Gold Substitutes

[perfect_simulation]

Let's acknowledge for moment that Gold is indeed a physical item that can be exchanged for cash. With that in mind, other physical items could serve the same role. HB said in his book he wasn't a fan of real estate because you can't sell just the deck, and a house requires upkeep.

But let's brainstorm: sports cards, cars (think utility like trucks), tools, art, shoes (air jordans) - these are all items that hold their value quite well. I happen to own a couple JUKI industrial sewing machines. I know I couldn't sell them overnight but I'm certain they're worth every dollar.

So the question for this post....do you ever include these kinds of physical items as "gold" substitutes in your gold allocation? What are the pros/cons of doing so?

[Hal]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

[vnatale]

Let's acknowledge for moment that Gold is indeed a physical item that can be exchanged for cash. With that in mind, other physical items could serve the same role. HB said in his book he wasn't a fan of real estate because you can't sell just the deck, and a house requires upkeep.

But let's brainstorm: sports cards, cars (think utility like trucks), tools, art, shoes (air jordans) - these are all items that hold their value quite well. I happen to own a couple JUKI industrial sewing machines. I know I couldn't sell them overnight but I'm certain they're worth every dollar.

So the question for this post....do you ever include these kinds of physical items as "gold" substitutes in your gold allocation? What are the pros/cons of doing so?

Way back in 1988 to 1991 I "invested" about $30,000 into sports (mainly baseball) cards. During the 1991 recession their value went down 50% and stayed there for decades. Last year I was pleasantly surprised to see that almost all the value had finally come back plus some.

But there are a lot of selling costs involved with them.

Taking scans of them and creating a description of them to place on eBay. Then actually getting any of them sold and then shipping them out once the sale is made. Finally, both eBay and PayPal taking a not insignificant amount of cuts for their fees.

I've actually not attempted yet to sell any of them via eBay (but did try selling them 30 years ago at card shows).

In the early 2000's for a few years I "invested" another $5,000 in about 20,000 Sports Illustrateds. Last fall / winter I spent an incredible amount of time both getting them physically organized and listed in Excel worksheets. Spent maybe 400 hours doing so? In December finally put up about 60 for sale. Since then I've sold about 20?

The story is that physical objects are nowhere as easy to sell as a financial asset or even a more widely traded physical asset like gold (but which can also be bought and sold as easily as a financial asset if bought in the proper form).

Most physical assets need to be cared for so as to not deteriorate. One needs to choose whether to insure them or not. Finally, when one decides to sell them there is significant time and costs involved in selling them.

[vnatale]

To show you the prices that Sports Illustrateds are being sold for (asking price) and actual sales:

$52,600 asking price (and charges $50 shipping on top of that!)

https://www.ebay.com/itm/204167635996?h ... R8TH6aeyYg

An actual sale $8,050 (+ shipping!!)

https://www.ebay.com/itm/235042900734?h ... R5Dt_KeyYg

[vnatale]

In regards to gold itself .....

https://www.washingtonpost.com/business ... rc=nl_most

How right-wing news powers the ‘gold IRA’ industry

Ads for gold coins have become a mainstay on Fox News, Newsmax and other conservative outlets, even as regulators have accused some companies of defrauding elderly clients.

By Jeremy B. Merrill and Hanna Kozlowska
July 25, 2023 at 7:08 a.m. EDT

[seajay]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

The Euro is very young, 1990, and formed on a very shaky foundation, requires very socialist policies, free movement of goods, people, money across international members borders and common governance. A common levelling of interest rates etc. that at times will be totally out of sync with individual countries.

Historically, gold, silver, copper ... metallic currency (silver dollars quarters, copper cent). Up to the 1960's and silver dollars contained around three-quarters of a dollars worth of silver, enough of a margin that if the price of silver rose 33% it still wasn't in conflict as a coin currency worth its weight. After the price of silver rose beyond that, silver dollars etc. became 'collectable' for the metallic silver value.

The gold/silver ratio is quite volatile whilst broader longer term rewards tend to compare, some rotate either fully or partially between the two in reflection of those relative valuations.

Prior to the 1930's, gold and silver were money (coins). Many with surplus money deposited that into cash deposits and got paid interest (for the bank to safely store that gold). On that basis and given the outlawing of gold in the US from 1934 to the mid 1970's, you can backtest a PP with cash deposits instead of gold pre 1934, silver 1934 to 1975, gold thereafter. In all cases (yearly granularity) since 1871 it always returned your inflation adjusted money (via 3.3%/year 30 yearly instalments (SWR)) and more often left a decent residual value at the end of the 30 years. Often with low downside volatility, or where when downside volatility was higher the drawdown tended to be relatively short lived.

That aside, and yes there are alternatives. Anything that is durable and generally perceived to be a preserver of wealth/value, where what you might buy today with a view to preserving value with surplus capital, might later be bought by another for similar reasoning. Valued art for instance. Indeed in prior centuries a combination of land, art and gold were popular choices of assets. Art however requires a eye and inclination, stocks serve as a more viable alternative to art IMO.

With regards to land/house not being easily rebalanced, well sometimes rebalancing works best, sometimes non-rebalanced works best, its not unreasonable to diversify across both, in which case the obvious choice is to leave the home/land value as non-rebalanced.

For UK investors your primary home is tax exempt, no capital gain tax when sold. Gold legal tender coins are tax exempt. Combine those with stocks held in a tax efficient/exempt account and the tax savings = lower reward needed in order to compare to other asset allocations/assets that incur taxation. A 3.33% net SWR (PP) is better than a 4% SWR that endures a 20% taxation (3.2% net).

[D1984]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

The Euro is very young, 1990, and formed on a very shaky foundation, requires very socialist policies, free movement of goods, people, money across international members borders and common governance. A common levelling of interest rates etc. that at times will be totally out of sync with individual countries.

Historically, gold, silver, copper ... metallic currency (silver dollars quarters, copper cent). Up to the 1960's and silver dollars contained around three-quarters of a dollars worth of silver, enough of a margin that if the price of silver rose 33% it still wasn't in conflict as a coin currency worth its weight. After the price of silver rose beyond that, silver dollars etc. became 'collectable' for the metallic silver value.

The gold/silver ratio is quite volatile whilst broader longer term rewards tend to compare, some rotate either fully or partially between the two in reflection of those relative valuations.

Prior to the 1930's, gold and silver were money (coins). Many with surplus money deposited that into cash deposits and got paid interest (for the bank to safely store that gold). On that basis and given the outlawing of gold in the US from 1934 to the mid 1970's, you can backtest a PP with cash deposits instead of gold pre 1934, silver 1934 to 1975, gold thereafter. In all cases (yearly granularity) since 1871 it always returned your inflation adjusted money (via 3.3%/year 30 yearly instalments (SWR)) and more often left a decent residual value at the end of the 30 years. Often with low downside volatility, or where when downside volatility was higher the drawdown tended to be relatively short lived.

That aside, and yes there are alternatives. Anything that is durable and generally perceived to be a preserver of wealth/value, where what you might buy today with a view to preserving value with surplus capital, might later be bought by another for similar reasoning. Valued art for instance. Indeed in prior centuries a combination of land, art and gold were popular choices of assets. Art however requires a eye and inclination, stocks serve as a more viable alternative to art IMO.

With regards to land/house not being easily rebalanced, well sometimes rebalancing works best, sometimes non-rebalanced works best, its not unreasonable to diversify across both, in which case the obvious choice is to leave the home/land value as non-rebalanced.

For UK investors your primary home is tax exempt, no capital gain tax when sold. Gold legal tender coins are tax exempt. Combine those with stocks held in a tax efficient/exempt account and the tax savings = lower reward needed in order to compare to other asset allocations/assets that incur taxation. A 3.33% net SWR (PP) is better than a 4% SWR that endures a 20% taxation (3.2% net).

