Gold as diversifier

[NiceUnparticularMan]

What's the difference between investing in gold and gambling?

Marketing?

[NiceUnparticularMan]

So far on the HBO series "The Last of Us", nobody is talking about the need for gold as the fungus ridden zombies attack.

I have, however, put 10% of my portfolio in truck batteries.

[dcabler]

So far on the HBO series "The Last of Us", nobody is talking about the need for gold as the fungus ridden zombies attack.

I have, however, put 10% of my portfolio in truck batteries.

Absolutely! That makes a lot of sense to me.

[GRP]

I've posted this before and I'm going to post it again. It's from one of the Bridgewater analyses of gold.





Gold has provided a reliable hedge to declines in conventional stock/bond portfolios over the shorter term, and in the longer term it has been by far the best inflation hedge known to society (literally thousands of years).

Regarding its role as a diversifier to conventional stock/bond portfolios in the shorter term: the only reason why most Bogleheads don't see this is because they aren't measuring gold's performance in an unbiased way. Note in the graph I posted above that the performance of gold is being measured in global fx. This is the most unbiased and impartial way to conduct any such analysis. Engaging in any kind of discussion regarding gold purely from the eyes of the U.S. investor is nothing more than a bad case of home country bias. Also, looking back on data further back than what Portfolio Visualizer provides is extremely useful as well.

[Northern Flicker]

BRK pays no dividends, its left to each individual investor to create their own, at times and to the amounts of their own choosing.

Dividends are a red herring. Berkshire generates revenue. Gold does not.

[NoRegret]

So suppose every year you take 5% of your portfolio and bet it on a coin flip--heads you double, tails you lose it all.

This "investment" will have a 0% expected return. It will have very high volatility of returns. Finally, it will have zero correlation to stocks/bonds.

So, is this "investment" necessarily a good idea?

Figuring out why not was an important exercise in one of the courses I took on finance. I continue to think it is a good exercise.

By the way, I note there is nothing special about gold in these respects. Again, gambling has the same structure. Commodity spot prices generally have the same structure. Collectibles generally have the same structure. There are lots and lots of different things beside gold that could serve the same purpose--if it was a good idea to begin with.

And in fact, there is a possible case for using diversified collateralized commodities futures, captured in this paper:

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

Vanguard does NOT make the claim there that CCFs will generally improve the efficiency of portfolios as measured by things like Sharpe Ratios. But, they could potentially serve as an unexpected inflation hedge, which is a different concept. That is specific to commodities futures, versus commodity spot prices, because of the much higher Beta to unexpected inflation.

Note gold futures could be a part of the CCF futures basket. But there would be no particular reason to ONLY use gold futures. And as studied in that paper, gold spot prices only would not be a remotely good substitute.

OK, so, no, this is not a good argument for specifically speculating on gold spot prices.

But there is a different argument for CCFs, and gold futures could be in such a basket.

The OP should read up on Shannon’s demon. Rebalancing premium is critical to understanding the role of a diversifier yet I too often people here just add up the long term expected returns.

These gold threads have shown that it’s nearly impossible to change people’s minds. That was why I started a thread of my own and put all my thoughts there. These days I’m primarily concerned with the timing of gold.

Check out my reply to Forrester a couple months ago if you’re interested.
viewtopic.php?p=6957828#p6957828

[NiceUnparticularMan]

I've posted this before and I'm going to post it again. It's from one of the Bridgewater analyses of gold. . . . Gold has provided a reliable hedge to declines in conventional stock/bond portfolios

The way that chart is constructed makes this very hard to see, but from 1980 to 2000, gold frequently had poor returns at the same time as stocks.

Then from 2000 to 2020, more often it had good returns at the same time as stocks were having bad returns.

Why the change? Well, most just because 1980 to 2000 was a generally bad 20 years for gold, and that included when stocks were down.

And mostly 2000 to 2020 was a good 20 years for gold, and that included when stocks were down.

So, no, free-floating gold has not been a reliable stock (or bond) hedge.

Also, looking back on data further back than what Portfolio Visualizer provides is extremely useful as well.

Looking at data involving gold when gold was subject to a different monetary regime is an obvious mistake if you are trying to model free-floating gold.

But of course all these points have been hashed and rehashed in these threads.

[Northern Flicker]

The OP should read up on Shannon’s demon. Rebalancing premium is critical to understanding the role of a diversifier yet I too often people here just add up the long term expected returns.

I ran backtests on PV for 70% US Stock, 15% INT-treasuries and 15% gold from 1972 to present, with and without rebalancing using rebalancing bands. The difference in performance was a premium of 25 basis points per year. And a significant part of that would have been from the stocks and bonds. If you don't like the fact that gold generates no revenue, a rebalancing premium is unlikely to change one's view. It is a bonus to try for if you've already made up your mind to hold gold.

[forwhatiknow]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

[secondopinion]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

The question is whether the suits include real pockets or not…

[Northern Flicker]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

I didn't realize that suit prices were so volatile.

[GRP]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

Longer than that. Many centuries.

In the RR episode on gold, they mention that bread priced in gold today is similar to what it was priced in during the age of the ancient romans, and that a roman centurion's pay is comparable to a US army captain today.

Gold is the inflation hedge nonpareil.

[seajay]

The OP should read up on Shannon’s demon. Rebalancing premium is critical to understanding the role of a diversifier yet I too often people here just add up the long term expected returns.

I ran backtests on PV for 70% US Stock, 15% INT-treasuries and 15% gold from 1972 to present, with and without rebalancing using rebalancing bands. The difference in performance was a premium of 25 basis points per year. And a significant part of that would have been from the stocks and bonds. If you don't like the fact that gold generates no revenue, a rebalancing premium is unlikely to change one's view. It is a bonus to try for if you've already made up your mind to hold gold.

Check/click the Allocation Drift tab (PV).

By March 1975 gold had risen to being 50% of the total portfolio value. 10K invested in 70/15/15 stock/10yrT/gold at the start of 1972 had risen to 13.8K value (10.7K real), whilst 70/30 TSM/10yrT stood at 9.3K (7.2K real). 70/15/15 had 48% more total value at that time. If rather than continuing with 50% of your portfolio value in gold you sold gold to load all-in the 70/30 then you'd have remained near 50% ahead forever thereafter (same 70/30 portfolio but loaded with 48% more total value (dollars)). Or if you continued to have held gold then in 1980 gold would have risen to being 57.5% of the total portfolio value, so conceptually yielded a even greater dividend (based on cherry picking the better time to have sold gold).

In other cases (start date), having held some gold will just see that gold weighting fade (non rebalanced) towards insignificance, acted as a minor lag factor, as stocks did well, 70/15/15 from a 1980 start date compared to 70/30 and 6.85% annualized real to recent compared to 6.93% for 70/30 (by 1998 had seen gold decline to being less than 1% of the total portfolio weighting). But when gold did well, as above, it hedged early years bad sequence of returns (in stocks/bonds) risk. The factors that tends to result in a bad sequence of returns for stocks/bonds tends to be good for gold, such as high/rising interest rates/inflation, falling domestic currency value relative to other currencies ...etc.

So as per your example, the cost of the hedging/portfolio-insurance/bad-earlier-years-sequence-of-returns-mitigation by including gold was minimal - relatively low difference in final value/outcome when no 'claims' (gold dividend) were made (25 basis points). But significant when a claim was made (around 50% more stock and bond shares being held following the claim). And where that insurance mitigated earlier years bad sequence of returns risk (in 1975 the portfolio was up in real terms, whilst 70/30 was down -28% in real terms)

[seajay]

Also have a look at rebalanced. Instead of Buffett's 90/10 stock/T-Bills, that tends to near align with 100% stock, holding 80/20 stock/gold. As is, 1972 to recent and 80/20 stock/gold yielded the higher reward and had the higher (better) Sharpe Ratio. But that's without any 'claims' such as that of the 1975 example in the previous post. In June 1975 from a start date of 1972 80/20 stock/gold portfolio value was 50% more than either 90/10 stock/T-Bills or 100% stock. Selling gold to move into 90/10 (or 100/0) at that time would have locked in that 50% benefit forever thereafter.

[seajay]

How about more recent times, a start of year 2000 investor in having seen great 1980's/1990's gains in stocks opts for a 90/10 stock/T-Bills Buffett choice, or even 100% stock, compared to 80/20 stock/gold (yearly rebalanced). At the end of August 2011 they measure their 80/20 stock/gold portfolio's relative difference compared to 90/10 stock/T-Bills (and 100% stock) and see that they've achieved a 50% higher portfolio value (45% more than 90/10, 52% more than 100/0) - so opt to sell gold (to claim the gold dividend) and rotate into either of those 90/10 or 100/0 alternatives - and forever thereafter remain 50% ahead.

[seajay]

In the UK we don't have ETF's, instead we have long standing Investment Trusts, individual stocks whose primary/sole purpose is to invest. The oldest of which, FCIT, dates back to the mid 1800's. FCIT is a general world stock type holding, similar to a world stock index fund/ETF. A feature however is that the share price fluctuates around its net asset value (NAV) and at times the share price drops to being 10% below its NAV - similar to being able to buy a world stock ETF at a 10% discount. Historically they could at times drop much deeper, but policies changed such that now most of such Investment Trusts buy back shares to prevent the price to NAV discount dropping below certain levels (10% in the case of FCIT).

A reasonable approach is to rotate into FCIT when at/around a 10% discount, rotate into a World stock ETF when the price to NAV has risen back to/near 0%. In September 2022 for instance the discount was over 10% https://www.trustnet.com/factsheets/t/f ... al-inv-tst (Premium/Discount chart) and more recently its close to being back to 0%

Rather than tracking 80/20 stock/gold until a 50% benefit becomes apparent, and then rotating into 90/10 stock/T-Bills forever thereafter, if you instead flip/flop between the two in a similar vein to flipping between FCIT and a World stock ETF, then its just a case of monitoring the relative differences. In earlier post examples that may have meant a rotation in 1975 from 80/20 stock/gold into 90/10 stock/T-Bills, and then back to a 80/20 stock/gold in the 1980's/1990's, and rotate yet again in the 2000's ...etc. Perhaps generating 33% more shares/value once per decade average, that adds near a additional 3% annualized to overall rewards.

May not work out, you might opt for one, such as 80/20 stock/gold, and remain stuck in that for decades/forever, but where the overall outcome is little different to 90/10 stock/T-Bills, negligible 'loss' - maybe a 25 basis points lag. But could work out well, perhaps adding 3% or more to annualized rewards.

