe this year, that's not been the case. Likewise, many stock/bond portfolios have lost considerable purchasing power this year, partly because they've been radically underexposed (by market weighting) to real assets.

Gold is generally just a very tradable analog for broad commodity exposure:

Image

We've been in a 40 year bull market for financial assets, with falling commodity prices, over which financial assets (bonds) have reached record valuations. We can't predict the future, but we do know what's happened, and it follows a conventional understanding of debt cycles.
One of the problem in this area is telling the difference between "cycles" and structural changes. Big picture, interest rates have been steadily declining over centuries. So what we have been experiencing globally in recent decades is not necessarily a "cycle", it could be just more of that.

That said, again, if you want to do something like invest in a diversified basket of commodities futures, that might be a reasonable hedge over it being more of a cycle than a structural change. Of course this was a popular idea at one point, then it generated poor returns (a consequence of the continuation of that "bull market" you referenced), and it became very unpopular. And just recently, it would finally have paid off--sort of. It still wouldn't score all that well as a long term strategy, but again who knows if this is just a blip in a structural change, or the beginning of a new "cycle".

But to reiterate, buying something like gold is not a substitute for such a strategy.
The way I'd frame it: when debt's reached levels where it gets risky to have rates above 4.5%, and financial assets are effectively returning nothing, you're either in a '1% everything economy' (structural), or the forces that have taken debt and valuations up are going to have to start unwinding. And when the tide's going out, it's useful to have a few things that won't be sunk by the same forces that make yesterday's stocks and bonds (and debt) less desirable. And I'd say the more one studies market history, the more one likely allocates to real assets (up to about 30-50%).
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Re: What is going on with Gold price?

Post by seajay »

NiceUnparticularMan wrote: Thu Nov 24, 2022 9:45 am
The exact same might be said for stocks, the Dow real price has endured wild swings in real terms
Absolutely. And hopefully, no one is trying to sell people on investing in stocks on the claim they can be sold to buy a consistent amount of real stuff every year. They do not.

The reason to invest in stocks is fundamentally that they are ownership shares in businesses, which in turn own productive assets they intend to operate at a profit in the future, with those profits being returned to stock investors.

The current market prices of those ownership shares changes around a lot, but if you hold them long enough, you will get your share of those profits.

Obviously, this is why stocks are not greater fool assets, and free-floating gold is. With free-floating gold, there are no such operating profits. You are just hoping someone comes along willing to pay more. With stocks, you can reasonably hope to get your share of those operating profits. So, not the same thing, of course.
Many do not expect gold to compare to stock total returns, but instead to bonds/cash/art - where the hope is for 0% net real - without all of the regular taxable events that the likes of bonds involve. But in awareness of extreme volatility, similar to share prices, but obviously where there is no operating profits/dividends behind gold.

Given two assets with the same broad return expectancy, even if that is 0% real, in a volatile manner, then 50/50 of both is appropriate such that rebalancing has the tendency to yield a positive real (and the higher that deviance/inverse correlation the greater the 'rebalance bonus'). Attribute that rebalance benefit to gold, 2x the rebalance bonus amount, and that can compare to stock dividend benefits. Which both tend to compare to average nominal price increases.

Sources of rewards can arise from each/any/all of price appreciation, income/dividends, volatility capture. And all broadly compare. Options traders targeting volatility capture broadly do no worse/better than investors who target just price appreciation (growth) or blends of price appreciation and dividends. If that weren't true and one source of rewards was consistently the better then investors would concentrate into that factor alone.

If gold didn't broadly pace inflation, similar to share prices, then a Dow/Gold ratio would exhibit a long term downward slope, which historically isn't evident

Image
(source macrotrends)
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Re: What is going on with Gold price?

Post by NiceUnparticularMan »

Logan Roy wrote: Thu Nov 24, 2022 1:01 pm I don't think so. When you've got negative yields, as an investor, it makes much more sense to go ultra short duration. When you're presented with negative real yields, an investor doesn't think: I need to secure these for the next 20 years. A trader can think that. But a trader is expecting to sell.
So I don't know how you are defining what an "investor" is trying to do.

But I would note a typical "saver" who is simply trying to efficiently match future liabilities might well think it is worth securing negative real yields for the next 20 years, on the theory it is entirely possible they will go even lower.

If that "saver" instead decides to go "ultra short duration," de facto that is speculating that real rates will get better over that time period, and not worse. But if they do that, again they are risking that their speculation will prove wrong, and they will end up worse off as a result.

So it seems to me what you are suggesting is that an "investor" in these circumstances will always want to take the risk of speculating on rates improving.
What it has to do with "greater fool theory" is that all productive assets, and the whole economy, are ultimately buyers of real assets.
So just to be clear, as the term "real assets" is normally defined, things like factories and equipment are also real assets. They are not commodities, but commodities are only a subset of real assets.

But yes, to the extent they are not fully vertically integrated, any given business in the supply chain will likely be buying real assets in order to operate their business. That again has absolutely nothing to do with the greater fool theory, and I honestly have no idea why you think it would.
And of course if the businesses you own are fully hedged against inflation and price spikes, you'd already own those assets. But as we've seen in Europe this year, that's not been the case.
It is true that not all businesses are necessarily "fully hedged". Hedging has a cost, and the degree to which a business rationally decides to hedge requires assessing the possible benefits versus the costs and striking a reasonable balance. Among other things, businesses have to assess things like to what extent they can pass on higher input costs to their customers (and in fact some businesses explicitly have contracts allowing them to do so).

The principle I was suggesting above is that it is a pretty good starting assumption that the managers of the businesses you own have tried to strike this balance in a reasonable way. That may not always prove to be the case, but I am a bit skeptical that a typical personal investor using highly diversified stock funds, which means there are thousands of individual stocks in their portfolio, actually has the ability to profitably second-guess the hedging strategies of all those businesses.
Likewise, many stock/bond portfolios have lost considerable purchasing power this year, partly because they've been radically underexposed (by market weighting) to real assets.
So I am not quite sure what sort of causation you are claiming here.

A few different things have happened recently.

One is that inflation expectations have unexpectedly increased. This is a bad thing for people invested in nominal bonds. TIPS are not subject to this problem, but don't provide portfolio level protection. And as I mentioned before, it is true that something like a diversified commodities futures fund might be a way of hedging against this risk on a portfolio level. Not gold, though.

Another is that market interest rates have unexpectedly increased. This is a neutral thing for people holding bonds to maturity, but it has reduced the current liquidation value of bonds, both nominal and TIPS.

OK, now we can also observe that stock prices have gone down. How much, if any, of that is because of unexpectedly increased inflation expectations? How much is instead because of the unexpected increase in discount rates typically associated with increased market interest rates?

