Question for Melveyr

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technovelist
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Re: Question for Melveyr

Post by technovelist » Sat Feb 20, 2016 11:10 am

cnh wrote: The discussion of gold as an inflation hedge in this thread--and more generally in this forum and the crawlingroad blog--is interesting in light of some research published in recent years. For example, citing analysis by research firm Ibbotson Associates, the Wall Street Journal published an article (http://www.wsj.com/articles/SB100014240 ... #printMode) questioning the effectiveness of gold as an inflation hedge. And I suspect at least some here must be familiar with the 2013 NBER Working Paper (http://www.nber.org/papers/w18706) in which Erb and Harvey find that "gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge." There's more research on the topic.

Do many here dispute such findings?

My confidence in gold as an inflation hedge has diminished. Along with treasuries, it seems to have more significance when the "flight to safety" phenomenon dominates the markets.
I think it is very amusing that when I read market commentary, the commenters seem to switch between "gold is a safe haven" and "gold is a risk asset" based on what has just happened in the markets.

Which is just another example of how, as HB said a long time ago, market commentary is basically useless except as entertainment.
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Re: Question for Melveyr

Post by Austen Heller » Sat Feb 20, 2016 12:13 pm

cnh wrote: The discussion of gold as an inflation hedge in this thread--and more generally in this forum and the crawlingroad blog--is interesting in light of some research published in recent years. For example, citing analysis by research firm Ibbotson Associates, the Wall Street Journal published an article (http://www.wsj.com/articles/SB100014240 ... #printMode) questioning the effectiveness of gold as an inflation hedge. And I suspect at least some here must be familiar with the 2013 NBER Working Paper (http://www.nber.org/papers/w18706) in which Erb and Harvey find that "gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge." There's more research on the topic.

Do many here dispute such findings?

My confidence in gold as an inflation hedge has diminished. Along with treasuries, it seems to have more significance when the "flight to safety" phenomenon dominates the markets.
Bill Bernstein's book "Deep Risk", addresses your issue about gold.  We talked about it here:

http://gyroscopicinvesting.com/forum/pe ... /#msg83163

My conclusion from Deep Risk was that gold doesn't really respond very well to inflation.  It's not even that great of a diversifier; from 1976-2013, Bernstein finds that the normal 4x25 PP had an average return of 8.66% with a SD of 7.92%.  You can get the same return with an even lower SD using the portfolio 29% stocks : 35.5% bonds : 35.5% cash ("Deep Risk", pg.16).  However, gold still has useful roles, as a form of portfolio insurance, a safe-haven, and an alternative currency for holders of US dollars.
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Re: Question for Melveyr

Post by pugchief » Sat Feb 20, 2016 12:22 pm

Austen Heller wrote:
cnh wrote: The discussion of gold as an inflation hedge in this thread--and more generally in this forum and the crawlingroad blog--is interesting in light of some research published in recent years. For example, citing analysis by research firm Ibbotson Associates, the Wall Street Journal published an article (http://www.wsj.com/articles/SB100014240 ... #printMode) questioning the effectiveness of gold as an inflation hedge. And I suspect at least some here must be familiar with the 2013 NBER Working Paper (http://www.nber.org/papers/w18706) in which Erb and Harvey find that "gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge." There's more research on the topic.

Do many here dispute such findings?

My confidence in gold as an inflation hedge has diminished. Along with treasuries, it seems to have more significance when the "flight to safety" phenomenon dominates the markets.
Bill Bernstein's book "Deep Risk", addresses your issue about gold.  We talked about it here:

http://gyroscopicinvesting.com/forum/pe ... /#msg83163

My conclusion from Deep Risk was that gold doesn't really respond very well to inflation.  It's not even that great of a diversifier; from 1976-2013, Bernstein finds that the normal 4x25 PP had an average return of 8.66% with a SD of 7.92%.  You can get the same return with an even lower SD using the portfolio 29% stocks : 35.5% bonds : 35.5% cash ("Deep Risk", pg.16).  However, gold still has useful roles, as a form of portfolio insurance, a safe-haven, and an alternative currency for holders of US dollars.
Austen, is 'bonds' in your example LTT, ITT or total bond market?
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Re: Question for Melveyr

Post by Austen Heller » Sat Feb 20, 2016 12:36 pm

pugchief wrote: Austen, is 'bonds' in your example LTT, ITT or total bond market?
Bonds = Long-Term Treasuries
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Re: Question for Melveyr

Post by stuper1 » Sat Feb 20, 2016 6:21 pm

Austen Heller wrote: Bill Bernstein's book "Deep Risk", addresses your issue about gold.  We talked about it here:

http://gyroscopicinvesting.com/forum/pe ... /#msg83163

My conclusion from Deep Risk was that gold doesn't really respond very well to inflation.  It's not even that great of a diversifier; from 1976-2013, Bernstein finds that the normal 4x25 PP had an average return of 8.66% with a SD of 7.92%.  You can get the same return with an even lower SD using the portfolio 29% stocks : 35.5% bonds : 35.5% cash ("Deep Risk", pg.16).  However, gold still has useful roles, as a form of portfolio insurance, a safe-haven, and an alternative currency for holders of US dollars.
I agree that gold doesn't necessarily respond well to inflation.  However, as a diversifier, I think gold definitely serves an important purpose.  The retirement withdrawal calculator at portfoliocharts.com shows that your 29/35.5/35.5 portfolio could support a safe withdrawal rate of 2.8 to 3.7%.  The 4x25 can support a SWR of 3.9 to 4.8%.  This means that with gold in your portfolio, you can live about 33% richer in retirement, which seems quite significant.
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Re: Question for Melveyr

Post by Desert » Sat Feb 20, 2016 7:07 pm

Austen Heller wrote:
cnh wrote: The discussion of gold as an inflation hedge in this thread--and more generally in this forum and the crawlingroad blog--is interesting in light of some research published in recent years. For example, citing analysis by research firm Ibbotson Associates, the Wall Street Journal published an article (http://www.wsj.com/articles/SB100014240 ... #printMode) questioning the effectiveness of gold as an inflation hedge. And I suspect at least some here must be familiar with the 2013 NBER Working Paper (http://www.nber.org/papers/w18706) in which Erb and Harvey find that "gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge." There's more research on the topic.

Do many here dispute such findings?

My confidence in gold as an inflation hedge has diminished. Along with treasuries, it seems to have more significance when the "flight to safety" phenomenon dominates the markets.
Bill Bernstein's book "Deep Risk", addresses your issue about gold.  We talked about it here:

http://gyroscopicinvesting.com/forum/pe ... /#msg83163

My conclusion from Deep Risk was that gold doesn't really respond very well to inflation.  It's not even that great of a diversifier; from 1976-2013, Bernstein finds that the normal 4x25 PP had an average return of 8.66% with a SD of 7.92%.  You can get the same return with an even lower SD using the portfolio 29% stocks : 35.5% bonds : 35.5% cash ("Deep Risk", pg.16).  However, gold still has useful roles, as a form of portfolio insurance, a safe-haven, and an alternative currency for holders of US dollars.
The start date is all important, when discussing gold back-testing.  Gold proponents see high inflation and large gold returns in the 70's, but it's not clear that inflation drove those returns.  Eliminating the gold/dollar peg in 1972 was a huge event for gold, one we'll never see again.  Much of the 70's gold return can be interpreted as a kind of reset, after being controlled for so long.  And of course one couldn't legally own gold in the U.S. until 1975. 

I still like a bit of gold as insurance, and it appears that allocations up to about 10% haven't harmed returns over the past 30-40 years.  If the apocalypse does occur, even a 10% allocation to physical gold will make one richer than all one's starving friends. 
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
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Re: Question for Melveyr

Post by technovelist » Sat Feb 20, 2016 7:22 pm

Desert wrote:
Austen Heller wrote:
cnh wrote: The discussion of gold as an inflation hedge in this thread--and more generally in this forum and the crawlingroad blog--is interesting in light of some research published in recent years. For example, citing analysis by research firm Ibbotson Associates, the Wall Street Journal published an article (http://www.wsj.com/articles/SB100014240 ... #printMode) questioning the effectiveness of gold as an inflation hedge. And I suspect at least some here must be familiar with the 2013 NBER Working Paper (http://www.nber.org/papers/w18706) in which Erb and Harvey find that "gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge." There's more research on the topic.

Do many here dispute such findings?

My confidence in gold as an inflation hedge has diminished. Along with treasuries, it seems to have more significance when the "flight to safety" phenomenon dominates the markets.
Bill Bernstein's book "Deep Risk", addresses your issue about gold.  We talked about it here:

http://gyroscopicinvesting.com/forum/pe ... /#msg83163

My conclusion from Deep Risk was that gold doesn't really respond very well to inflation.  It's not even that great of a diversifier; from 1976-2013, Bernstein finds that the normal 4x25 PP had an average return of 8.66% with a SD of 7.92%.  You can get the same return with an even lower SD using the portfolio 29% stocks : 35.5% bonds : 35.5% cash ("Deep Risk", pg.16).  However, gold still has useful roles, as a form of portfolio insurance, a safe-haven, and an alternative currency for holders of US dollars.
The start date is all important, when discussing gold back-testing.  Gold proponents see high inflation and large gold returns in the 70's, but it's not clear that inflation drove those returns.  Eliminating the gold/dollar peg in 1972 was a huge event for gold, one we'll never see again.  Much of the 70's gold return can be interpreted as a kind of reset, after being controlled for so long.  And of course one couldn't legally own gold in the U.S. until 1975. 