[NiceUnparticularMan]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

Free-floating gold's value in terms of clothing has bounced up and down wildly in the same general way it has bounced up and down wildly in real terms generally.

So, no, there is no such rule as applied to free-floating gold.

[NiceUnparticularMan]

How about more recent times, a start of year 2000 investor . . .

Right, whether speculating on free-floating gold's price has helped or hurt investors depends entirely on your pick of start and end dates.

That is because while it isn't a reliable anything, it has swung up and down quite dynamically, making it ideal for the person who likes to cherry pick data.

[seajay]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

I didn't realize that suit prices were so volatile.

Prices when currencies such as US dollars were pegged to gold tended to remain constant for decades (inflation broadly averaged 0%). Currencies used to be gold and silver coins, Soveign Pound coin for instance in the UK. Since currencies were disconnected from gold (Pound notes created in the UK with the "I promise to pay the bearer the sum of one Pound" wording i.e. a gold sovereign) and permitted to free-float, prices in US Dollars (and Pounds etc.) have tended to rise in reflection of the tendency of free floating fiat currency to decline relative to gold. A transition to where the state nor banks needed to borrow your gold, to a situation where instead the state could simply print/spend dollars, or banks create debt (loans) out of thin air.

The range of suits available may included imported suits, international trade. Up to the early 1930's and gold bars were physically moved in reflection of international trade surpluses/deficits. The US however directed a change over to using the US dollar for international trade, where as part of that it agreed to peg the US dollar to gold. That was broken by President Nixon in the late 1960's however, as a means to pay down the cost of the Vietnam war, but has since partially been reintroduced by Yellen as of 2013. The Pound and Dollar etc. have mostly been pegged to gold for millennia, excepting that 1969 to 2012 interlude when the dollar as a supposed 1:1 for gold was permitted to free-float. Gold = money, and the dollar no longer was money for those years, just a currency, across which time prices increased around 6.5 times (high inflation - indicative of dollar depreciation relative to gold/money).

The actual decoupling of gold/dollar runs back further than Nixon's 1969 decoupling, in effect the fixed gold price had pent up elastic stretching. When American's could buy investment gold again from 1975 the price increased from the 35 dollars/ounce price to which the US pegged the dollar to in 1934/35, up to around 200/ounce in 1978, the market in effect priced in the 'correct' value/price. In reflection of subsequent 6.5 times inflation (dollar devaluation) up to 2013 = 6.5 x 200 = 1300/ounce price, i.e. around the actual price that gold was in 2013/14/15/16/17/18. The jump from there to 1800/ounce type price since 2020 is likely a function of Covid fears related, combined with forward looking inflation expectations of perhaps around 38% in total over the years since 2018.

[z3r0c00l]

An ounce of gold will still purchase a good suit for a man. This has been the rule for the better part of 100 years.

I didn't realize that suit prices were so volatile.

Prices when currencies such as US dollars were pegged to gold tended to remain constant for decades (inflation broadly averaged 0%).

This is strange to hear, I was under the impression that inflation/deflation was quite common and severe in the 1800s and early 1900s. I understand that inflation has been the norm since going off the gold standard, but it has also been rather muted. The spikes of 20-30% inflation between 1776 and 1920 must have been terrible.

[seajay]

1793 to 1914 0% inflation (annualized), periods of both inflation and deflation in around equal measure and that tended to cluster. Since then 3.1%



Over a similar period, stock and bond total returns were much the same, IIRC however stocks were the more volatile, so lower Sharpe (same reward with more yearly volatility). As money = gold (and silver) coins, then buying bonds = depositing gold, that returned more ounces of gold (money/interest). In effect the state (assuming you bought treasuries) paid you for it to securely store your gold.

[NiceUnparticularMan]

periods of both inflation and deflation

That's not what "constant" means.

As the chart clearly shows, both the worst periods of deflation AND the worst periods of inflation happened when the USD was tied to gold in some way.

Shifting to modern monetary policy, including without any such gold tie, did in fact allow inflation to average higher . . . and also greatly reduced the variability of inflation/deflation. Aka, made it more, not less, constant.

These are both good things--a small and relatively predictable positive inflation rate is preferable to a very unpredictable inflation/deflation rate that averages zero, including because it encourages investing in productive assets as opposed to hoarding.

[simplextableau]

How about more recent times, a start of year 2000 investor . . .

Right, whether speculating on free-floating gold's price has helped or hurt investors depends entirely on your pick of start and end dates.

That is because while it isn't a reliable anything, it has swung up and down quite dynamically, making it ideal for the person who likes to cherry pick data.

I get that you really really dislike gold, and I have no dog on either side of this fight, but your refrain of "free-floating gold" gets tiring. The Federal Reserve sets and manipulates the money supply to expand (or contract) by billions of dollars as part of its operations. (I do not criticize this). Gold, on the other hand, exists physically and is slowly mined but does not fluctuate in its quantity in the same way as the US dollar. When the US money supply and dollar are all over the place as a result of nothing more than market conditions (i.e. intangible consensus and fiat monetary policy), but gold is an unchanging physical asset, then gold isn't free-floating. It's the dollar that's free-floating. Call it "unpegged gold" if you want, but "free-floating" is just silly and undermines your credibility.

[sureshoe]

How about more recent times, a start of year 2000 investor . . .

Right, whether speculating on free-floating gold's price has helped or hurt investors depends entirely on your pick of start and end dates.

