Golden Butterfly Portfolio

A place to talk about speculative investing ideas for the optional Variable Portfolio

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Kbg
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Re: Golden Butterfly Portfolio

Post by Kbg » Sat Jun 03, 2017 10:20 pm

I think Desert is exactly right. While the term bubble is probably overused, gold in 78-79 was absolutely bubbleiscious...way, way, way beyond any fundamental reasons.
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Re: Golden Butterfly Portfolio

Post by sophie » Sun Jun 04, 2017 8:37 am

Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.
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Re: Golden Butterfly Portfolio

Post by barrett » Sun Jun 04, 2017 1:00 pm

sophie wrote:Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.
Not to mention that the conventional 60/40 stock/bond split lost money in real terms for the 12-year period from 1970 to 1981. When financial assets like stocks and treasuries are doing poorly (because they are not keeping up with inflation), people have a tendency to buy hard assets like gold and housing. Housing prices in real terms kind of gyrated around in the 1970s but went consistently up during the years Sophie is citing above.

I totally get that the early 1970s gold data is questionable, but I believe that of the mid to late 1970s makes sense.
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sophie
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Re: Golden Butterfly Portfolio

Post by sophie » Sun Jun 04, 2017 6:16 pm

Barrett, that's a really good point: housing prices were subject to the same conditions in 1978-79 minus the history of price fixing. If they responded similarly to gold, that would be some evidence that the gold gains were not artificial.

Although, I personally can't believe that gold's fluctuations for the entire decade were all due to the effect of the previous price fixing. How do you explain the 25% drop in gold price in 1975? If 1973-4 were a gold bubble, I'd say a 25% drop is pretty effectively the end of it. That's about the same as the gold drop in 2013. I doubt anyone in 2014 was saying that gold was in a bubble.

What I'm more worried about with gold is the rise of ETFs, i.e. paper gold. It might be making gold more of a speculative than a safe haven asset. What exactly does a share in an ETF mean, if the managers can loan out a large proportion of their gold stores?
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Re: Golden Butterfly Portfolio

Post by mathjak107 » Sun Jun 04, 2017 7:13 pm

housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .
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Re: Golden Butterfly Portfolio

Post by barrett » Sun Jun 04, 2017 8:38 pm

mathjak107 wrote:housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .
Source? From everything I can find housing went up in real dollar terms in the 1970s. The biggest rise in the late 1970s corresponded pretty closely with the rise in gold.
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Re: Golden Butterfly Portfolio

Post by D1984 » Sun Jun 04, 2017 10:28 pm

barrett wrote:
mathjak107 wrote:housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .
Source? From everything I can find housing went up in real dollar terms in the 1970s. The biggest rise in the late 1970s corresponded pretty closely with the rise in gold.

http://www.econ.yale.edu/~shiller/data/Fig3-1.xls

It gives both real and nominal values for a US residential housing price index; AFAIK this is a price only index and does not include what you would've made in rental income if you had rented the housing out.

For the period that stocks lost to inflation (1966-81 or 1969-81 depending on whether you go by the Dow or S&P 500) it shows nominal non-inflation adjusted residential housing prices from 1966-1981 increased just under 200% for 66-81 (i.e. if it was worth $10K on Jan 1st 1966 it was worth a little over $29.9K in December 1981) or approximately 177.94% for 69-81 (i.e. if it was worth $10K on Jan 1st 1969 it was worth around $27.8K in December 1981).

As per the Minneapolis Fed's inflation adjusted price calculator you would have had to have $24,790 in 1981 to buy what $10,000 would have bought in 1969; you would have had to have $28,000 in 1981 to buy what $10,000 would have bought in 1966. So it looks like for the whole late 60s to early 80s inflationary period residential housing beat inflation, albeit only slightly.

Now, for the 1978 to 1981 Volcker rate shock period, housing (as per Shiller's document referenced above), actually did slightly worse than inflation overall; the real inflation-adjusted value of residential housing went from approximately 113.4 at the beginning of 1978 to around 111.04 by December 1981.
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Re: Golden Butterfly Portfolio

Post by grapesofwrath » Mon Jun 05, 2017 5:44 am

Desert wrote:I do like the 40 percent equity though, and am slowly building up from 30% to 40%.
You feel comfortable increasing your equity exposure at a time when US stocks are "richly" valued ?
I'm well below 30% and would like to increase towards 40% but am reluctant to do so now and wish to wait for a "mean reversion". Of course I could be waiting a long time as US stocks could be on a permanently high plateau.
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Re: Golden Butterfly Portfolio

Post by barrett » Mon Jun 05, 2017 6:22 am

D1984 wrote:
barrett wrote:
mathjak107 wrote:housing prices fell during the high inflation high interest rate years and did not recover until rates and inflation starting falling .
Source? From everything I can find housing went up in real dollar terms in the 1970s. The biggest rise in the late 1970s corresponded pretty closely with the rise in gold.

http://www.econ.yale.edu/~shiller/data/Fig3-1.xls

It gives both real and nominal values for a US residential housing price index; AFAIK this is a price only index and does not include what you would've made in rental income if you had rented the housing out.

For the period that stocks lost to inflation (1966-81 or 1969-81 depending on whether you go by the Dow or S&P 500) it shows nominal non-inflation adjusted residential housing prices from 1966-1981 increased just under 200% for 66-81 (i.e. if it was worth $10K on Jan 1st 1966 it was worth a little over $29.9K in December 1981) or approximately 177.94% for 69-81 (i.e. if it was worth $10K on Jan 1st 1969 it was worth around $27.8K in December 1981).