Except that pre-1934 cash deposits weren't truly "safe" in the modern sense; this was before the FDIC existed. Deposit your money in a bank and you might lose it all in a bank failure/bank run. In any event, silver shows a far higher correlation with gold than does cash; why not run the backtest with silver from 1871 to 1934? That would be a fairer equivalent to gold than would be using cash.

I suspect that such a backtest would show worse returns than using cash (bank deposits) since silver not only doesn't pay any interest but also got killed in the 1921-mid-1920s period and then again during 1930-1933. Whether gold--with its higher "safe havenness" and its being less of an industrial metal than silver would've done better than silver is an open counterfactual but unfortunately, I am not aware of any simulation of gold returns during the 1900-1933 period.

[Hal]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

The Euro is very young, 1990, and formed on a very shaky foundation, requires very socialist policies, free movement of goods, people, money across international members borders and common governance. A common levelling of interest rates etc. that at times will be totally out of sync with individual countries.
<snip>

That aside, and yes there are alternatives. Anything that is durable and generally perceived to be a preserver of wealth/value, where what you might buy today with a view to preserving value with surplus capital, might later be bought by another for similar reasoning. Valued art for instance. Indeed in prior centuries a combination of land, art and gold were popular choices of assets. Art however requires a eye and inclination, stocks serve as a more viable alternative to art IMO.

Fair call. While the Euro may be the third most popular form of money now (it was just a guess), we don't know what would hold the third place when confidence is lost in the USD. Silver? Crypto?

[seajay]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

The Euro is very young, 1990, and formed on a very shaky foundation, requires very socialist policies, free movement of goods, people, money across international members borders and common governance. A common levelling of interest rates etc. that at times will be totally out of sync with individual countries.

Historically, gold, silver, copper ... metallic currency (silver dollars quarters, copper cent). Up to the 1960's and silver dollars contained around three-quarters of a dollars worth of silver, enough of a margin that if the price of silver rose 33% it still wasn't in conflict as a coin currency worth its weight. After the price of silver rose beyond that, silver dollars etc. became 'collectable' for the metallic silver value.

The gold/silver ratio is quite volatile whilst broader longer term rewards tend to compare, some rotate either fully or partially between the two in reflection of those relative valuations.

Prior to the 1930's, gold and silver were money (coins). Many with surplus money deposited that into cash deposits and got paid interest (for the bank to safely store that gold). On that basis and given the outlawing of gold in the US from 1934 to the mid 1970's, you can backtest a PP with cash deposits instead of gold pre 1934, silver 1934 to 1975, gold thereafter. In all cases (yearly granularity) since 1871 it always returned your inflation adjusted money (via 3.3%/year 30 yearly instalments (SWR)) and more often left a decent residual value at the end of the 30 years. Often with low downside volatility, or where when downside volatility was higher the drawdown tended to be relatively short lived.

That aside, and yes there are alternatives. Anything that is durable and generally perceived to be a preserver of wealth/value, where what you might buy today with a view to preserving value with surplus capital, might later be bought by another for similar reasoning. Valued art for instance. Indeed in prior centuries a combination of land, art and gold were popular choices of assets. Art however requires a eye and inclination, stocks serve as a more viable alternative to art IMO.

With regards to land/house not being easily rebalanced, well sometimes rebalancing works best, sometimes non-rebalanced works best, its not unreasonable to diversify across both, in which case the obvious choice is to leave the home/land value as non-rebalanced.

For UK investors your primary home is tax exempt, no capital gain tax when sold. Gold legal tender coins are tax exempt. Combine those with stocks held in a tax efficient/exempt account and the tax savings = lower reward needed in order to compare to other asset allocations/assets that incur taxation. A 3.33% net SWR (PP) is better than a 4% SWR that endures a 20% taxation (3.2% net).