That is because while it isn't a reliable anything, it has swung up and down quite dynamically, making it ideal for the person who likes to cherry pick data.

I get that you really really dislike gold, and I have no dog on either side of this fight, but your refrain of "free-floating gold" gets tiring. The Federal Reserve sets and manipulates the money supply to expand (or contract) by billions of dollars as part of its operations. (I do not criticize this). Gold, on the other hand, exists physically and is slowly mined but does not fluctuate in its quantity in the same way as the US dollar. When the US money supply and dollar are all over the place as a result of nothing more than market conditions (i.e. intangible consensus and fiat monetary policy), but gold is an unchanging physical asset, then gold isn't free-floating. It's the dollar that's free-floating. Call it "unpegged gold" if you want, but "free-floating" is just silly and undermines your credibility.

I enjoy these threads.

Yes gold gets a lot of hate, but it's well earned. The vagueness is the problem. Nobody can seem to really identify why gold is a good investment or what function it serves in a portfolio.

The line above will be inevitably quoted and told "it's wrong" with vague descriptions of what gold is. But the definition is all over the place. One day it's a hedge, the other it's a better-than-stocks investment, the other day it's a diversifier, the other day it's a currency offset. Whatever.

US Dollars (or Pesos or Pounds or whatever) are tied to the faith of the government backing it. Most people would advise against non-experts doing currency investing, but if I chose to do so - I would know exactly what and why I'm investing. Gold investors have trouble saying that.

[GRP]

1793 to 1914 0% inflation (annualized), periods of both inflation and deflation in around equal measure and that tended to cluster. Since then 3.1%



Over a similar period, stock and bond total returns were much the same, IIRC however stocks were the more volatile, so lower Sharpe (same reward with more yearly volatility). As money = gold (and silver) coins, then buying bonds = depositing gold, that returned more ounces of gold (money/interest). In effect the state (assuming you bought treasuries) paid you for it to securely store your gold.

Yeah, and when one looks globally, one realizes what kind of unprecedented situation we're in since gold was official money. Going on and off the gold standard is nothing new for individual countries, but this is the first time that the world's currencies are fiat and not backed by anything.

It's one thing to think of an isolated place like Germany and Zimbabwe experiencing massive devaluation... think of the whole planet.

[NiceUnparticularMan]

gold isn't free-floating. It's the dollar that's free-floating. Call it "unpegged gold" if you want, but "free-floating" is just silly

In this context, "free-floating" is just a (properly used) technical term.

Free-floating in the context of monetary policy just means a system in which exchange rates are allowed to move due to market forces without intervention by monetary or fiscal authorities. To say the Euro is free-floating isn't somehow to imply the USD is not free-floating, nor is it somehow to imply the Euro is bad and the USD is good, or so on. They are both free-floating.

OK, so under the Bretton Woods system, other currencies were tied to the USD, and the USD was tied to gold, which meant other currencies were tied to gold too. The governments who agreed to the system, plus the IMF, all committed to intervening to maintain those ties. So, at the time, none of the USD, gold, or these other currencies were free-floating.

Once Bretton Woods was fully unwound--which actually took quite a while--then finally all of the USD, these other currencies, and gold were free-floating.

And so "free-floating gold" is a perfectly good term for gold after the end of Bretton Woods. So is "free-floating USD", "free-floating GBP", and so on. All these things, including but not limited to gold, became "free-floating" as a result of the Bretton Woods system unwinding.

And no, I didn't invent this usage. Like, here is the Wikipedia article on the Jamaica Accords, which formally ended Bretton Woods:

https://en.wikipedia.org/wiki/Jamaica_Accords

As one passage there says:

The accords allowed the price of gold to float with respect to the U.S. dollar and other currencies, albeit within a set of agreed constraints. In practice the dollar had been floating in this way, in contravention of the articles of an agreement of the IMF, since the Nixon shock in 1971.

That passage is alternatively talking about gold floating with respect to the USD and other currencies, and the USD floating, because it all means the same thing.

Now, if you want to substitute the term "unpegged gold" or "unpegged USD" or "unpegged GBP" or so on, that is fine also. Because the Bretton Woods system was in fact a type of pegging system, so it is equally true that all these things, including gold but not limited to gold, became "unpegged" as a result of the Bretton Woods system unwinding.

But that is not somehow more accurate. In this context, "free-floating" and "unpegged" just mean the same thing, and it applies to gold, the USD, and all the relevant currencies,

So I don't care which of those terms people use, and I am going to freely use either. And no, that is not "silly". It is accurate.

By the way, what really matters is not this semantic complaint, it is understanding two crucial historical facts.

One, unpegged/free-floating gold has behaved very differently in financial terms from pegged gold, which was to be expected for obvious reasons.

Second, the state of being unpegged/free-floating was not something that happened overnight. The Bretton Woods system took many year to fully unwind, and as long as there were some governments still trying to intervene, gold was not fully free-floating/unpegged.

The beginning of the end was at least as early as March of 1968, with the collapse of the London Gold Pool, and arguably really started with the 1967 devaluation of the GBP in November of 1967.

The last major legal event was the aforementioned ratification of the Jamaica Accord in 1976, but it didn't require an immediate end to all currency/USD/gold pegging, instead granting countries time to unwind gradually.

So, the transition from pegged gold to unpegged/free-floating gold started in like 1967/68, and was finally completed at some ill-defined point after 1976.