I still like a bit of gold as insurance, and it appears that allocations up to about 10% haven't harmed returns over the past 30-40 years.  If the apocalypse does occur, even a 10% allocation to physical gold will make one richer than all one's starving friends.
It's true that we'll never again see the US government default on its obligation to pay gold in exchange for "US dollars", as they have already done that.

But what we will see one of these days is the refusal of anyone (other than possibly the US government) to accept the "US dollar" in payment for anything. The effects of that should be at least as interesting as the default in the 1970's, at least for people holding "US dollars", and probably for anyone else with significant assets as well.
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Re: Question for Melveyr

Post by Desert » Sat Feb 20, 2016 7:27 pm

technovelist wrote: It's true that we'll never again see the US government default on its obligation to pay gold in exchange for "US dollars", as they have already done that.

But what we will see one of these days is the refusal of anyone (other than possibly the US government) to accept the "US dollar" in payment for anything. The effects of that should be at least as interesting as the default in the 1970's, at least for people holding "US dollars", and probably for anyone else with significant assets as well.
I'm not a doomer, but I don't completely discount the possibility of such a scenario.  If that scenario did unfold, the whole world would change.  In addition to gold, there would be some other things one would want to do to prepare. 
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
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Re: Question for Melveyr

Post by BearBones » Sat Feb 20, 2016 9:35 pm

Desert wrote: I still like a bit of gold as insurance, and it appears that allocations up to about 10% haven't harmed returns over the past 30-40 years.  If the apocalypse does occur, even a 10% allocation to physical gold will make one richer than all one's starving friends.
Are you still favoring your 60/30/10 over others, Desert?
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Re: Question for Melveyr

Post by ochotona » Sat Feb 20, 2016 9:48 pm

Desert wrote: I still like a bit of gold as insurance, and it appears that allocations up to about 10% haven't harmed returns over the past 30-40 years.  If the apocalypse does occur, even a 10% allocation to physical gold will make one richer than all one's starving friends.
Weird things can and do happen. They happened to my parents. They could happen to me. Some insurance is a good idea. The questions - how much, and what price per unit to pay?
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Re: Question for Melveyr

Post by Desert » Sat Feb 20, 2016 9:52 pm

BearBones wrote:
Desert wrote: I still like a bit of gold as insurance, and it appears that allocations up to about 10% haven't harmed returns over the past 30-40 years.  If the apocalypse does occur, even a 10% allocation to physical gold will make one richer than all one's starving friends.
Are you still favoring your 60/30/10 over others, Desert?
Yes, I am, for my own portfolio.  I still have great appreciation for the HBPP, and I think it's a decent portfolio.  But I think that the 70's gold returns have unrealistically skewed expectations for future returns of this portfolio. 

My general view is that most investors in the U.S. are advised to hold a portfolio with more risk than they are capable of dealing with.  And I don't think that risk is merely volatility.  So my starting point for portfolio design is something less stock-heavy than the traditional 50/50 portfolio.  I think 30/70 better serves the average investor.  But I appreciate gold.  I'm not a doomer or a gold bug, but I do appreciate the diversification and insurance that an allocation to gold provides.  In back-testing, I can see that a 10 percent allocation to gold doesn't significantly degrade the performance of a 30/70 portfolio.  And that's good enough for me; if I can add a 10 percent slice of gold to my portfolio without materially sacrificing returns, that's a great trade-off.  I gain a bit of diversification in "normal" times, and an insurance policy in the worst of times.  Finally, I personally find a 10 percent holding in physical gold to be about the upper limit to what I want to deal with.  And I strongly prefer to hold gold in physical form.  If/when we really need the gold, we'll want it in physical form, not in digits on a screen. 
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
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Re: Question for Melveyr

Post by technovelist » Sat Feb 20, 2016 10:58 pm

Desert wrote:
technovelist wrote: It's true that we'll never again see the US government default on its obligation to pay gold in exchange for "US dollars", as they have already done that.

But what we will see one of these days is the refusal of anyone (other than possibly the US government) to accept the "US dollar" in payment for anything. The effects of that should be at least as interesting as the default in the 1970's, at least for people holding "US dollars", and probably for anyone else with significant assets as well.
I'm not a doomer, but I don't completely discount the possibility of such a scenario.  If that scenario did unfold, the whole world would change.  In addition to gold, there would be some other things one would want to do to prepare.
Yes, probably the most important of which is to have somewhere else to go and a way to go there.
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