That's a tricky question to answer. But unless we know that a lot of what has happened to stock prices is because unexpected inflation has lowered future real earnings expectations, and not just that the same future real earnings are now being discounted more heavily, we can't conclude there has actually been a significant, widespread failure of hedging strategies.
Gold is generally just a very tradable analog for broad commodity exposure
It is not.

https://static.vgcontent.info/crp/intl/ ... t-tips.pdf

That paper specifically compares gold to broader commodities futures indices, such as the Bloomberg Commodity Index. Gold was not in fact a suitable proxy for those broader indices.

That then proved true out of sample as well. YTD, something like DJP (iPath Bloomberg Commodity Index Total Return ETN) has returned 15.83%. GLD is at -10.25% YTD.

So, GLD proved to NOT be a good proxy for DJP this year so far. Dramatically so.

By the way, that chart you linked is comparing gold to SPOT commodity prices, which is not the same thing as comparing them to the returns on commodities futures. The latter is conceptually closer to a hedging strategy for productive businesses.

That chart also ends quite a while ago now.

Finally, it is quite clear even just eyeballing that chart that gold prices and spot commodity prices can and have diverged significantly.
The way I'd frame it: when debt's reached levels where it gets risky to have rates above 4.5%, and financial assets are effectively returning nothing, you're either in a '1% everything economy' (structural), or the forces that have taken debt and valuations up are going to have to start unwinding.
Right, this is a way of expressing the thought that such conditions could be structural, could be cyclical, or could be a mix of both.
And when the tide's going out, it's useful to have a few things that won't be sunk by the same forces that make yesterday's stocks and bonds (and debt) less desirable.
Sure, to the extent you could actually have found an investable asset that had been unimpacted by general asset price inflation, that would have been good. Easier said than done, however, again because it is not like you are the only person in the world who would have been looking to invest in such an asset

And unfortunately, that big drop in gold prices indicates that gold was not such an asset.

Rolling commodities futures, though, have done well.
And I'd say the more one studies market history, the more one likely allocates to real assets (up to about 30-50%).
I'd say that studying market history in a way that is reliable and not subject to things like confirmation bias, overfitting, and so on is quite difficult.

That Vanguard white paper is at least a good faith attempt to address these issues in such a reliable way.

Merely eyeballing that chart is not.
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Re: What is going on with Gold price?

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Gold is doing okay in other currencies. Reason why it is not doing well in USD is due to the strong dollar.
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Re: What is going on with Gold price?

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seajay wrote: Thu Nov 24, 2022 6:13 pm Many do not expect gold to compare to stock total returns, but instead to bonds/cash/art - where the hope is for 0% net real
So lumping greater fool assets like free-floating gold in with something like bonds is an obvious conceptual mistake.

With a high-quality bond, you pretty much know what return you will get. If you want that security in real terms, and are OK with using CPI as your measure of inflation, you can buy TIPS.

Free-floating old might well have around a 0% real expected return (actually, it should be a little less than that). But the risks associated with that return are far higher. Meaning over any given period of years, or of decades, gold might return way less than 0% real. Or way more. Who knows?

So, speculating on gold prices is indeed not like buying stocks. It is also not like buying TIPS. It is more like putting a certain percentage of your portfolio on a roulette wheel each year.
But in awareness of extreme volatility, similar to share prices, but obviously where there is no operating profits/dividends behind gold.
I think sometimes when people use the term "volatility", they implicitly think this is only a short-term issue.

With greater fool assets like gold, it is equally a long-term issue. Meaning the real purchasing power of a unit of free-floating gold in, say, 20 or 30 years from now could be anything--much lower than today, or much higher than today, and anywhere in between.

So, the risk associated with investing in free-floating gold is not just that it will have a lot less real purchasing power next year. It is also the risk that it will have a lot less real purchasing power in 30 years, or whenever an investor today could plausibly want to use it for the purpose of funding consumption.

OK, so yes. Gold has the very low expected returns of something like TIPS at negative real yields, but unlike with those TIPS there is a chance, indeed a significant chance, that gold will do far worse than expected over any given period of time.

But it could also do better. Who knows?
Given two assets with the same broad return expectancy, even if that is 0% real, in a volatile manner, then 50/50 of both is appropriate such that rebalancing has the tendency to yield a positive real (and the higher that deviance/inverse correlation the greater the 'rebalance bonus').
Since stocks are generally considered to have a significantly higher expected real return than gold, the necessary premises for this argument do not apply.

Again, it is helpful to remember the roulette wheel analogy. The roulette wheel strategy does not improve the efficiency (risk-adjusted returns) of a typical long-term savings portfolio. That is precisely because while the roulette wheel strategy is indeed quite volatile, and completely uncorrelated, its expected return, and thus its risk-adjusted expected returns, are too low for it to be helpful.

Free-floating gold is like that. It is indeed a very risky asset, AND it has a very low (likely somewhat negative real) expected return. It therefore is not expected to improve the efficiency of a typical long-term savings portfolio, any more than the roulette wheel strategy would, and for the same basic reasons.
Options traders targeting volatility capture broadly do no worse/better than investors who target just price appreciation (growth) or blends of price appreciation and dividends. If that weren't true and one source of rewards was consistently the better then investors would concentrate into that factor alone.
The primary purpose of most options is for hedging something.

Again, an airline might buy fuel options. They are not doing that because they expect to make a profit off those fuel options per se. They are doing that as a hedge.

Now, it is true there are a small number of entities that have no such natural hedging interest in options, but they buy and sell options speculatively instead. To the extent that is profitable, it is necessarily because there are transient inefficiencies in the options markets that can be exploited while they last. Typically, this requires things like supercomputers, PhDs on staff, proprietary models, extremely rapid trading infrastructure, and billions in liquid capital.

Personally, I am skeptical about the ability of personal investors to profitably speculate on options given that situation. Indeed, I think more likely the personal investors who try just become part of those transient inefficiencies that the serious players are racing to exploit.

But if that is your argument for investing in gold--that you think you can compete with these sorts of investors, and profitably speculate--OK.

That is very much not the same thing, though, as investing in stocks and bonds and such at market prices, on the assumption those market prices are efficient.
If gold didn't broadly pace inflation . . .
If free-floating gold did not "pace" inflation, it would experience wild swings in inflation-adjusted price.

It has in fact experienced wild swings in inflation-adjusted price. Including just recently.

It does not therefore "pace" inflation.

A lot of effort seems to be expended in some circles to try to obscure this basic observation. But anyone can look up an inflation-adjusted gold price chart, and see the wild swings for themselves ever since gold has been free-floating.
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Re: What is going on with Gold price?

Post by NiceUnparticularMan »

Anon9001 wrote: Fri Nov 25, 2022 7:30 am Gold is doing okay in other currencies. Reason why it is not doing well in USD is due to the strong dollar.
Well, the USD notoriously has lost quite a bit of purchasing power as to real things in the United States.

OK, so if gold has lost ability to purchase USD, and USD have lost ability to purchase real things in the United States, then gold has lost the ability to purchase real things in the United States even more rapidly than USD.

It is true, though, that if you were looking at gold's ability to purchase real things in a different country, you would have to instead look at what happened to gold's ability to purchase that local currency, and then that currency's ability to purchase real things in that country.

And then you could make it even more complicated by looking at the ability to convert gold into USD, then the ability to convert USD into another currency, and then use that currency to buy real things in another country. Or, even the ability to convert gold into another currency, then convert that currency into USD, and then use those USD to buy real things in the United States.

I can assure people, though, that those complications won't make any material difference (because otherwise, there would be a massive arbitrage opportunity being overlooked by currency traders, which does not happen).

And I'm not sure how comforting any of this is supposed to be. Gold definitely did not do what its proponents often promise it will do, such as "pace inflation". Some places it did worse at that than others, but it generally it did not do it in many, if any, places actually well.

Of course it hasn't done that reliably in the free-floating era in general, so one should not have expected otherwise in the first place.
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Re: What is going on with Gold price?

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NiceUnparticularMan wrote: Fri Nov 25, 2022 7:56 am
seajay wrote: Thu Nov 24, 2022 6:13 pm Many do not expect gold to compare to stock total returns, but instead to bonds/cash/art - where the hope is for 0% net real
So lumping greater fool assets like free-floating gold in with something like bonds is an obvious conceptual mistake.

With a high-quality bond, you pretty much know what return you will get. If you want that security in real terms, and are OK with using CPI as your measure of inflation, you can buy TIPS.
For the same maturity, perpetual, perpetual TIPS would (given non such exist) be as volatile
Free-floating gold might well have around a 0% real expected return (actually, it should be a little less than that). But the risks associated with that return are far higher. Meaning over any given period of years, or of decades, gold might return way less than 0% real. Or way more. Who knows?
As might any perpetual stock (price only) or bond. Volatility isn't always considered as 'risk', can yield rewards particularly when there is high volatility and inverse correlations.
With greater fool assets like gold, it is equally a long-term issue. Meaning the real purchasing power of a unit of free-floating gold in, say, 20 or 30 years from now could be anything--much lower than today, or much higher than today, and anywhere in between.
But with a tendency for inverse correlation to stocks, a great decade(s) for stocks can be dismal for gold and vice-versa. Again your incessant repeating of gold 'greater fool' branding is just antagonistic, portrays your intense dislike of gold as a investment portfolio asset. If you don't like it by all means avoid it - and best if you don't partake in thread with negativity because you dislike a particular asset.
Given two assets with the same broad return expectancy, even if that is 0% real, in a volatile manner, then 50/50 of both is appropriate such that rebalancing has the tendency to yield a positive real (and the higher that deviance/inverse correlation the greater the 'rebalance bonus').
Since stocks are generally considered to have a significantly higher expected real return than gold, the necessary premises for this argument do not apply.
You're comparing gold to stock total returns again, it should instead be considered a 0% real broad expectancy, high volatility. Similar to stock price only.
Free-floating gold is like that. It is indeed a very risky asset, AND it has a very low (likely somewhat negative real) expected return. It therefore is not expected to improve the efficiency of a typical long-term savings portfolio, any more than the roulette wheel strategy would, and for the same basic reasons.
Compared to cash, that has to be deposited/invested in order to negate inflationary effects, and where that interest might be taxed, and the high volatility, tendency to have no/negative multi-year correlation to stocks can make it actually safer. 50/50 stock/cash versus 50/50 stock/gold for 3.33% 30 year SWR periods has had a better/safer outcome for stock/gold than for stock/cash. And I'm not just referring to US since 1970's era, but long term (century). Gold was still freely traded elsewhere when the US decided to outlaw its domestic investment trading.
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Re: What is going on with Gold price?

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Instead if asking the question, "what is going on with the price of gold, isn't it supposed to be an inflation hedge?", one could just state the obvious: the behavior of gold in 2022 shows that it is an unreliable inflation hedge at best.

It may be a pretty good deflation hedge, but I would not want to depend in it. It was up almost 30% in the first half of 2020.
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Re: What is going on with Gold price?

Post by seajay »

Northern Flicker wrote: Fri Nov 25, 2022 10:13 am Instead if asking the question, "what is going on with the price of gold, isn't it supposed to be an inflation hedge?", one could just state the obvious: the behavior of gold in 2022 shows that it is an unreliable inflation hedge at best.

It may be a pretty good deflation hedge, but I would not want to depend in it. It was up almost 30% in the first half of 2020.
As are marked to market long dated TIPS not a reliable/consistent inflation hedge. PV shows TIPS down -12.5%, yet inflation is running at +8% !!!

Two investors, each with $1M, starting retirement in 2000 and drawing a 4% SWR

One opts for all-stock, the other drops $500K into each of stock and gold and thereafter removes the SW value from whichever is the higher valued at the time, otherwise no rebalancing (tends to self rebalance via withdrawals).

Image

2008/9 financial crisis and the all-stock'er had less than half the nominal value of the start date portfolio value, and their withdrawal rate as a percentage of the ongoing portfolio value was up into double digits, no different to starting at that time and expecting a successful double digit SWR to succeed.

The 50/50 stock/gold'er ... casually breezed through the dot com/financial crisis/Covid/Ukraine war years, as likely will it do so if we endure another inflationary spike.

Yes at other times the all-stock'er does far better, ends 30 years with perhaps multiples more than the 50/50'er. But both succeed in a primary objective of a 4% SWR and the 50/50'er more often still had their inflation adjusted start date wealth value still intact. In some cases, where all-stock'er just saw the 4% SWR barely succeed, so the 50/50'er ended with their inflation adjusted start date portfolio value still intact. Less variance between extremes - safer.

Bonds/cash in contrast, well during bad times they can correlate with stocks, down, but just not by as much as stocks; Up, but just not by as much as stocks.
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Re: What is going on with Gold price?

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seajay wrote: Thu Nov 24, 2022 6:13 pm prices, then a Dow/Gold ratio would exhibit a long term downward slope, which historically isn't evident

Image
(source macrotrends)
This might be a stupid question but is this Dow to Gold Rato factoring in dividends? The DOW Index everyone quotes is a Price Index which doesnt reinvest dividends so I am wondering what is used here.
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Re: What is going on with Gold price?

Post by Logan Roy »

NiceUnparticularMan wrote: Fri Nov 25, 2022 7:22 am
Logan Roy wrote: Thu Nov 24, 2022 1:01 pm I don't think so. When you've got negative yields, as an investor, it makes much more sense to go ultra short duration. When you're presented with negative real yields, an investor doesn't think: I need to secure these for the next 20 years. A trader can think that. But a trader is expecting to sell.
So I don't know how you are defining what an "investor" is trying to do.

But I would note a typical "saver" who is simply trying to efficiently match future liabilities might well think it is worth securing negative real yields for the next 20 years, on the theory it is entirely possible they will go even lower.

If that "saver" instead decides to go "ultra short duration," de facto that is speculating that real rates will get better over that time period, and not worse. But if they do that, again they are risking that their speculation will prove wrong, and they will end up worse off as a result.

So it seems to me what you are suggesting is that an "investor" in these circumstances will always want to take the risk of speculating on rates improving.
The simple aim of the investor is to invest in things that are likely to increase (rather than decrease) one's purchasing power.

Now I could accept that the investor *may* buy assets guaranteed to lose real value, if there were no other options, and no guarantee things would ever get cheaper. But if one can buy Utilities stocks, direct infrastructure, corporates, etc. on 4-5% earnings yields, then that's simply not the case, and doesn't make any sense from an investment point of view.

What it has to do with "greater fool theory" is that all productive assets, and the whole economy, are ultimately buyers of real assets.
So just to be clear, as the term "real assets" is normally defined, things like factories and equipment are also real assets. They are not commodities, but commodities are only a subset of real assets.

But yes, to the extent they are not fully vertically integrated, any given business in the supply chain will likely be buying real assets in order to operate their business. That again has absolutely nothing to do with the greater fool theory, and I honestly have no idea why you think it would.
Very simple example: the guy who holds real assets isn't necessarily going to be selling them to a speculator. Ultimately, demand is dictated by the people who need energy, materials, buildings, etc.

Likewise, many stock/bond portfolios have lost considerable purchasing power this year, partly because they've been radically underexposed (by market weighting) to real assets.
So I am not quite sure what sort of causation you are claiming here.
...
That's a tricky question to answer. But unless we know that a lot of what has happened to stock prices is because unexpected inflation has lowered future real earnings expectations, and not just that the same future real earnings are now being discounted more heavily, we can't conclude there has actually been a significant, widespread failure of hedging strategies.
Tightening affects discount rates, first, then demand (as people spend less – which is the goal of tightening).

Knowing inflation is unforecastable, and a global market portfolio would include gold (at about half the market cap of the NYSE, off the top of my head) and lots of real assets, the decision not to hold real assets is an active bet against the market (as defined by William Sharpe). And historically, over most 20 year periods, this bet has failed. It's usually been more profitable, and less volatile, to hold 20-30% in gold (to 70-80% in stocks) than bonds.

Gold is generally just a very tradable analog for broad commodity exposure
It is not.

https://static.vgcontent.info/crp/intl/ ... t-tips.pdf

That paper specifically compares gold to broader commodities futures indices, such as the Bloomberg Commodity Index. Gold was not in fact a suitable proxy for those broader indices.
And it's utterly useless.

"We tested the major liquid ones to see how they fared over the test period 1991–2018."

Whatever we want to say about Vanguard and the qualifications of who wrote the paper, testing an inflation hypothesis over a period in which there's been no significant or persistent inflation isn't going to tell us anything we can't guess.
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Re: What is going on with Gold price?

Post by Northern Flicker »

seajay wrote: As are marked to market long dated TIPS not a reliable/consistent inflation hedge. PV shows TIPS down -12.5%, yet inflation is running at +8% !!!
Correct, they are not. They take explicit term risk. They only hedge inflation risk if one neutralizes term risk by matching their duration to liabilities.

Gold also takes long duration term risk, but it is probabilistic, not deterministic. The additional contribution of speculative return makes it virtually impossible to neutralize term sensitivity by duration matching.

I think a case could be made for gold when real yields of TIPS are negative, but I think it is hard to justify gold as a hedge for inflation when real yields are positive.
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Re: What is going on with Gold price?

Post by Logan Roy »

seajay wrote: Fri Nov 25, 2022 11:15 am
Northern Flicker wrote: Fri Nov 25, 2022 10:13 am Instead if asking the question, "what is going on with the price of gold, isn't it supposed to be an inflation hedge?", one could just state the obvious: the behavior of gold in 2022 shows that it is an unreliable inflation hedge at best.

It may be a pretty good deflation hedge, but I would not want to depend in it. It was up almost 30% in the first half of 2020.
As are marked to market long dated TIPS not a reliable/consistent inflation hedge. PV shows TIPS down -12.5%, yet inflation is running at +8% !!!
I've always felt this was an erroneous comparison. Long-dated TIPS are designed to hedge inflation over 15+ years. And will do that. They do hedge inflation over the short-term, but there are two moving parts – one sensitive to inflation, and one to rates.

And yes, as a UK investor, gold's hedged inflation pretty well for us. The distortion for the US investor is dollar strength due to tightening. Historically, gold rips back up (relative to dollar) as soon as policy eases. So I think you'll get some inflation protection from gold, but it's also got two moving part (the gold, and the thing you're measuring it against). So articles that pick shorter timeframes are going to be measuring two different effects, that might overlap and muddy what the asset is really doing.
seajay
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Re: What is going on with Gold price?

Post by seajay »

Anon9001 wrote: Fri Nov 25, 2022 2:09 pm
seajay wrote: Thu Nov 24, 2022 6:13 pm prices, then a Dow/Gold ratio would exhibit a long term downward slope, which historically isn't evident

Image
(source macrotrends)
This might be a stupid question but is this Dow to Gold Ratio factoring in dividends? The DOW Index everyone quotes is a Price Index which doesn't reinvest dividends so I am wondering what is used here.
I believe the Dow/Gold ratio is conventionally just Dow price only value, no dividends included.

US 1980's dividend taxation policies directed more of earnings being retained, lower dividends, more price appreciation. In the UK the major index price only value has more zigzagged around inflation pacing, in a volatile manner, as has gold - but in a similar counter-direction motion, so equally saw stock (price only) gold ratio zigzag between significant extremes.
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Re: What is going on with Gold price?

Post by seajay »

Logan Roy wrote: Fri Nov 25, 2022 6:08 pmThe simple aim of the investor is to invest in things that are likely to increase (rather than decrease) one's purchasing power.

Now I could accept that the investor *may* buy assets guaranteed to lose real value, if there were no other options, and no guarantee things would ever get cheaper. But if one can buy Utilities stocks, direct infrastructure, corporates, etc. on 4-5% earnings yields, then that's simply not the case, and doesn't make any sense from an investment point of view.
Some (many) might invest surplus capital today with a view to spending that later and having maintained its purchase power. Where additional real gains on top are icing on the cake. Some with sufficient surplus capital may even be prepared to pay $110 today for a $100 guaranteed future date spending power (have more than enough for their needs such that they can throw some away in return for guaranteed protections).