OK, so whatever term one uses, one important thing to understand is we do not have historical data for use in studying the financial behavior of fully-unpegged/free-floating gold from before 1977, and even the last few years of the 1970s are a bit ambiguous. Instead, before like 1967/68, the data is about pegged gold, and between 1967/68 and the late 1970s, the data is about gold making the transition from being pegged to being unpegged/free-floating.

[NiceUnparticularMan]

It's one thing to think of an isolated place like Germany and Zimbabwe experiencing massive devaluation... think of the whole planet.

Indeed.

Like, try to imagine who is buying all the goods and services in all the markets around the world at prices which have risen suddenly and massively in all the world's currencies.

That is indeed truly hard to imagine.

[GRP]

I get that you really really dislike gold, and I have no dog on either side of this fight, but your refrain of "free-floating gold" gets tiring. The Federal Reserve sets and manipulates the money supply to expand (or contract) by billions of dollars as part of its operations. (I do not criticize this). Gold, on the other hand, exists physically and is slowly mined but does not fluctuate in its quantity in the same way as the US dollar. When the US money supply and dollar are all over the place as a result of nothing more than market conditions (i.e. intangible consensus and fiat monetary policy), but gold is an unchanging physical asset, then gold isn't free-floating. It's the dollar that's free-floating. Call it "unpegged gold" if you want, but "free-floating" is just silly and undermines your credibility.

Tiring, unnecessary, and totally made up. It's also something I'm willing to bet no one here has ever heard from anyone else anywhere else.

[simplextableau]

gold isn't free-floating. It's the dollar that's free-floating. Call it "unpegged gold" if you want, but "free-floating" is just silly

In this context, "free-floating" is just a (properly used) technical term.

Free-floating in the context of monetary policy just means a system in which exchange rates are allowed to move due to market forces without intervention by monetary or fiscal authorities. To say the Euro is free-floating isn't somehow to imply the USD is not free-floating, nor is it somehow to imply the Euro is bad and the USD is good, or so on. They are both free-floating.

OK, so under the Bretton Woods system, other currencies were tied to the USD, and the USD was tied to gold, which meant other currencies were tied to gold too. The governments who agreed to the system, plus the IMF, all committed to intervening to maintain those ties. So, at the time, none of the USD, gold, or these other currencies were free-floating.

Once Bretton Woods was fully unwound--which actually took quite a while--then finally all of the USD, these other currencies, and gold were free-floating.

And so "free-floating gold" is a perfectly good term for gold after the end of Bretton Woods. So is "free-floating USD", "free-floating GBP", and so on. All these things, including but not limited to gold, became "free-floating" as a result of the Bretton Woods system unwinding.

And no, I didn't invent this usage. Like, here is the Wikipedia article on the Jamaica Accords, which formally ended Bretton Woods:

https://en.wikipedia.org/wiki/Jamaica_Accords

As one passage there says:

The accords allowed the price of gold to float with respect to the U.S. dollar and other currencies, albeit within a set of agreed constraints. In practice the dollar had been floating in this way, in contravention of the articles of an agreement of the IMF, since the Nixon shock in 1971.

That passage is alternatively talking about gold floating with respect to the USD and other currencies, and the USD floating, because it all means the same thing.

Now, if you want to substitute the term "unpegged gold" or "unpegged USD" or "unpegged GBP" or so on, that is fine also. Because the Bretton Woods system was in fact a type of pegging system, so it is equally true that all these things, including gold but not limited to gold, became "unpegged" as a result of the Bretton Woods system unwinding.

But that is not somehow more accurate. In this context, "free-floating" and "unpegged" just mean the same thing, and it applies to gold, the USD, and all the relevant currencies,

So I don't care which of those terms people use, and I am going to freely use either. And no, that is not "silly". It is accurate.

By the way, what really matters is not this semantic complaint, it is understanding two crucial historical facts.

One, unpegged/free-floating gold has behaved very differently in financial terms from pegged gold, which was to be expected for obvious reasons.

Second, the state of being unpegged/free-floating was not something that happened overnight. The Bretton Woods system took many year to fully unwind, and as long as there were some governments still trying to intervene, gold was not fully free-floating/unpegged.

The beginning of the end was at least as early as March of 1968, with the collapse of the London Gold Pool, and arguably really started with the 1967 devaluation of the GBP in November of 1967.

The last major legal event was the aforementioned ratification of the Jamaica Accord in 1976, but it didn't require an immediate end to all currency/USD/gold pegging, instead granting countries time to unwind gradually.

So, the transition from pegged gold to unpegged/free-floating gold started in like 1967/68, and was finally completed at some ill-defined point after 1976.

OK, so whatever term one uses, one important thing to understand is we do not have historical data for use in studying the financial behavior of fully-unpegged/free-floating gold from before 1977, and even the last few years of the 1970s are a bit ambiguous. Instead, before like 1967/68, the data is about pegged gold, and between 1967/68 and the late 1970s, the data is about gold making the transition from being pegged to being unpegged/free-floating.

I appreciate the response. I don't disagree with any of your historical points. I still think "free-floating gold" is a silly term though. We don't say "free-floating oil" or "free-floating cotton." I think it's an anti-gold term rather than a neutral label. I would just call it "post-Bretton Woods gold" or something.

[NiceUnparticularMan]

Tiring, unnecessary, and totally made up. It's also something I'm willing to bet no one here has ever heard from anyone else anywhere else.

