Question for Melveyr

[barrett]

Please keep in mind that I am personally more comfortable having a portfolio that consists of traditional asset classes, so that makes my portfolio more susceptible to the extreme inflation tail risks. A gold heavy portfolio is likely to be the best portfolio in an extreme inflation. I just don't like having a large amount of capital tied up in something that is such a small part of the global portfolio. The gold market is around $6 trillion in size whereas the size of the global equity and bond markets is closer to $300 trillion.

I am really not trying to give advice. Please just interpret this as what I am doing, not what you should. Every portfolio that generates decent returns takes risks and you have to make sure that it is aligned with your psychology. The PP is not aligned with mine so I stopped using it.

Hey Ryan,

OK, so the gold market is relatively small compared to bond and equity markets. Why does that matter? Couldn't an argument be made that if investors really started to move into gold, there is potential for a big upside move based on the respective sizes of these markets?

[Libertarian666]

Please keep in mind that I am personally more comfortable having a portfolio that consists of traditional asset classes, so that makes my portfolio more susceptible to the extreme inflation tail risks. A gold heavy portfolio is likely to be the best portfolio in an extreme inflation. I just don't like having a large amount of capital tied up in something that is such a small part of the global portfolio. The gold market is around $6 trillion in size whereas the size of the global equity and bond markets is closer to $300 trillion.

I am really not trying to give advice. Please just interpret this as what I am doing, not what you should. Every portfolio that generates decent returns takes risks and you have to make sure that it is aligned with your psychology. The PP is not aligned with mine so I stopped using it.

Hey Ryan,

OK, so the gold market is relatively small compared to bond and equity markets. Why does that matter? Couldn't an argument be made that if investors really started to move into gold, there is potential for a big upside move based on the respective sizes of these markets?

Yes, that is a consideration. There's also the fact that, as HB pointed out, unlike other markets, most holders of gold generally have similar reasons for holding it, namely as insurance against investment chaos, which becomes more valuable as a crisis erupts. Thus, to get an existing holder to let go of some of his gold in a crisis may require a much higher price than before the crisis.

[sophie]

Thanks for the LLC suggestion tech!  Yes I'm academic but have a (limited) practice, plus there are risks associated with engaging in clinical research.

I don't think the size of the gold market matters either.  If it were large relative to the stock market, gold wouldn't be nearly as valuable.  It has to remain in limited supply for the PP to work.

[cnh]

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.

[Libertarian666]

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.

[Austen Heller]

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 Heller]

Austen, is 'bonds' in your example LTT, ITT or total bond market?

Bonds = Long-Term Treasuries

[stuper1]

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.

[Libertarian666]

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.

[BearBones]

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?

[ochotona]

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?

[Libertarian666]

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.

[Kriegsspiel]

Blackbox

If, in the past, a portfolio has returned 4% real returns, when a bunch of varied and crazy shit has happened, who cares what the individual components are? Don't the results speak for themselves?

/Blackbox

[buddtholomew]

Blackbox

If, in the past, a portfolio has returned 4% real returns, when a bunch of varied and crazy shit has happened, who cares what the individual components are? Don't the results speak for themselves?

/Blackbox

+1, the PP is a package.
Interesting that we continue to look for alternatives with the portfolio performing so well YTD.
After 5+ years, my appreciation for its design has only strengthened.

[vnatale]

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.

I do remember reading what Bernstein wrote in his book "Deep Risk" regarding gold. And, at the time, it caused me to write off gold an investment. Good response, though, from stuper1 here.

Vinny

[GT]

Blackbox

If, in the past, a portfolio has returned 4% real returns, when a bunch of varied and crazy shit has happened, who cares what the individual components are? Don't the results speak for themselves?

/Blackbox

+1, the PP is a package.
Interesting that we continue to look for alternatives with the portfolio performing so well YTD.
After 5+ years, my appreciation for its design has only strengthened.

