Larry Swedroe's take on gold

Discussion of the Gold portion of the Permanent Portfolio

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ppbob
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Larry Swedroe's take on gold

Postby ppbob » Sun Mar 19, 2017 12:22 pm

His article:
http://www.etf.com/sections/index-investor-corner/swedroe-dont-be-distracted-golds-glitter
See also the discussion on Bogleheads (also some discussion of the permanent portfolio on the thread)
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=214011&newpost=3288702

The article was anti-gold biased. Here is a typical quote from the Swedroe article:
On Jan. 21, 1980, the price of gold reached a then-record high of $850. On March 19, 2002, gold was trading at $293, well below where it was 20 years earlier. Note that the inflation rate for the period 1980 through 2001 was 3.9%. Thus, gold’s loss in real purchasing power was about 85%. How can gold be an inflation hedge when, over the course of 22 years, it loses 85% in real terms?


Of course, this is major cherry-picking of intervals. I could just as easily write:
In 1971 gold cost $35 per ounce and 9 short years later it cost $850 per ounce. That is a gain of 2430% for a compounded annual return of 35%.


The article is worthless but the comments on the Boglheads thread are more balanced. In particular, poster willthrill81's point that the historical low volatility of the permanent portfolio is useful for people in the withdrawal phase like me.
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sophie
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Re: Larry Swedroe's take on gold

Postby sophie » Sun Mar 19, 2017 12:58 pm

I think what Larry Swedroe is missing here is that gold's volatility, counterbalancing other assets like stocks, is possibly more important to why it works than the modest overall increase in price.

Which suggests that gold doesn't make sense if you're not strictly and consistently following an asset allocation strategy like the PP or its variants. In fact, it could be quite dangerous if you're playing market timing games, performance chasing, or frequently hopping between strategies. I wonder if Larry Swedroe is aware of all this and privately thinks that the average investor isn't disciplined enough to use gold properly, and that's why he advocates against it.
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mathjak107
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Re: Larry Swedroe's take on gold

Postby mathjak107 » Sun Mar 19, 2017 1:59 pm

the reality is anything pertaining to gold from the 1970's was really a mis-price both up and down . gold was subject to the perfect storm which was a sequence of events that likely will never combine and duplicate ever . so it ended up at a price that never should have happened . it is like the trading computers got whacked out during brexit trading .

popular etf's like DVY went crazy and until things sorted out DVY was down 35% while the assets it owns were only down 5% . it took a few minutes for the trade imbalance to clear before things synchronized again . yes , trades executed at that loss if you had a stop loss but that does not mean that low was a meaningful benchmark for dvy .

comparing gold at 850 to anything is meaningless since gold should never have been at that level in the first place just like DVY
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Re: Larry Swedroe's take on gold

Postby Dieter » Sun Mar 19, 2017 3:15 pm

Perhaps obvious, but an interesting part was comparing extraction price vs market price.

As long as market price is above extraction price, in the long term, prices will come down.

Aka, supply and demand.

But hadn't really thought about [edit: the specific claimed price of production. At least, for some Russian miners if I recall correctly.]

And haven't made any plan changes.
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Re: Larry Swedroe's take on gold

Postby technovelist » Mon Mar 20, 2017 11:01 am

He doesn't understand gold. In that respect, he is in a lot of company, but that doesn't make his comments valuable.
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Tyler
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Re: Larry Swedroe's take on gold

Postby Tyler » Mon Mar 20, 2017 11:25 am

I like Swedroe's insights in some areas, but he misses the boat on gold. If he would set aside his bias and take the time to run the same return distribution analysis on a portfolio containing gold that he does with his Larry Portfolio in "Reducing the Risk of Black Swans" he might sing a very different tune. Gold is a great ingredient for achieving the low-volatility portfolio goal he promotes.
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mathjak107
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Re: Larry Swedroe's take on gold

Postby mathjak107 » Mon Mar 20, 2017 12:04 pm

even i agree , in a portfolio gold kind of sets a positive real return floor most of the time allowing an easier comeback that bonds do not always provide
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Re: Larry Swedroe's take on gold

Postby technovelist » Mon Mar 20, 2017 1:20 pm

Tyler wrote:I like Swedroe's insights in some areas, but he misses the boat on gold. If he would set aside his bias and take the time to run the same return distribution analysis on a portfolio containing gold that he does with his Larry Portfolio in "Reducing the Risk of Black Swans" he might sing a very different tune. Gold is a great ingredient for achieving the low-volatility portfolio goal he promotes.


But gold isn't backed by anything!
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Desert
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Re: Larry Swedroe's take on gold

Postby Desert » Mon Mar 20, 2017 8:38 pm

Tyler wrote:I like Swedroe's insights in some areas, but he misses the boat on gold. If he would set aside his bias and take the time to run the same return distribution analysis on a portfolio containing gold that he does with his Larry Portfolio in "Reducing the Risk of Black Swans" he might sing a very different tune. Gold is a great ingredient for achieving the low-volatility portfolio goal he promotes.


I think Swedroe can't abide an asset with zero expected real returns, even if it improved a portfolio's risk-adjusted returns slightly in the past. Previously, he's recommended commodity futures as a diversifying slice, but that was in the days of contango and generally postive real CCF returns.
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Desert
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Re: Larry Swedroe's take on gold

Postby Desert » Mon Mar 20, 2017 8:42 pm

technovelist wrote:
Tyler wrote:I like Swedroe's insights in some areas, but he misses the boat on gold. If he would set aside his bias and take the time to run the same return distribution analysis on a portfolio containing gold that he does with his Larry Portfolio in "Reducing the Risk of Black Swans" he might sing a very different tune. Gold is a great ingredient for achieving the low-volatility portfolio goal he promotes.


But gold isn't backed by anything!


There's some truth to that statement. There is no earnings multiple, and no claim on a nation's productive capacity. It's just a shiny piece of metal that one hopes will retain its value.

But heaven's streets aren't paved with stock certificates.
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Tyler
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Re: Larry Swedroe's take on gold

Postby Tyler » Mon Mar 20, 2017 8:52 pm

Desert wrote:I think Swedroe can't abide an asset with zero expected real returns, even if it improved a portfolio's risk-adjusted returns slightly in the past.


Yeah, he definitely talks about expected returns quite a bit. Occasionally to the point of completely misusing them, IHMO. Maybe that filter clouds his judgment.

I just find it interesting when someone who spends so much time thinking about asset allocation writes a hit piece about a single asset while ignoring its measurable impact on portfolios. He's really good about talking about the portfolio as a whole in other situations, so it seems kinda out of character.

But i guess we all have our own hang-ups.
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Re: Larry Swedroe's take on gold

Postby farjean2 » Tue Mar 21, 2017 4:27 pm

Desert wrote:But heaven's streets aren't paved with stock certificates.


Actually the streets in heaven aren't paved with gold. The street (singular), was of pure gold, transparent as glass.

(I'm a stickler for Biblical accuracy even though I'm a non-believer).

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