Kshartle,
Please what? The mini-duscussion was "what would happen to gold if my paper assets went to zero?" I laid out my case for a real boom in gold rather than just nominal. If gold just went up nominally with inflation, it wouldn't be the right asset for the PP. I want an asset that acts as a "canary in the coal mine." Not the news reporter that gets to the coal mine two days after the mine collapses to report the deaths.
This is a compliment, not a criticism, to gold. It's basically saying that it's so good at what it does within the context of a properly-diversified portfolio, that you don't need much of it. Is that so ridiculous to warrant an "eye-rolling" response?
The only way this might look like a criticism, is the recognition that gold can go down for decades if the government is effectively subsidizing savers by giving them an FDIC or fed-protected real rate of return that is nice and lucrative.
The important thing isn't to judge gold as "good" or "bad," but get a feel for what its "skillset" truly is, and use it accordingly.
However, if inflation is low.....why are stocks up 185% and gold up 45% in the last five years? I know 5 years ago was almost the bottom and stocks were really low but 185%?!?!?!?
You must think we are really prosperous despite falling real incomes and falling employment. If inflation hasn't pushed up these prices then what has done it? Also realize there is a lag between when inflation hits financial prices and gets to consumer prices. Browne explains this clearly in some of his books and puts it at usually around 2 years.
So now you're measuring inflation via the price of long-term contract financial assets? Does that mean we had staggering deflation when the stock & bond market got hit in 1981, even though CPI still rose by 10 that year?
I measure inflation not by financial asset prices, but general price level of goods and services. Expectations of future inflation does factor into how the market prices certain financial assets, to be sure, but their prices are a horrible measure of inflation in-and-of-themselves. For instance, if the market (in a world free of the fed, shall we say, where hypothetically we are looking at pre-% interest rates) expected sharp deflation general price deflation due to some sort of massive exogenous event, bond prices would likely rise considerably on the "safe" end of the bond curve. Does this mean that we have "inflation" because the bond prices rose? That seems like a foolish way to look at it.
Further, the market knows the fed is going to play with the safest end of the dollar-denominated bond market (t-bills/t-bonds) to set an effective "floor" for interest rates, and that expectations of future actions in this arena is going to affect LT bond prices considerably. There's always going to be relatively big swings in the 30-year bond market due to what future fed expectations are. Does this mean every time they go down, we have deflation, and every time they go up, we have inflation?
The stock market is simply trying to price itself against alternatives. I don't think rises in the stock market really mean all that much, except some indication of relative future stability, and expectations increasing that earnings will be generated, or a repricing of those earnings against other investments (real estate, bonds, etc).
The price of long-term financial assets, especially if they're fixed-income generators, is a horrible way to measure inflation, unless we're going to start re-defining why inflation is good or bad. The reason inflation is even measured, is because we want to get a feel what the increasing price of daily REAL economic purchases/expenses are.
Kshartle wrote:
Here's the thing about hyperinflation guys........
If Gold goes to 1 million an ounce, it will first hit 2k, 3k, 4k.....
The move from 2k to 4k is the same percentage as 500k to 1 million.
Will you know the warning signs and prevent yourself from selling at 2k, 3k, 4k, 10k?
If so please share with us when you see them.
My point is it will be extremely difficult to do this, and if the gold is the only thing really going up (maybe stocks by a much smaller measure), you'll sell out at least a couple times before the gravity of the situation is really grasped. Your current allocation of 25% gold will end up being more like having 5-10% gold currently and holding all the way through. This will not make you wealthy or even close to it. Everything that is tangible will be going up in price.
Your neighbor who owns has a big mortagage, some cars, a boat, guns, extra food, ammo etc. will be a lot better off in real terms. You will be left with something though.
I'm not trying to bag on the PP, just saying it is not a solution for a really bad inflationary scenario. There is too much invested in USD bonds without regards to rates and debt levels....currently IMO.
I think it's a fine strategy for people with very short time horizons and when the fiscal position of the bond issuer is not so....precarious as it appears to me now.
There is a point where the rejection of the domestic currency is such that you really can't call it your "domestic currency" anymore. Heck, most of the reason I advocate for the U.S. PP is the U.S.'s stability in the world.
And this is assuming that gold is simply going up with CPI (assuming that's about what you mean by "in real terms." It seems we have yet to agree on what "inflation" is even a measurement of).
But a rejection of a currency is essentially going to result in the de-facto rejection of half of your PP, since the entire thing is suggested on the premise of the current financial stability of the U.S. government and monetary system.
It's not about whether gold hits $2k, $3k, or $10k, but how quickly the U.S. dollar is losing real value. If the dollar is losing value fast enough (25% per year), one might want to consider putting a pause on their rebalances.
At least I have the option.
If we have a deflationary recession harsh enough that the fed can't swap its way into inflation (CPI inflation), an inflationist's gold and stocks could get slaughtered... however, unlike me, they don't even really have an option at that point. They've made their bed.
I'm also confused... you say that what the fed's doing is jacking the prices of the stock & MT/LT bond markets. But then you say they're punishing savers. I think it's important to point out that a "saver" is just someone who doesn't spend income. They're not necessarily putting it into 1-year CD's. Many forms of savings benefit from low interest rates or inflation. So you might want to be more specific about the savers that are being punished (assuming that the fed is grossly setting interest rates too low).
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine