The value of physical gold

[Cortopassi]

I'm sure many have heard -- Chinese market has now banned selling of stocks by insiders with 5% or more ownership (or something like that)  and

"The New York Stock Exchange (NYSE) has halted trading today, leaving investors unable to buy and sell securities.

A technical issue has triggered a system-wide halt, officials said, and all open orders will be canceled.

"We're currently experiencing a technical issue that we’re working to resolve as quickly as possible," a spokeswoman for the NYSE said in a statement. "We will be providing further updates as soon as we can, and are doing our utmost to produce a swift resolution, communicate thoroughly and transparently, and ensure a timely and orderly market re-open."

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Sure, these are all one off events and won't cascade into anything too bad, right....

25% gold feels pretty safe right about now.

[barrett]

Sure, these are all one off events and won't cascade into anything too bad, right....

25% gold feels pretty safe right about now.

I find myself questioning if 25% might be too high but I thought I'd share this Ray Dalio clip for those who haven't seen it:

http://www.zerohedge.com/news/2015-05-1 ... -economics

The clip is only a couple of minutes long. RD seems to consistently come up with figures between 7.5% and 10% for gold ownership. His basic claim is that "anyone who doesn't hold some gold just doesn't understand the history of money." And I am assuming that he means physical gold.

Another thing that Harry Browne was really clear about in one of his radio shows was that the USD was the world's #1 reserve currency and gold was number #2. His assertion was that it's only events that threaten the USD's status that move the price of gold way up. I think in the real world these "events" mostly come down to severe inflation (I believe the figure HB gave was about 6% or higher), or the perceived threat of severe inflation.

HB made also made it very clear that a common misconception that people have about gold is that they expect geopolitical events in and of themselves to spark a gold rally. They may in fact do so but only if they somehow threaten the USD.

[mathjak107]

Severe inflation may be about then only thing that moves gold . today there are to many other options from buying foreign currancy' to options , short selling and funds that bet against the market.

unless we saw an Armageddon  type scenario gold may not even be the benefactor of hyper inflation anymore . it's day may have come and gone  for that.

[barrett]

Desert, you may be correct but I don't think a more than seven fold increase in price between 2002 and 2011 should be thought of as random.

I always come back to not investing in something that I don't understand. In order to justify holding gold, I therefore need at least a belief that I know what was behind that run up. I think there were a lot of factors that were contributing to people not having as much faith in the USD. A very big one was a fear that money printing would lead to a lot of inflation. In fact it didn't, but I think that fear at least contributed to a lot of the rise, say, from 2009 to 2011.

Again, it's any threat to the USD that causes gold to rise. At least that is the premise that I am going by.

[Stewardship]

Phew!  As a contrarian investor, judging by the prevailing sentiment as demonstrated in this forum, I suspect that a rise in gold is just around the corner and now is a good time to buy.

[mathjak107]

i think i still have some gold bug newsletters  from decades  ago.  they said the same thing .

[Stewardship]

i think i still have some gold bug newsletters  from decades  ago.  they said the same thing .

Can you send me a copy?  I'd like to put today's date on it.

[Reub]

Phew!  As a contrarian investor, judging by the prevailing sentiment as demonstrated in this forum, I suspect that a rise in gold is just around the corner and now is a good time to buy.

I hope that you're right. If bonds and stocks are both as overvalued as it seems gold may be our saving grace in the near future.

[koekebakker]

Holding physical gold is pretty hard for me as well. But whenever I feel like selling it I think about the feeling of not having any gold at all, and I end up not selling anything  .

I'll probably never like gold but I do believe it has a few benefits: low/no correlation and the idea of owning a non-paper asset. It makes it easier for me to put 90% of my money in stocks and bonds knowing that 10% is 'invested' in something completely different.

25% in gold is probably too much. Given gold's volatility and expected return of 0%, I don't see any any reason to hold 25% instead of 15% or 20%.
I keep it at 10% in my permanent-couch-potato-portfolio , knowing that if gold reacts, it will react strongly, and 10% is enough for diversification benefits.