There are other cases where a investor might intentionally buy assets pretty much guaranteed to lose real value, such as 75/25 SPY/SDS (1x long SP500/2x short SP500) - that might broadly yield 0% real as a collective and migrate funds out one account, that perhaps has taxation implications against withdrawals, and into another account that doesn't have such taxation.

Gold might be expected to maintain its purchase power in the broad sense as otherwise its utility/worth value might decline towards zero. But that is subject to rarity and investor perception of its value. A large unexpected find could for instance devalue its rarity, as could inexpensive/free energy enabling it to be manufactured. Part of recent unexpected lagging of the price of gold is perhaps a consequence of bit-coin type virtual rarity alternatives being considered as possible alternatives. A factor there however is that involves counter-party risk, isn't something physical/in-hand, and digital/virtual is renowned for flaws either in the programming (bugs) or in structure (based on trust, that might be abused - such as recent issues).

Even TIPS aren't guaranteed. In the UK the equivalent of iBonds in effect were closed to new purchases following the 2008/9 financial crisis, as can taxation policies/allowances be revised. Accordingly investors will look to diversify risk, avoid concentration risk such as all-in TIPS alone or whatever. Each of bonds, stock price only, gold, art, land ....etc. all have the capacity to achieve 0% real, will likely do so to varying degrees of success/failure, but hopefully will average out and achieve that objective. And if more-so, such as with additional dividends, imputed rent, volatility trading benefits on top, so much the better.

A investor who holds for instance thirds each in land (owns there own home), stocks, gold, assuming physical gold and they have just 33% counter-party risk (stocks) that can be liquidated in T+3 time. Imputed rent benefit, not having to find/pay rent to others liability matches that element. Different taxation policies diversifies taxation risks. And if in addition to imputed rent benefit they draw disposable income from a initial 50/50 stock/gold allocation from whichever is the higher valued at the time then that alone can be sufficient rebalancing, that also has the tendency to lower earlier years bad sequence of returns risk - as indicated in that image/data I posted earlier. Much of SWR success is depicted by how well/poorly the portfolio does in the early years, and there's a tendency for if stocks do poorly gold can do well and vice-versa. Considered as two separate portfolios, one stock, one gold and a 8% SWR drawn from the better performing, 0% from the other and historically in good cases 8% SWR was OK whilst 0% from the poorer performing was better than compounding both declines with withdrawals. Whilst bonds/CD's might be held instead of gold, that induces additional taxation risks, and historically was more inclined to correlate with stocks, a bad sequence of years for stock real total returns commonly also saw poorer bond real total returns. Gold in contrast was less/no correlated or even inversely correlated, provided better hedging of earlier years SoR risk, as did stocks equally hedge poor gold SoR risk.

Looked at in isolation and gold might be assumed to be 0% real, with high variance, no guarantees ...etc. But as a portfolio asset the rewards can be reasonable/good. Again assuming the same thirds each initial home/stock/gold asset allocation that is only 'rebalanced' by drawing SWR/income from the higher valued of either stock or gold. Perhaps 4% imputed rent benefit from the home, 1.33% proportioned to a third weighting, supplemented with 2% from stock/gold (3% proportioned). For a combined 3.33% SWR that over 30 years is the return of your inflation adjusted capital (via instalments). In practice often that will end 30 years with around the same total portfolio value in inflation adjusted terms as at the start, you in effect had your money returned twice, once via SWR/instalments, and again in terminal portfolio value. But in getting there you also only 50% time averaged your capital at risk, you started with 100% at risk, had half of that returned by 15 years (SWR instalments), all of it returned by the 30th year ... overall 50% average capital at risk, in return for a 2x total return amount, which = (2 / 0.5)^(1/30) = 1.0475 or 4.75% real return on average capital at risk. Even though the assets included a mixture of 0% real reward gold and stocks 0% real price + 4% dividend type assets. And all relatively easily managed, rent all payed, take a inflation adjusted SWR amount from either gold, or stock total return accumulation according to whichever pot is the higher valued at the time, something that a financially illiterate spouse heir could reasonably easily follow.

Has the likes of bitcoin detracted from the price of gold? I suspect in part it has, but I do not envisage it ever becoming a total replacement, instead you might see a trend towards the likes of blockchains backed by physical gold (and US dollars ..etc.). But for some/many, holding a virtual asset that has a permanent record of all historic transactions digitally recorded isn't the same as holding/trading physical gold. Or if you bury physical gold in a locked box and lose the key you can at least smash that open rather than the key loss being a total loss. Or it being more readily exposed to being stolen from anywhere remotely across the planet. As such I expect any alternative to gold and the price impact that may have had in more recent years is a transitory effect. A non persistent fad.
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Re: What is going on with Gold price?

Post by Northern Flicker »

One other very significant difference between the behavior of long TIPS and gold when both fall in response to rising rates is that TIPS are then earning a higher yield. Unlike with gold, TIPS don't need price reversion to recoup the lost value.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: What is going on with Gold price?

Post by Logan Roy »

seajay wrote: Sat Nov 26, 2022 12:36 am
Logan Roy wrote: Fri Nov 25, 2022 6:08 pmThe simple aim of the investor is to invest in things that are likely to increase (rather than decrease) one's purchasing power.

Now I could accept that the investor *may* buy assets guaranteed to lose real value, if there were no other options, and no guarantee things would ever get cheaper. But if one can buy Utilities stocks, direct infrastructure, corporates, etc. on 4-5% earnings yields, then that's simply not the case, and doesn't make any sense from an investment point of view.
Some (many) might invest surplus capital today with a view to spending that later and having maintained its purchase power. Where additional real gains on top are icing on the cake. Some with sufficient surplus capital may even be prepared to pay $110 today for a $100 guaranteed future date spending power (have more than enough for their needs such that they can throw some away in return for guaranteed protections).

There are other cases where a investor might intentionally buy assets pretty much guaranteed to lose real value, such as 75/25 SPY/SDS (1x long SP500/2x short SP500) - that might broadly yield 0% real as a collective and migrate funds out one account, that perhaps has taxation implications against withdrawals, and into another account that doesn't have such taxation.

Gold might be expected to maintain its purchase power in the broad sense as otherwise its utility/worth value might decline towards zero. But that is subject to rarity and investor perception of its value. A large unexpected find could for instance devalue its rarity, as could inexpensive/free energy enabling it to be manufactured. Part of recent unexpected lagging of the price of gold is perhaps a consequence of bit-coin type virtual rarity alternatives being considered as possible alternatives. A factor there however is that involves counter-party risk, isn't something physical/in-hand, and digital/virtual is renowned for flaws either in the programming (bugs) or in structure (based on trust, that might be abused - such as recent issues).