As per the Minneapolis Fed's inflation adjusted price calculator you would have had to have $24,790 in 1981 to buy what $10,000 would have bought in 1969; you would have had to have $28,000 in 1981 to buy what $10,000 would have bought in 1966. So it looks like for the whole late 60s to early 80s inflationary period residential housing beat inflation, albeit only slightly.

Now, for the 1978 to 1981 Volcker rate shock period, housing (as per Shiller's document referenced above), actually did slightly worse than inflation overall; the real inflation-adjusted value of residential housing went from approximately 113.4 at the beginning of 1978 to around 111.04 by December 1981.
Here is one of the charts that I was looking at (this is inflation adjusted data as well):

https://inflationdata.com/articles/wp-c ... ousing.gif

I'll keep looking for better links but note that housing started to come down in real dollar terms in 1980 and continued to drop in 1981. 1981, as we all know, was a bad time to own just about anything. I believe T-Bills or money market funds were the relative "winners" that year.
sophie wrote:Barrett, that's a really good point: housing prices were subject to the same conditions in 1978-79 minus the history of price fixing. If they responded similarly to gold, that would be some evidence that the gold gains were not artificial.

Although, I personally can't believe that gold's fluctuations for the entire decade were all due to the effect of the previous price fixing. How do you explain the 25% drop in gold price in 1975? If 1973-4 were a gold bubble, I'd say a 25% drop is pretty effectively the end of it. That's about the same as the gold drop in 2013. I doubt anyone in 2014 was saying that gold was in a bubble.
Sophie, also notice that the gold drop you are referring to corresponded with stocks shooting up. This gets back to Tyler's main point about gold... that it is largely uncorrelated with stocks.
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Re: Golden Butterfly Portfolio

Post by Kbg » Mon Jun 05, 2017 10:31 pm

sophie wrote:Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.
Seriously...you don't think 1978-Jan 1980 wasn't a speculative bubble? I may give you 1978, but no way after that. Pretty much the definition of a bubble is up 400% in a year (79) and down by half the following year (80). Going near vertical in 2 months on a price chart is a pretty good tell as well.
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Re: Golden Butterfly Portfolio

Post by sophie » Tue Jun 06, 2017 7:05 am

Kbg wrote:
sophie wrote:Why couldn't there have been fundamental reasons?

In 1978, US inflation (December -> December CPI) was 9% (average 7.6%). The 3 month Treasury bill was paying 6-7%. In 1979, inflation went up to 13% by CPI (average 11%). The 3 month Treasury bill in that year spent most of the year at 9%, and went up to 12% by the end of the year. At the time, several European countries had much lower inflation rates.

That sounds to me like the exact scenario (rising inflation to > 10% with cash interest slow to catch up) that would cause investors to switch from buying Treasuries to gold. You're forgetting also that while gold may have been controlled in the US earlier in the decade, it was not in many other countries, and they collectively have a lot of power to influence the gold price with investment choices. The US was big at the time, but most certainly not the only player in the world gold market.
Seriously...you don't think 1978-Jan 1980 wasn't a speculative bubble? I may give you 1978, but no way after that. Pretty much the definition of a bubble is up 400% in a year (79) and down by half the following year (80). Going near vertical in 2 months on a price chart is a pretty good tell as well.
Nope. Why would a bubble be defined purely from price movements, ignoring the conditions that may have triggered it? And still less, why do you attribute the gold gains in this period to something that happened almost a decade earlier? There was a lot going on in 1980 that I don't have time to research at the moment - maybe you should?

Gold and treasuries rose after the 2008 financial shock as well. Treasuries rose ~30% in a very short time in 2008. Was that a "speculative bubble", or a logical result of what was going on in the markets at the time? Regardless of the term you use, those events are precisely why you hold gold and treasuries. People holding PP's in 2008 were calmly rebalancing and reaping the gains from these drastic price movements, while everyone else was in shock at watching their retirement account balances almost cut in half. I'm HAPPY to know that gold can move that fast in the right conditions. That's the whole point of owning it as part of a balanced portfolio.
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Re: Golden Butterfly Portfolio

Post by barrett » Tue Jun 06, 2017 7:47 am

Here's a good chart in nominal dollars (sorry about that!) so we know what we are debating:

http://goldprice.org/gold-price-chart.html

One of the things I remember about that time in late 1979/early 1980 is that the Hunt Brothers were attempting to corner the silver market. When they got over-leveraged, it caused a panic sell-off in silver that had a spillover effect into other commodities.

This link is not bad:

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

I look at that spillover as pretty much the same thing that happens when the stock market gets slammed. Good companies are dragged down with the bad.

It's interesting to note that gold settled into a less crazy trading range through, say, the middle of the 1990s, and it did so at a price that was way above the value at the time of de-pegging. Maybe its price was in fact bubbly in 1979 but Sophie is right that that time was crazy. Among other things, cash yields were sky high.

Because of where gold "settled" after Volcker got the markets calmed down, I'm going to speculate that gold was really only in a bubble in very late 1979 to early 1980. Ditto for, say 2011 to early 2013.

Obviously we all have the benefit of hindsight now but another thing I remember about late 1979/early 1980 is that everyone was talking about the price of gold. Kind of like stocks in the late 1990s and housing in the middle of the aughts.
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