I was trying to find an even more amusing example of the common usage of this term besides citing Wikipedia, and I thought this was a good one:

Since 1973, when the price of gold became free-floating . . . .

Care to guess what scoundrels dared impugn the fine name of gold in such a silly fashion?

[waits]

That is from SPDR Gold Shares, "The Case for Gold: A Strategic Asset":

https://www.spdrgoldshares.com/media/GL ... 022012.pdf

But, sure, I invented the term to make gold look bad . . . .

[Marseille07]

Until recently I thought that since gold has long term expected return of 0% it has no use in portfolio theoretically. I thought that recent history results where it improved returns are just artefact.

Gold is traded around the world. Why would it be expected to peg USD-demoninated 0% real? Such a US-centric view isn't substantiated at all.

[GRP]

Until recently I thought that since gold has long term expected return of 0% it has no use in portfolio theoretically. I thought that recent history results where it improved returns are just artefact.

Gold is traded around the world. Why would it be expected to peg USD-demoninated 0% real? Such a US-centric view isn't substantiated at all.

Yeah, a global fx view is most prudent.

[GRP]

Also, regarding the 0% real expected return thing.

For anyone interested in incorporating gold in their portfolio, but with a potentially better risk/reward profile (also requiring more discipline), you may be interested in William Bernstein’s excellent work on gold mining stocks as an explicit allocation in a portfolio.

[NiceUnparticularMan]

I still think "free-floating gold" is a silly term though. We don't say "free-floating oil" or "free-floating cotton." I think it's an anti-gold term rather than a neutral label. I would just call it "post-Bretton Woods gold" or something.

Right, a term so anti-gold it was also used in the promotional materials for SPDR GLD . . . .

The reason that term "free floating" is commonly used as to gold and not other commodities is because gold played a unique role in the international monetary system under Bretton Woods (and indeed before under different regimes). And it specifically refers to how under Bretton Woods, monetary and fiscal authorities were intervening to maintain an agreed relationship between gold prices and currency exchange rates.

"Unpegged" and "post-Bretton Woods" are fine too, but so is "free floating".

And actually, I find it baffling that anyone would think of it as an ANTI-gold term. I mean, if anything, it is HELPING the people who argue gold is money, gold isn't just another commodity, or so on.

In that sense, maybe it is too PRO-gold. That sure would explain why SPDR GLD used it in its promotional materials . . . .

But personally, I am not concerned about using the same terms as SPDR GLD, because I understand it is a neutral, and accurate, term.

[NiceUnparticularMan]

Gold is traded around the world. Why would it be expected to peg USD-demoninated 0% real? Such a US-centric view isn't substantiated at all.

Stored commodities are usually expected to have less than a 0% real return long term for a variety of reasons, including storage/security/insurance costs, and also the expectation that commodity-related productive processes will gradually become more efficient.

Of course over the short term commodity spot prices can vary wildly, and theoretically demand-side structural changes can occur, like inventions of new ways to use a commodity that may cause demand to increase and cause marginal productive efficiencies to decrease (although often there is eventually a productive response that halts and possibly unwinds such effects).

But none of this is specific to the USD. Indeed, the whole idea of real returns is to control for whatever monetary unit might be used as a medium of exchange between the asset in question and something else of real value.

So stored commodities are usually expected to have less than 0% real returns long term regardless of the medium of exchange.

However, because commodity markets are typically global, and real exchange rates can vary over time, real exchange rates becomes another source of short-term variation for the real returns of stored commodities in some one specific currency. But generally speaking that won't change the long-term expected real return of that stored commodity.

[secondopinion]

I still think "free-floating gold" is a silly term though. We don't say "free-floating oil" or "free-floating cotton." I think it's an anti-gold term rather than a neutral label. I would just call it "post-Bretton Woods gold" or something.

Right, a term so anti-gold it was also used in the promotional materials for SPDR GLD . . . .

The reason that term "free floating" is commonly used as to gold and not other commodities is because gold played a unique role in the international monetary system under Bretton Woods (and indeed before under different regimes). And it specifically refers to how under Bretton Woods, monetary and fiscal authorities were intervening to maintain an agreed relationship between gold prices and currency exchange rates.

"Unpegged" and "post-Bretton Woods" are fine too, but so is "free floating".

And actually, I find it baffling that anyone would think of it as an ANTI-gold term. I mean, if anything, it is HELPING the people who argue gold is money, gold isn't just another commodity, or so on.

In that sense, maybe it is too PRO-gold. That sure would explain why SPDR GLD used it in its promotional materials . . . .

But personally, I am not concerned about using the same terms as SPDR GLD, because I understand it is a neutral, and accurate, term.

I actually find "free-floating" just fine and I have never objected to its use. Seriously, gold is more useful as an investment/speculation (whichever is believed to be correct) than it was because nothing is pegged off of it these days (and that gold is not pegged on modern financing).

For all intent and purpose, it should be a compliment. Nothing is tying gold down nor buoying it up; the merits of gold will be what they will be. It is "free-floating".

[NiceUnparticularMan]

I actually find "free-floating" just fine and I have never objected to its use. Seriously, gold is more useful as an investment/speculation (whichever is believed to be correct) than it was because nothing is pegged off of it these days (and that gold is not pegged on modern financing).

For all intent and purpose, it should be a compliment. Nothing is tying gold down nor buoying it up; the merits of gold will be what they will be. It is "free-floating".