[barrett]

Yes, I agree that there are some pretty compelling reasons for gold's rise from 2008 onward.  But the rise beginning from a local minimum of ~$350 in 2001 seems strange.  But you could be right, that gold price was responding to at least a perceived weakness in the U.S. currency or economy.  But we also have to accept that it went into a big bull market for 10 years, and for many of those years equities and bonds were cranking along pretty well too.  So gold could also decline in tandem with bonds or equities. 

Also, I find it increasingly difficult to hold an asset with little to no expected real return.  Here is an inflation-adjusted gold price chart.  You can see that the 2000's bull market nearly hit the high reached back in the 1970's, 3 decades earlier.  So while there may be some opportunity for a rebalancing bonus (or decrement), I just can't see devoting 25% of my portfolio to an asset with this behavior, unless I really feel that some major calamity is approaching.  And even if it is, my 10% would dwarf the average gold allocation in the U.S. 

Yeah, your 10% would dwarf the average gold allocation just about anywhere, not just here in the US. And maybe that is good enough. In bad scenarios you just want to find yourself in a better position that most other folks, meaning that your piece of the pie is relatively larger when the dust settles.

Desert, is there any cash in The Desert Portfolio? It's 60/30/10 (10-year bonds/stocks/gold), correct?

How do you deal with big money events like sending a kid to college? I'm really just asking about anything that requires a big chunk of cash that is more than what your bonds and equities will generate in interest and dividends.

Thanks.

[barrett]

Thanks for clarifying, Desert. I only include the 529s in my calculations if I want to make myself feel better about how much money we have. It's really just "cash" that will disappear in the next few years when our daughter will be in college.

So on the gold question (physical or paper), I find myself drifting toward a preference for less than 25% but that might just be because of recency bias with regard to poor performance.

[Cortopassi]

After reading bits and pieces of Craig's book again to counteract the doubts seeded in my mind by mathjak (no offense), you run across stuff like Greece:

https://market-ticker.org/akcs-www?singlepost=3382685

One of the preconditions imposed on Greece for a deal is that it signs into law European rules that would put euro zone authorities at the ECB and in Brussels, rather than Athens, in charge of identifying and closing or breaking up sick banks.

This in turn could lead to a shake-up of the sector that could see some banks close, with losses pushed onto bondholders and possibly even large depositors. In such circumstances, there would be little that Athens could do to prevent this.

Can't happen in the US, right?  Sure....

These thoughts are far out there, but we've all probably heard discussions of nationalizing 401k/retirement accounts "for the retirement safety of the people/country."  I also at times wonder, all those portfolios we hold, so much of them are simply ones and zeros on a machine somewhere.  Certainly backed up, but hackable/deletable, with what recourse?

Physical gold will always be a strong component for me.

[Pointedstick]

Reserve currency issuer vs non-reserve currency user; it's not really applicable until and unless the dollar is dropped as the world's reserve currency. That said, nothing's impossible, especially where congress is concerned. Eventually they might try it even if it wouldn't make any sense.

[dutchtraffic]

Reserve currency issuer vs non-reserve currency user; it's not really applicable until and unless the dollar is dropped as the world's reserve currency. That said, nothing's impossible, especially where congress is concerned. Eventually they might try it even if it wouldn't make any sense.

Every fiat currency dies, none have ever survived, and the USD is way overdue.

[barrett]

Every fiat currency dies, none have ever survived, and the USD is way overdue.

I don't believe the USD is going to be around forever, but what is really putting it in jeopardy say in the next ten or 20 years? Certainly not the Euro. And I'll believe in the Renminbi is for real when I see it being used widely outside of China.

[Pointedstick]

You don't have to outrun the bear, you just have to outrun your friend. The USD has no major competitors. The Euro's future looks uncertain. China is a corrupt oligarchy. Russia is a corrupt kleptocracy. There are no major currencies backed by strong governments to be found in South America, Africa, or South Asia. The USD may not be perfect, but with no transition plan, the world's reserve currency it will remain.