Except that pre-1934 cash deposits weren't truly "safe" in the modern sense; this was before the FDIC existed. Deposit your money in a bank and you might lose it all in a bank failure/bank run. In any event, silver shows a far higher correlation with gold than does cash; why not run the backtest with silver from 1871 to 1934? That would be a fairer equivalent to gold than would be using cash.

I suspect that such a backtest would show worse returns than using cash (bank deposits) since silver not only doesn't pay any interest but also got killed in the 1921-mid-1920s period and then again during 1930-1933. Whether gold--with its higher "safe havenness" and its being less of an industrial metal than silver would've done better than silver is an open counterfactual but unfortunately, I am not aware of any simulation of gold returns during the 1900-1933 period.

In a era when gold/silver were money, someone with surplus cash, silver dollar coins for instance, I suspect might have found somewhere for that, with modest safety possibly along with interest rather than keeping it all at home.

There was -10% pa type inflation (deflation) in each of those 1920 and 1930's periods.

measuringworth indicates gold remained at 20.67/ounce 1879 to 1932, inflation broadly flat, gold/silver ratio that around doubled, so yes seemingly silver was a poorer asset over that period, more so as measuringworth also indicate 5% type short term rates over those years. Such that if a saver who deposited/invested their gold/silver coins into that sort of return, rather than keeping the coin at home/wherever, in real terms did OK. Indeed pretty much didn't need anything else. "Stocks! Bah! For speculators only!" ... type era.

[vnatale]

Over Tuesday / Wednesday I read William Bernstein's excellent new book.

I am now on my second reading, doing so in a studying fashion.

Just moments ago I read what he had to say about gold / silver.

"Unlike crude oil or soybeans, you can store a reasonable amount of gold, but as we just saw, it has about zero long-term real return. The same is true of silver, which over the past few centuries has also barely held its purchasing power."

And, as a bonus, what he had to say about cryptocurrency.

"Finally, what about cryptocurrency? If you believe its enthusiasts, it’s money freed from the specter of the government’s prying eyes and printing presses. You can even earn interest on it, as long as you’re willing to take in yet more cryptocurrency and don’t mind taking the risk that the founder of the “bank” paying you that interest might turn out to be a blatant fraudster, instead of the altruistic visionary portrayed in his or her initial press coverage. If I want to own currency, I’ll take it in dollars, euros, yen, and pounds sterling, thank you. Crypto technology may well revolutionize finance—so did the appearance of stamped metal coins millennia ago and paper money after that—but over the centuries since these marvellous inventions, holding them in your safe or purse hasn’t proved a paying proposition."

[seajay]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

The Euro is very young, 1990, and formed on a very shaky foundation, requires very socialist policies, free movement of goods, people, money across international members borders and common governance. A common levelling of interest rates etc. that at times will be totally out of sync with individual countries.
<snip>

That aside, and yes there are alternatives. Anything that is durable and generally perceived to be a preserver of wealth/value, where what you might buy today with a view to preserving value with surplus capital, might later be bought by another for similar reasoning. Valued art for instance. Indeed in prior centuries a combination of land, art and gold were popular choices of assets. Art however requires a eye and inclination, stocks serve as a more viable alternative to art IMO.

Fair call. While the Euro may be the third most popular form of money now (it was just a guess), we don't know what would hold the third place when confidence is lost in the USD. Silver? Crypto?

When confidence is lost in any individual currency, the price of gold and other currencies go up.

Iceland saw the price of gold soar across the 2008 financial crisis, the price of gold in Euros however remained much the same, had a Icelander held either gold or Euros they did OK/well.

It's not as though the US dollar will totally fail, anymore than did the British Pound when it transitioned from being a major global trading currency (gold Sovereigns (One Pound coins) are still exchanged in some middle-eastern international settlements).

I very much suspect that for a while international trade may swap into alternatives to the dollar, only to later return when they hit the problems so doing involves such as a constant trade deficit by one nation seeing all of its gold reserves depleted, and/or the higher costs and volatility in repeated FX costs and constant price variations.

Crypto and public (albeit encrypted) ledger will at some point hit a wall where it becomes all too obvious that ledgers are best kept private, or otherwise are at risk of being corrupted such that entire values (currencies) might just 'vanish'. A great weapon in the event of wars where a opponent is over-reliant on a distributed/public ledger, 51% attack and hitting that even for a very brief instant and the ledger can be made useless. All of your opponents money ... gone. One such attack algorithm I heard of is where the attacker flagged 'better opportunities here' to the network, such that many systems switched from mining one coin to instead expend the time/effort mining the alternative, that resulted in the 51% attack needing just 10%. Others involve taking down other systems via a common rolled out flaw, or their network links. As ever, security/defence has to be 100% all of the time, whereas a attacker only need a single brief instant of weakness.

[vnatale]

More from the Bernstein book:

Energy stocks and precious metals equity (PME) are recommended only for those who tolerate portfolio complexity and want protection against unexpected inflation, a cat that may already be out of the bag at the time of this book’s publication.

PME is an especially thorny asset class. It has suffered share price losses of 70% or more three times during the past six decades, but it’s precisely this volatility that recommends it to those with a cast-iron stomach for risk, despite a real return of 0%–2%, depending on the time period. The relatively large purchases mandated by portfolio rebalancing during the severe downdrafts eventually sow the seeds for large gains during the bounce backs, which saw a rapid tripling of share prices from each of the three market bottoms. Needless to say, this asset class requires nerves of steel and the patience of Job, is appropriate for only the most enthusiastic of asset class junkies, and in any case should constitute no more than a few percent of your portfolio. The yellow metal itself has actually provided slightly higher returns than PME, but is not nearly as volatile. Gold requires a much higher portfolio allocation than PME to provide the same degree of diversification as PME, and it thus yields less of a “rebalancing bonus.”

[dualstow]

So the question for this post....do you ever include these kinds of physical items as "gold" substitutes in your gold allocation? What are the pros/cons of doing so?

Sneakers, works of art etc are just things of value. That's why I disagree with your premise

other physical items could serve the same role {as gold}

There's no standardization. Whether you buy/sell a krugerrand or an eagle or whatever, you pretty much know what you're going to get.
Those sneakers are worth different things to different people, even if there are market trends.
A comic book in the basement is no more a substitute for gold than it is for stocks, just because it might go up someday.

That's not to say that these non-gold physical items aren't useful. Wealthy people buy art as a multigenerational investment all the time, of course.
It's simply variable portfolio territory.

[vnatale]

So the question for this post....do you ever include these kinds of physical items as "gold" substitutes in your gold allocation? What are the pros/cons of doing so?

Sneakers, works of art etc are just things of value. That's why I disagree with your premise

other physical items could serve the same role {as gold}

There's no standardization. Whether you buy/sell a krugerrand or an eagle or whatever, you pretty much know what you're going to get.
Those sneakers are worth different things to different people, even if there are market trends.
A comic book in the basement is no more a substitute for gold than it is for stocks, just because it might go up someday.

That's not to say that these non-gold physical items aren't useful. Wealthy people buy art as a multigenerational investment all the time, of course.
It's simply variable portfolio territory.

Well stated.

You point out the uniqueness of each item plus an unestablished market price for each item.

[seajay]

Over Tuesday / Wednesday I read William Bernstein's excellent new book.

I am now on my second reading, doing so in a studying fashion.

Just moments ago I read what he had to say about gold / silver.

"Unlike crude oil or soybeans, you can store a reasonable amount of gold, but as we just saw, it has about zero long-term real return. The same is true of silver, which over the past few centuries has also barely held its purchasing power."

As might .. house prices, stock price only, art, bonds ...etc. Each individually tending to broadly yield 0% but in a volatile manner. A blend will tend to smooth down that volatility. Stocks additionally pay dividends, perhaps 3% net. Allocate a third to stocks and proportionately 1.33% real ... that is enough to support a 30 year 4% SWR (a constant 0% real with a 1.33% supplement).