Yeah, it is basically emphasizing that governments have stopped intervening in gold prices. Seems like a good thing, no?

By the way, although I think personalizing all this is an unwelcome distraction, I note for the record that I invest both in gold producers and in gold futures. It is true I do that through index funds which also invest in other commodity producers and other commodity futures. But I don't try to exclude gold, and in that sense I am neutral as to gold, in the same sense as I am to neutral as to sugar, copper, crude oil, or any other commodity.

And indeed, for such purposes, it is good, not bad, that gold is free-floating. That is really critical to the idea gold producer stocks could be part of a general stock diversification plan, gold futures could be part of a commodities futures diversification plan, and so on. No more so than other commodities, but also no less so.

But in the minds of some people, I guess if you are not more positive on gold investing than investing in other commodities, and use terms consistent with that neutral view, that means you are anti-gold.

[Marseille07]

Stored commodities are usually expected to have less than a 0% real return long term for a variety of reasons, including storage/security/insurance costs, and also the expectation that commodity productive processes will gradually become more efficient.

Of course over the short term commodity spot prices can vary wildly, and theoretically demand-side structural changes can occur, like inventions of new ways to use a commodity that may cause demand to increase and cause marginal productive efficiencies to decrease (although often there is eventually a productive response that halts and possibly unwinds such effects).

But none of this is specific to the USD. Indeed, the whole idea of real returns is to control for whatever monetary unit might be used as a medium of exchange between the asset in question and something else of real value.

So stored commodities are usually expected to have less than 0% real returns long term regardless of the medium of exchange.

However, because commodity markets are typically global, and real exchange rates can vary over time, real exchange rates becomes another source of short-term variation for the real returns of stored commodities in some one specific currency. But generally speaking that won't change the long-term expected real return of that stored commodity.

I think the supply side could also be a factor, such as oil going scarce or when we land on Asteroid 16 Psyche: https://theprint.in/opinion/giant-aster ... er/260482/

Asteroid 16 Psyche has enough gold to give everyone on Earth $93 billion

[NiceUnparticularMan]

I think the supply side could also be a factor, such as oil going scarce or when we land on Asteroid 16 Psyche: https://theprint.in/opinion/giant-aster ... er/260482/

Asteroid 16 Psyche has enough gold to give everyone on Earth $93 billion

Yeah, that would be a fairly radical version of gold production suddenly getting a lot more efficient.

Oil is actually a common example of that bit about "demand-side structural changes can occur, like inventions of new ways to use a commodity that may cause demand to increase and cause marginal productive efficiencies to decrease (although often there is eventually a productive response that halts and possibly unwinds such effects)."

Like, back in the early 20th Century, the rapid rise of the automobile caused what was then a dramatic spike in real crude oil prices, but pretty quickly crude oil producers caught up, and then in the Great Depression real oil prices actually hit historic lows.

As the world generally industrialized post-WWII, oil consumption took off, eventually rocketing past coal (which had previously been the first big industrial fuel). This proved unsustainable, including because real non-OPEC production costs were so much higher than OPEC production costs. And then of course OPEC restricted supply, and boom--massive oil price spike.

One consequence was that demand started shifting to alternatives. But interestingly, non-OPEC production costs also started coming down in real terms. And that chilled things out for a while.

But then by the mid-2000s, it seemed like all that was running out of steam, and "peak oil" became a really big discussion topic.

And then unconventional oil production got a lot more economically competitive . . . .

So it has been a wild ride since 1980, but on the whole there has been no big long-term increase in real oil prices since that time. Whether we will ever get back to 1960s prices on a sustained basis, I don't know, but it looks like the pandemic has brought forward a lot of estimates of "peak oil demand," and some of those models include at least some scenarios where global oil demand goes down very rapidly.

Anyway, point being even in a case as extreme as oil in terms of demand increases, eventually a combination of demand- and production-side efficiencies can potentially halt, and possibly reverse, the resulting real price effects.

[cbox]

What I like about gold are the infomercials directed at seniors in the afternoon hours on t.v. Always a good sign...

...and the probability that if the world as we know it does end, there will likely be a pawn shop that rises from the ashes, willing to take gold off my hands for "a good price."

[Anon9001]

One also wonders about the asset class correlations you assumed (if you made an assumption).

Sorry for the late reply. Here is the Correlation Matrix.Note 1 is Sensex, 2 is MSCI USA 3. Gold 4. NASDAQ 5.ACWI 6. Bonds. I used Cholensky Decomposition to correlate the assets.

Code: Select all

1	2	3	4	5	6
1	1.0	0.5	0.0	0.5	0.6	0.0

2	0.5	1.0	0.0	0.8	0.9	0.0

3	0.0	0.0	1.0	0.0	0.0	0.0

4	0.5	0.8	0.0	1.0	0.7	0.0

5	0.6	0.9	0.0	0.7	1.0	0.0

6	0.0	0.0	0.0	0.0	0.0	1.0

[Marseille07]

Yeah, that would be a fairly radical version of gold production suddenly getting a lot more efficient.

Oil is actually a common example of that bit about "demand-side structural changes can occur, like inventions of new ways to use a commodity that may cause demand to increase and cause marginal productive efficiencies to decrease (although often there is eventually a productive response that halts and possibly unwinds such effects)."