Did Budd really say the above back in the day?

[Kriegsspiel]

He would say it periodically. budd was very high amplitude.

[pmward]

I wonder if Budd wound up selling those gold and long treasuries he loathed so much? If so he literally would have capitulated right at the bottom. LTT's and gold have basically out performed stocks pretty much since the very day he went on that tirade and was booted. Maybe we all owe Budd a debt of gratitude for causing gold and LTT's to go up???

[stuper1]

The guy had $13M and still wasn't happy. I owe him a debt of gratitude for reminding me that money doesn't buy happiness.

I wonder if he was any happier when that $13M was substantially less about a month ago?

[mathjak107]

The guy had $13M and still wasn't happy. I owe him a debt of gratitude for reminding me that money doesn't buy happiness.

I wonder if he was any happier when that $13M was substantially less about a month ago?

Money rarely buys happiness ..but what it does buy in life is choices many times ....I learned very early on about the importance of having choices in life

[stuper1]

Yes, and once a person's basic needs are met, which doesn't cost a whole lot at least in our society, then happiness becomes a choice. At least for a lot of people. There are exceptions perhaps for people who had truly bad parents or circumstances. I do believe that a lot of people who aren't very happy could change that simply by choosing to look at things in a different perspective.

But there's nothing wrong with having some money to have even more choices in life.

[pmward]

The guy had $13M and still wasn't happy. I owe him a debt of gratitude for reminding me that money doesn't buy happiness.

I wonder if he was any happier when that $13M was substantially less about a month ago?

Money rarely buys happiness ..but what it does buy in life is choices many times ....I learned very early on about the importance of having choices in life

I couldn't agree more.

[mathjak107]

The guy had $13M and still wasn't happy. I owe him a debt of gratitude for reminding me that money doesn't buy happiness.

I wonder if he was any happier when that $13M was substantially less about a month ago?

Money rarely buys happiness ..but what it does buy in life is choices many times ....I learned very early on about the importance of having choices in life

I couldn't agree more.

two things stuck with me my entire life as my entire motivation .

first was i grew up pretty poor in a new york city housing project ... i promised myself never to ever go back or raise my family in one .

the 2nd thing was i learned how important having money for choices was ...

i didn't hang out with the best of crowds in those days .. so i hung with a bunch of guys that were always up to no good ...

well one night they decided to do something that myself and another guy wanted no part of so we didn't go ..

my friend though ended up being arrested days later .... he was being accused of doing something he never did ... i knew he was innocent because he was with me . but he couldn't afford a lawyer and his parents were just over the limit for legal aid ...

HE WAS GOING TO PLEAD GUILTY to a crime he never did ... he felt he had no choices since he could not get a lawyer .....

the thought that he had to plead guilty to something he didnt do blew me away .... i never ever wanted to be in a position of no choice .

at the last minute a relative came to his aid and he got a lawyer and was found innocent ...

this served as a life long lesson and motivated me every day to stay not only out of the projects but to always have enough to have choices within reason that i could afford

[dualstow]

I wonder if Budd wound up selling those gold and long treasuries he loathed so much? If so he literally would have capitulated right at the bottom. LTT's and gold have basically out performed stocks pretty much since the very day he went on that tirade and was booted. Maybe we all owe Budd a debt of gratitude for causing gold and LTT's to go up???

I think Budd sold his gold. I remember him feeling relieved by the sale. Not sure if he held onto his bonds.

[Smith1776]

I think Budd sold his gold. I remember him feeling relieved by the sale. Not sure if he held onto his bonds.

Budd was an interesting character. Most people who hate the PP or whatever portfolio just make an adjustment and move on.

He was an odd case where he seemed so displeased with the PP (especially gold), but couldn't help but hold assets he hated and continued posting on this forum. Why stay? Why not just move on if this whole community and its philosophy upsets you so much? Why bother going through all the drama of asking to be banned?

Strange.