Push higher weighting of stock for more dividend benefit, and you increase the portfolios price only variance, at the extreme of all-stock you've lost the smoothing.

If a valued asset did not tend to broadly (mid/longer term) negate inflation then that implies either its considered value fades to zero, or it becomes unaffordably expensive.

1906 - 1988 and Robert Shiller's data indicates S&P real stock price 0% real. Dividend payments used to be higher up to the mid 1980's at which point taxation policies were changed that promoted more of stock earnings being retained. So stock prices have subsequently tended to advance in real terms due to in effect automatic reinvestment of dividends (more of earnings retained), more price appreciation, less in actual dividends. In other countries such as the UK and over the last 130+ years stock prices have broadly yielded 0% real, but in a very volatile manner. Payed more in dividends, seen less price appreciation.

For those content with a less volatile portfolio, 4% SWR, then a third stock, two thirds in other 0% real expectancy where a bunch of such assets tends to smooth out the individual asset volatility ... will tend to do the job. So you get the PP, Larry Portfolio, Wellesley ...type offerings for that.

A Larry type portfolio of 33/67 SCV/10yrT ... compared to another of 33/33/34 SCV/gold/cash, and 1972 to recent both annualised around 9.3%, both had max dradowns of -16.7%. Or why not cash/LTT/gold as the 0% expectancy blend. Again since 1972 and compared to just 10 year treasury's alone ... were pretty much the same.

He hits a nail on the head when he says "you can store a reasonable amount of gold", in hand, no counter party risk, off radar. Which in itself diversifies/dilutes other risks, but also adds some of its own risk factors. Concentration risk is a major risk factor, diversifying leads to a higher frequency of any one single assets risk presenting but a smaller loss than a concentrated risk that occurs less frequently but is potentially financially fatal as and when it does present.

[D1984]

HB stated in his radio show, the reason he chose Gold is that it is the second most popular form of money after the USD.
The rationale being is if people lost confidence in the USD, they would move to the next most popular money, Gold.

So assuming Gold is not accessible, I would expect the best Gold substitute would be the third most popular form of money. At a guess, I suspect this would be the Euro.

The Euro is very young, 1990, and formed on a very shaky foundation, requires very socialist policies, free movement of goods, people, money across international members borders and common governance. A common levelling of interest rates etc. that at times will be totally out of sync with individual countries.

Historically, gold, silver, copper ... metallic currency (silver dollars quarters, copper cent). Up to the 1960's and silver dollars contained around three-quarters of a dollars worth of silver, enough of a margin that if the price of silver rose 33% it still wasn't in conflict as a coin currency worth its weight. After the price of silver rose beyond that, silver dollars etc. became 'collectable' for the metallic silver value.

The gold/silver ratio is quite volatile whilst broader longer term rewards tend to compare, some rotate either fully or partially between the two in reflection of those relative valuations.

Prior to the 1930's, gold and silver were money (coins). Many with surplus money deposited that into cash deposits and got paid interest (for the bank to safely store that gold). On that basis and given the outlawing of gold in the US from 1934 to the mid 1970's, you can backtest a PP with cash deposits instead of gold pre 1934, silver 1934 to 1975, gold thereafter. In all cases (yearly granularity) since 1871 it always returned your inflation adjusted money (via 3.3%/year 30 yearly instalments (SWR)) and more often left a decent residual value at the end of the 30 years. Often with low downside volatility, or where when downside volatility was higher the drawdown tended to be relatively short lived.

That aside, and yes there are alternatives. Anything that is durable and generally perceived to be a preserver of wealth/value, where what you might buy today with a view to preserving value with surplus capital, might later be bought by another for similar reasoning. Valued art for instance. Indeed in prior centuries a combination of land, art and gold were popular choices of assets. Art however requires a eye and inclination, stocks serve as a more viable alternative to art IMO.