[LC475]

I always come back to not investing in something that I don't understand. In order to justify holding gold, I therefore need at least a belief that I know what was behind that run up

You don't have to understand all the thing's price movements, you just have to understand the thing itself: what it is, and why you would want it.

Nobody can really know why billions of market participants do what they do.  At least I can't.  Maybe you think you can and that belief can bring you comfort, but I personally think the comfort is an illusion.  But what I can understand is:

Gold is a rare, heavy, shiny, beautiful metal, with various unique chemical and physical properties which make it indispensable.  I can buy gold coins and have a very dense, very valuable store of wealth with an unbeatable historical track record.

Those gold coins, stored safely, will be unaffected by currency failures, wars, and other horrible disasters.  They will just sit there, safe from governmental inflation and economic turmoil.

That is what I understand about gold.  And so I hold it.  And that's good enough for me.  I don't have to know why it went up in price in the 2000s.

[Stewardship]

These thoughts are far out there, but we've all probably heard discussions of nationalizing 401k/retirement accounts "for the retirement safety of the people/country."  I also at times wonder, all those portfolios we hold, so much of them are simply ones and zeros on a machine somewhere.  Certainly backed up, but hackable/deletable, with what recourse?

Physical gold will always be a strong component for me.

I'm with you (see my sig.)  People seem to think that since the metal itself doesn't change or produce anything, then it must have a constant long-term value.  But gold is only one side of the equation; the world is changing at an ever-increasing rate.

I don't have to know why it went up in price in the 2000s.

The world changed in the 2000s.

[Cortopassi]

I have a good long term relationship with holding gold.  I have zero qualms about holding it and passing it to my children.

However, I absolutely hate the short term gyrations.  I am convinced it will fall further all the time.  I am convinced that every event that should cause it to rise causes the opposite.  I am convinced that on days it goes up it will be followed by 5 days down.  But I cannot stop watching it.  I watch a lot less now, but it still bothers me more to see gold down 1% vs. the stock or bond markets down 1%.

*IF* it is manipulated, they are excellent at psychological torture!

BTW, I would have the same comments with my silver holdings.  It's supposed to be a more industrial metal and more indicative of how the economy is doing.  If you use silver and copper to determine how things are going economically, I guess we are in the toilet.

There are too many contradictory indicators and wordsmithing for everything said, it is all very tiresome at times.

[Stewardship]

I have a good long term relationship with holding gold.  I have zero qualms about holding it and passing it to my children.

However, I absolutely hate the short term gyrations.  I am convinced it will fall further all the time.  I am convinced that every event that should cause it to rise causes the opposite.  I am convinced that on days it goes up it will be followed by 5 days down.  But I cannot stop watching it.  I watch a lot less now, but it still bothers me more to see gold down 1% vs. the stock or bond markets down 1%.

I like the gyrations.  They excite me.  They remind me that I have market exposure as opposed to just being a consumer.  I'm also confident that the PP strategy will protect me from significant losses.

I'm still pretty early in the accumulation phase so maybe I'll feel differently when my assets can't be replaced by just working a bit harder for a few years.

[MachineGhost]

You don't have to outrun the bear, you just have to outrun your friend. The USD has no major competitors. The Euro's future looks uncertain. China is a corrupt oligarchy. Russia is a corrupt kleptocracy. There are no major currencies backed by strong governments to be found in South America, Africa, or South Asia. The USD may not be perfect, but with no transition plan, the world's reserve currency it will remain.

The U.S. may not have a transition plan per se, but believe you me, the IMF sure does.

[MachineGhost]

Real assets don't gyrate; only the money it is measured against does. 

[mathjak107]

you can see that here , as they show you how much of gold's change is due to the dollar .

click on did gold really go down xxxxxxx



http://www.kitco.com/market/

[Bean]

Real assets don't gyrate; only the money it is measured against does. 

^ This, well said MachineGhost

[Libertarian666]

What, no reaction to the gold spike this morning? Since the stock market isn't exactly doing well at the moment, that should help people with the standard PP...