Even TIPS aren't guaranteed. In the UK the equivalent of iBonds in effect were closed to new purchases following the 2008/9 financial crisis, as can taxation policies/allowances be revised. Accordingly investors will look to diversify risk, avoid concentration risk such as all-in TIPS alone or whatever. Each of bonds, stock price only, gold, art, land ....etc. all have the capacity to achieve 0% real, will likely do so to varying degrees of success/failure, but hopefully will average out and achieve that objective. And if more-so, such as with additional dividends, imputed rent, volatility trading benefits on top, so much the better.

A investor who holds for instance thirds each in land (owns there own home), stocks, gold, assuming physical gold and they have just 33% counter-party risk (stocks) that can be liquidated in T+3 time. Imputed rent benefit, not having to find/pay rent to others liability matches that element. Different taxation policies diversifies taxation risks. And if in addition to imputed rent benefit they draw disposable income from a initial 50/50 stock/gold allocation from whichever is the higher valued at the time then that alone can be sufficient rebalancing, that also has the tendency to lower earlier years bad sequence of returns risk - as indicated in that image/data I posted earlier. Much of SWR success is depicted by how well/poorly the portfolio does in the early years, and there's a tendency for if stocks do poorly gold can do well and vice-versa. Considered as two separate portfolios, one stock, one gold and a 8% SWR drawn from the better performing, 0% from the other and historically in good cases 8% SWR was OK whilst 0% from the poorer performing was better than compounding both declines with withdrawals. Whilst bonds/CD's might be held instead of gold, that induces additional taxation risks, and historically was more inclined to correlate with stocks, a bad sequence of years for stock real total returns commonly also saw poorer bond real total returns. Gold in contrast was less/no correlated or even inversely correlated, provided better hedging of earlier years SoR risk, as did stocks equally hedge poor gold SoR risk.

Looked at in isolation and gold might be assumed to be 0% real, with high variance, no guarantees ...etc. But as a portfolio asset the rewards can be reasonable/good. Again assuming the same thirds each initial home/stock/gold asset allocation that is only 'rebalanced' by drawing SWR/income from the higher valued of either stock or gold. Perhaps 4% imputed rent benefit from the home, 1.33% proportioned to a third weighting, supplemented with 2% from stock/gold (3% proportioned). For a combined 3.33% SWR that over 30 years is the return of your inflation adjusted capital (via instalments). In practice often that will end 30 years with around the same total portfolio value in inflation adjusted terms as at the start, you in effect had your money returned twice, once via SWR/instalments, and again in terminal portfolio value. But in getting there you also only 50% time averaged your capital at risk, you started with 100% at risk, had half of that returned by 15 years (SWR instalments), all of it returned by the 30th year ... overall 50% average capital at risk, in return for a 2x total return amount, which = (2 / 0.5)^(1/30) = 1.0475 or 4.75% real return on average capital at risk. Even though the assets included a mixture of 0% real reward gold and stocks 0% real price + 4% dividend type assets. And all relatively easily managed, rent all payed, take a inflation adjusted SWR amount from either gold, or stock total return accumulation according to whichever pot is the higher valued at the time, something that a financially illiterate spouse heir could reasonably easily follow.

Has the likes of bitcoin detracted from the price of gold? I suspect in part it has, but I do not envisage it ever becoming a total replacement, instead you might see a trend towards the likes of blockchains backed by physical gold (and US dollars ..etc.). But for some/many, holding a virtual asset that has a permanent record of all historic transactions digitally recorded isn't the same as holding/trading physical gold. Or if you bury physical gold in a locked box and lose the key you can at least smash that open rather than the key loss being a total loss. Or it being more readily exposed to being stolen from anywhere remotely across the planet. As such I expect any alternative to gold and the price impact that may have had in more recent years is a transitory effect. A non persistent fad.
I certainly concede investors are doing that. But the basic principle (tax loss harvesting aside) should probably still be to secure great returns for as long as possible (buy the 30 year bonds in 1982), and churn weak returns as quickly as possible. Deferring to Ray Dalio in ‘Why in the world would you own bonds when...’, in early 2021: ‘Because you are trying to store buying power you have to take into consideration inflation. In the US, you have to wait over 500 years, and you will never get your buying power back in Europe or Japan.’

‘If the new demand for these bonds falls significantly short of the new supply, which seems likely, either a) interest rates will rise and bond prices will fall or b) central banks will have to print substantial amounts of money to buy the debt assets that the free-market buyer won’t buy, which would be very reflationary (bearish for the dollar and the leading currencies who do this, relative to reflation assets).’


So either you take this hit in purchasing power, along with having your capital tied up for 20-30 years, while it might be hammered by rising rates, or you need central banks to buy them off you. And that's really what QE is. If you're going to pay back all this debt the world's accumulated, someone needs to be patiently holding something that's going to lose a lot of real value (as we inflate away the debt). And it's one case where I *think* you can say 'greater fool', because these are investors who've bought things that were flashing, telling them they're never going to get their purchasing power back.

I don't think (the availability of) TIPS on positive yields are guaranteed at all. In fact I think beyond taming inflation, they make very little sense. I don't think crypto's affected the value of gold yet. Crypto's not behaving like a haven – it's behaving more like tech stocks (a dump for excess liquidity). One big difference is that when you've got gold out of the mine, it sits there as a measure of value, without costing you a thing. Crypto has a constant energy cost. In effect, everyone who wants to store value in crypto has to be covering that cost somehow. It makes me question how good it's going to be as a long-term store of value. But I think the technology makes a lot of sense in how we move value around in the future.
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Re: What is going on with Gold price?

Post by seajay »

Northern Flicker wrote: Sat Nov 26, 2022 2:56 pm One other very significant difference between the behavior of long TIPS and gold when both fall in response to rising rates is that TIPS are then earning a higher yield. Unlike with gold, TIPS don't need price reversion to recoup the lost value.
Because they're fixed income/fixed term. Perpetuals such as stocks (broad index) and gold have no fixed end date. And each in price only terms can endure prolonged periods of real drawdowns. Diversification of perpetuals reduces the concentration risk of being in the single asset that endures perhaps two decades+ of real drawdowns. Such that even if one of the assets is in drawdown for the 20+ years across which you hold that asset, other assets might counter-balance that.

Yes with productive assets such as stocks you additionally have dividends on top, however that may still not be enough, particularly for someone in retirement that compounds negative real stock periods and SWR/whatever income withdrawals.

Image

Stock price variability + dividends of say 3%, or less variability and a 1% proportioned portfolio dividend (third stock/gold/cash) might be more preferable for some.

Some may measure risk/reward by dividing the CAGR by the standard deviation in yearly returns, but that is biased according to choice of start/end dates, where even single shifts in start and/or end date can see significant differences. Log linear regression (exponential trend line) divided by exponential r-squared (indicator of deviance around the trend line) is a broader more level measure and on that measure stock/silver/cash was the better 'risk adjusted reward' than just stock, at least for the period in the above chart. Multiple volatile assets combined to a smoother average. As part of that its OK if one asset doesn't yield a positive real reward over the 20/whatever years you might hold it provide other assets counter-balance it.

In that chart both stock and all-three (yearly rebalanced thirds each stock/cash/silver) yielded close to a 2.75% slope (real). Add on dividends of say 4% average and that bolstered all-stock to 6.75% real type averages, but with considerable variability. Add on 1.33% dividends to all-three (stock third weighting) to make a 4% real type average, but that was more consistent, and a retiree might prefer that greater regularity. For a 30 year 4% SWR for instance only requires a consistent 1.33% real. A consistent 4% real yields a 30 year 5.8% SWR. The all-three wasn't that consistent, not a perfect straight line slope, but is was much closer than was stocks.

Noteworthy is how cash (and bonds) tended to correlate with periods of declines in stocks, whilst silver (and gold) tended to more inversely correlate.
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Re: What is going on with Gold price?

Post by Logan Roy »

seajay wrote: Sun Nov 27, 2022 12:02 am In that chart both stock and all-three (yearly rebalanced thirds each stock/cash/silver) yielded close to a 2.75% slope (real). Add on dividends of say 4% average and that bolstered all-stock to 6.75% real type averages, but with considerable variability. Add on 1.33% dividends to all-three (stock third weighting) to make a 4% real type average, but that was more consistent, and a retiree might prefer that greater regularity. For a 30 year 4% SWR for instance only requires a consistent 1.33% real. A consistent 4% real yields a 30 year 5.8% SWR. The all-three wasn't that consistent, not a perfect straight line slope, but is was much closer than was stocks.

Noteworthy is how cash (and bonds) tended to correlate with periods of declines in stocks, whilst silver (and gold) tended to more inversely correlate.
The consistency in these charts – like the Permanent Portfolio. You do obviously have to question how much *could* be down to back-fitting (in this case, silver seems a bit like something we're picking with hindsight, with the wisdom of lots of backtesting behind us). And how much structural shifts in the future could change dynamics that have held up for a long time. And how even small changes – e.g. with how silver behaves in the future – could drastically change how these portfolios behave. How much of a drag even 5% in commodities has been over the past 20-40 years.

But I find the consistency and generalisability of these kind of backtests as compelling as anything in investing. Maybe even more so than the long-term track record of stocks. It seems to be demonstrating a principle in how value moves around markets in response to economic shifts. How well demand for one type of asset compensates and balances another. There seems to be a panacea of All Weather investing, in which the perfect balance of assets never really suffers drawdowns, and grows quite consistently over all periods. How you find this balance is a really interesting exercise too.
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Re: What is going on with Gold price?

Post by Northern Flicker »

seajay wrote: Sun Nov 27, 2022 12:02 am
Northern Flicker wrote: Sat Nov 26, 2022 2:56 pm One other very significant difference between the behavior of long TIPS and gold when both fall in response to rising rates is that TIPS are then earning a higher yield. Unlike with gold, TIPS don't need price reversion to recoup the lost value.
Because they're fixed income/fixed term. Perpetuals such as stocks (broad index) and gold have no fixed end date.
Let's first leave stocks out of this discussion. It is not because gold is perpetual. There is a fixed income instrument called a perpetuity that has no termination. In times past, they were issued by sovereign govts. Their market value would fall when rates rise. Because they have an income stream, the price does not have to recover for the investor to recoup the loss. In the case of a bond with term, there is the additional mechanism that the issuer is contractually bound to return your principal, either at maturity or on some other schedule (eg amortizing mortgage).

Price reversion is required to recoup losses with gold because gold provides no income stream, and there is no contractually guaranteed price in the future.

If we want to include stocks in the discussion what we find is that gold has stock-like risk and volatility, with the expected return similar to a long TIPS with zero real yield, only lower because of the lack of a future guaranteed price.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Logan Roy
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Re: What is going on with Gold price?

Post by Logan Roy »

Northern Flicker wrote: Sun Nov 27, 2022 2:34 pm
seajay wrote: Sun Nov 27, 2022 12:02 am
Northern Flicker wrote: Sat Nov 26, 2022 2:56 pm One other very significant difference between the behavior of long TIPS and gold when both fall in response to rising rates is that TIPS are then earning a higher yield. Unlike with gold, TIPS don't need price reversion to recoup the lost value.
Because they're fixed income/fixed term. Perpetuals such as stocks (broad index) and gold have no fixed end date.
Let's first leave stocks out of this discussion. It is not because gold is perpetual. There is a fixed income instrument called a perpetuity that has no termination. In times past, they were issued by sovereign govts. Their market value would fall when rates rise. Because they have an income stream, the price does not have to recover for the investor to recoup the loss. In the case of a bond with term, there is the additional mechanism that the issuer is contractually bound to return your principal, either at maturity or on some other schedule (eg amortizing mortgage).

Price reversion is required to recoup losses with gold because gold provides no income stream, and there is no contractually guaranteed price in the future.

If we want to include stocks in the discussion what we find is that gold has stock-like risk and volatility, with the expected return of a long TIPS with zero real yield.
But of course the value of cash your financial assets pay is always headed towards zero (along with the value of debt), so long as there's no limit on how much can be created. While in an economy that wants to expand endlessly, in a system with finite resources, your ownership of a certain amount of a finite resource should always at least maintain its value (with a slope to infinity as the system runs into supply problems).

So the way I'd see it in an economy that's still expanding is that about 2/3rds of the time, the growth comes from financial asset appreciation. But when the value of money becomes too low, through the creation of too much of it, financial assets have to shed a lot of value. And that's when holding gold, etc. tends to help a portfolio hold onto its value. And as we run into environmental limits of economic expansion, demand for real assets (space, materials, etc.) probably overtakes financial asset growth at some point.
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Re: What is going on with Gold price?

Post by Northern Flicker »

Logan Roy wrote: Sun Nov 27, 2022 2:59 pm But of course the value of cash your financial assets pay is always headed towards zero (along with the value of debt), so long as there's no limit on how much can be created.
But there is a limit, so that is a specious argument. The Federal Reserve has a mandate to promote price stability. Currency value only heads to zero in the limit if currency actually is created increasingly without bound, not just because there is no theoretical limit.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Logan Roy
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Re: What is going on with Gold price?