Like, back in the early 20th Century, the rapid rise of the automobile caused what was then a dramatic spike in real crude oil prices, but pretty quickly crude oil producers caught up, and then in the Great Depression real oil prices actually hit historic lows.

As the world generally industrialized post-WWII, oil consumption took off, eventually rocketing past coal (which had previously been the first big industrial fuel). This proved unsustainable, including because real non-OPEC production costs were so much higher than OPEC production costs. And then of course OPEC restricted supply, and boom--massive oil price spike.

One consequence was that demand started shifting to alternatives. But interestingly, non-OPEC production costs also started coming down in real terms. And that chilled things out for a while.

But then by the mid-2000s, it seemed like all that was running out of steam, and "peak oil" became a really big discussion topic.

And then unconventional oil production got a lot more economically competitive . . . .

So it has been a wild ride since 1980, but on the whole there has been no big long-term increase in real oil prices since that time. Whether we will ever get back to 1960s prices on a sustained basis, I don't know, but it looks like the pandemic has brought forward a lot of estimates of "peak oil demand," and some of those models include at least some scenarios where global oil demand goes down very rapidly.

Anyway, point being even in a case as extreme as oil in terms of demand increases, eventually a combination of demand- and production-side efficiencies can potentially halt, and possibly reverse, the resulting real price effects.

Yeah, in the grand scheme of things I'm sure you're correct. If oil goes scarce then people look for alternative energy sources and the oil demand might not necessarily skyrocket even if oil eventually runs out.

Imo commodities could help during an inflationary period, but always holding something like gold is a questionable idea.

[RoadThunder]

What's the difference between investing in gold and gambling?

Marketing?

Gold has never had zero value.

[NiceUnparticularMan]

Imo commodities could help during an inflationary period, but always holding something like gold is a questionable idea.

I note we are sorta reinventing the wheel in terms of why some people suggest specifically collateralized commodity futures as an unexpected inflation hedge.

CCFs can respond a lot more dramatically to unexpectedly high price increases OR unexpectedly low decreases (warning: also unexpectedly low price increases or high decreases), and therefore do not depend solely on the general direction of commodity spot prices to serve as an unexpected inflation hedge. And there has been empirical research to support that theory.

[NiceUnparticularMan]

What's the difference between investing in gold and gambling?

Marketing?

Gold has never had zero value.

That's fair. Free-floating gold has experienced real value losses of over 80%, but the intrinsic value of gold (for actual productive purposes and such) does put a floor on its real value somewhere.

Of course if asteroid mining ever becomes a thing, that floor could be real low. As in, like the same as common flooring materials . . . .

[secondopinion]

Imo commodities could help during an inflationary period, but always holding something like gold is a questionable idea.

I note we are sorta reinventing the wheel in terms of why some people suggest specifically collateralized commodity futures as an unexpected inflation hedge.

CCFs can respond a lot more dramatically to unexpectedly high price increases OR unexpectedly low decreases (warning: also unexpectedly low price increases or high decreases), and therefore do not depend solely on the general direction of commodity spot prices to serve as an unexpected inflation hedge. And there has been empirical research to support that theory.

What would you recommend as a fund/ETF choice of having CCFs? I can say that IAUM and GLDM are both very good for "physical" gold expense-wise (I think they are 0.10% or around that), but I have no clue what is best for commodities in general. Personally, I have a stock tilt that holds a tad more in commodity production, but I do not do this tilt for this reason but rather is a byproduct that I am fine with.

[secondopinion]

What's the difference between investing in gold and gambling?

Marketing?

Gold has never had zero value.

That's fair. Free-floating gold has experienced real value losses of over 80%, but the intrinsic value of gold (for actual productive purposes and such) does put a floor on its real value somewhere.

Of course if asteroid mining ever becomes a thing, that floor could be real low. As in, like the same as common flooring materials . . . .

Right, I rather take my chances that silver will continue to be useful at a low-ish price.

[GRP]

What would you recommend as a fund/ETF choice of having CCFs? I can say that IAUM and GLDM are both very good for "physical" gold expense-wise (I think they are 0.10% or around that), but I have no clue what is best for commodities in general. Personally, I have a stock tilt that holds a tad more in commodity production, but I do not do this tilt for this reason but rather is a byproduct that I am fine with.

I know you didn't direct this query towards me, but if I may, I think that COM is the CCF ETF of choice in the American market. It doesn't overweight energy (unlike DBC and GSG), and systematically trades in and out of commodity positions between long and flat. It's the best way to hold CCFs in a long-term and non-speculative way IMO. The index is just better designed than any alternative currently out there. Some literature on the index is here: https://www.direxion.com/product/auspic ... rategy-etf

I use that as one end of my "barbell" strategy with gold. The other end being physical bullion.

[GRP]

For those interested, note how COM did against DBC and GSG (the two biggest commodity ETFs in the US market) during the COVID crash. Long/flat is the way to go for commodities as opposed to pure long. And this is a great way to get gold price exposure as part of a diversified portfolio, too. (Don't forget the physical bullion though of course.)

[secondopinion]

For those interested, note how COM did against DBC and GSG (the two biggest commodity ETFs in the US market) during the COVID crash. Long/flat is the way to go for commodities as opposed to pure long. And this is a great way to get gold price exposure as part of a diversified portfolio, too. (Don't forget the physical bullion though of course.)

Of course, the lack of beta is telling. I am not convinced that it will be long-term profitable by a trading strategy.