Post by Logan Roy »

Northern Flicker wrote: Sun Nov 27, 2022 3:08 pm
Logan Roy wrote: Sun Nov 27, 2022 2:59 pm But of course the value of cash your financial assets pay is always headed towards zero (along with the value of debt), so long as there's no limit on how much can be created.
But there is a limit, so that is a specious argument. The Federal Reserve has a mandate to promote price stability. Currency value only heads to zero in the limit if currency actually is created increasingly without bound, not just because there is no theoretical limit.
We can say it's always headed towards zero in percentage terms – like Zeno's arrow. So there's always going to be a point in the future where it's worth half what it is today.
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Re: What is going on with Gold price?

Post by Northern Flicker »

All you are saying is that holding gold is better than stuffing cash in your mattress.

The high inflation of the 1970's started with inflation increasing in 1967. The annualized inflation rate since 1967 is only 4%, and that is a very unfavorable start date for the measurement.
My postings represent my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
Logan Roy
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Re: What is going on with Gold price?

Post by Logan Roy »

Northern Flicker wrote: Sun Nov 27, 2022 3:58 pm All you are saying is that holding gold is better than stuffing cash in your mattress.

The high inflation of the 1970's started with inflation increasing in 1967. The annualized inflation rate since 1967 is only 4%, and that is a very unfavorable start date for the measurement.
Hopefully nothing that reductive. What I'm trying to get at is that financial assets enable us to grow an economy very rapidly, through the creation of debt. But the nature of having an unlimited supply of something is that it inevitably becomes worth less.

So in an economy in which all value is relative, you get long periods of expansion, until the value of money is so low that it needs to resolve itself with the value of things of which there's a limited supply. And this is inflation. We try to keep ahead of inflation by increasing the value of financial assets, but this means most/all the financial assets you're holding become worth less and less (relative to those same assets on sale tomorrow). So the optimal way to ride a debt cycle would be to hold an amount in financial assets equivalent to how much of the time markets spend expanding, and real assets in proportion to how much time they spend correcting. And as growth slows, and the fish gets as large as the tank, the value of real assets has to resolve with the value of financial assets.
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Re: What is going on with Gold price?

Post by seajay »

Logan Roy wrote: Sun Nov 27, 2022 4:53 pmSo the optimal way to ride a debt cycle would be to hold an amount in financial assets equivalent to how much of the time markets spend expanding, and real assets in proportion to how much time they spend correcting.
Central banks hold gold for various reasons, fear of inflation, potential distrust of government printed fiat currency, geopolitical instability. Its price is not affected by economic events in the same way as the prices of financial securities, its price is not highly correlated with the prices of other assets. Gold brings better stability to a portfolio, does not have any counter-party risk or credit risk, and because it is not issued by governments it has no default risk.

When money was gold the frequency of financial crises were relatively infrequent. Since the complete decoupling financial instability frequency has increased considerably.

Image
https://qz.com/1096237/deutsche-bank-an ... ial-crises

A optimal amount can only be determined with hindsight, more generally its the same as with stocks, not too much, not too little. I'd guess 10% being the border of too little, more than 50% being too much, somewhere between ...25%. Ben Graham advocated 50% stock, leaving 25% for bonds.

PV MC for that indicates a high probability of getting your inflation adjusted surplus money put aside to spend later - back via 30 years 3.33% SWR. But similar to stocks, drifts around that might likely yield similar outcomes, thirds each stock/gold/bonds for instance had a similar high success rate and had a 10% percentile worst case 3.33% PWR PV MC figure

It may be that the Ukraine war/Russian sanctions are seeing Russia funding spending via selling some of its gold. Combined with a flight to safety (US dollars/assets) lifting the dollar and having the price of gold in dollars not spiking as might otherwise have occurred with a less strong dollar. In other currencies the price of gold has risen.
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Re: What is going on with Gold price?

Post by Logan Roy »

seajay wrote: Sun Nov 27, 2022 7:29 pm
Logan Roy wrote: Sun Nov 27, 2022 4:53 pmSo the optimal way to ride a debt cycle would be to hold an amount in financial assets equivalent to how much of the time markets spend expanding, and real assets in proportion to how much time they spend correcting.
Central banks hold gold for various reasons, fear of inflation, potential distrust of government printed fiat currency, geopolitical instability. Its price is not affected by economic events in the same way as the prices of financial securities, its price is not highly correlated with the prices of other assets. Gold brings better stability to a portfolio, does not have any counter-party risk or credit risk, and because it is not issued by governments it has no default risk.

When money was gold the frequency of financial crises were relatively infrequent. Since the complete decoupling financial instability frequency has increased considerably.

Image
https://qz.com/1096237/deutsche-bank-an ... ial-crises

A optimal amount can only be determined with hindsight, more generally its the same as with stocks, not too much, not too little. I'd guess 10% being the border of too little, more than 50% being too much, somewhere between ...25%. Ben Graham advocated 50% stock, leaving 25% for bonds.

PV MC for that indicates a high probability of getting your inflation adjusted surplus money put aside to spend later - back via 30 years 3.33% SWR. But similar to stocks, drifts around that might likely yield similar outcomes, thirds each stock/gold/bonds for instance had a similar high success rate and had a 10% percentile worst case 3.33% PWR PV MC figure

It may be that the Ukraine war/Russian sanctions are seeing Russia funding spending via selling some of its gold. Combined with a flight to safety (US dollars/assets) lifting the dollar and having the price of gold in dollars not spiking as might otherwise have occurred with a less strong dollar. In other currencies the price of gold has risen.
I think we're much on the same page with gold, real assets and portfolio allocations. My own All Weather portfolio has 18% in gold. Those I outsource (All Weather hedge funds) are much more heavily in TIPS. Which I think is fine too. At least while TIPS are available on positive yields, I think they're a great analog for real assets and bonds.

What I've found has really changed backtesting for me this year, particularly, is:
– Building my own monte carlo and efficient frontiers models (from publicly available code) has made me question their reliability. The covariance matrices they run off reduce asset class relationships to a single number. So because, e.g., stocks and bonds cycle between positive and negative correlations, your data could suggest a diversifying effect that isn't reliable, or mask a diversifying effect that's cyclical (plus and minus cancel out). So it's too reductive. It didn't come up with portfolios that backtested particularly well, or made that much sense. Not a criticism to your MC there – just something I think needs a better mathematical approach.

– Stock sectors open up what you can do with diversification wonderfully. So my tests a few months back really found that conventional bonds and treasuries aren't very useful at all (if the aim is to produce optimal portfolios). And instead, sectors like Energy are extremely good inflation hedges and diversifiers (to sectors like Healthcare and Consumer Staples) over even typical 15 year periods. Sectors can be almost the asset classes we're missing from conventional portfolios. Leveraged long dollar ETFs are also pretty good hedges for tightening (when virtually nothing else is).
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