With regards to land/house not being easily rebalanced, well sometimes rebalancing works best, sometimes non-rebalanced works best, its not unreasonable to diversify across both, in which case the obvious choice is to leave the home/land value as non-rebalanced.

For UK investors your primary home is tax exempt, no capital gain tax when sold. Gold legal tender coins are tax exempt. Combine those with stocks held in a tax efficient/exempt account and the tax savings = lower reward needed in order to compare to other asset allocations/assets that incur taxation. A 3.33% net SWR (PP) is better than a 4% SWR that endures a 20% taxation (3.2% net).

Except that pre-1934 cash deposits weren't truly "safe" in the modern sense; this was before the FDIC existed. Deposit your money in a bank and you might lose it all in a bank failure/bank run. In any event, silver shows a far higher correlation with gold than does cash; why not run the backtest with silver from 1871 to 1934? That would be a fairer equivalent to gold than would be using cash.

I suspect that such a backtest would show worse returns than using cash (bank deposits) since silver not only doesn't pay any interest but also got killed in the 1921-mid-1920s period and then again during 1930-1933. Whether gold--with its higher "safe havenness" and its being less of an industrial metal than silver would've done better than silver is an open counterfactual but unfortunately, I am not aware of any simulation of gold returns during the 1900-1933 period.

In a era when gold/silver were money, someone with surplus cash, silver dollar coins for instance, I suspect might have found somewhere for that, with modest safety possibly along with interest rather than keeping it all at home.

There was -10% pa type inflation (deflation) in each of those 1920 and 1930's periods.

measuringworth indicates gold remained at 20.67/ounce 1879 to 1932, inflation broadly flat, gold/silver ratio that around doubled, so yes seemingly silver was a poorer asset over that period, more so as measuringworth also indicate 5% type short term rates over those years. Such that if a saver who deposited/invested their gold/silver coins into that sort of return, rather than keeping the coin at home/wherever, in real terms did OK. Indeed pretty much didn't need anything else. "Stocks! Bah! For speculators only!" ... type era.

You could NOT get 5% safely during most of the 1879-1934 period. IIRC Measuringworth uses commercial paper rates for its short-term rate during this period; commercial paper was nowhere near a risk free investment during this time (especially before late 1914 or early 1915 when the Federal Reserve started to act as buyer of last resort and as an actual central bank and liquidity provider....but even during the recession of 1920-21 commercial paper did experience some defaults and/or lack of liquidity at times; it was only from the mid-1920s onward that the modern very low risk commercial paper market as we know it came into being. In the early 1900s the closest equivalent of Treasury bills they had (actual short-term US Treasury paper didn't exist until late 1916 and wasn't plentiful until April of 1917 when the US started issuing more of it as part of the massive debt buildup around WWI) back then was 60, 90, or 120 day banker's acceptances/trade acceptances (the safety of these was because they were essentially backed by three separate sources of security; these being the credit of the person or company who originated the acceptance, the guarantee by the issuing bank standing behind it, and the goods backing the acceptance; this was unlike most commercial paper of the time which was essentially an unsecured short-term promissory note.,..again, until maybe 1922/1923 or so commercial paper was not the virtually risk-free instrument it is today); I have yield data on these from January 1915 onward (they existed before then but the Federal Reserve didn't start discounting/buying them until late December 1914 so before then yields/rates on them were not recorded anywhere that I know of...at least for USD-denominated acceptances rather than for pound sterling-denominated ones) and rates on them never hit 5% except for a fairly brief period from late Dec 1919 to early August of 1921

As I mentioned before, bank deposits weren't truly secure until 1934 with the advent of the FDIC so that is out as far as risk-free or low risk investments are concerned.

As such, if you had some money you wanted to put in fairly safe and reasonably liquid (and reasonably free of duration risk) investments you had the following choices:

From 1879 to 1915 - The only data I have for this period for what could be called a low-risk short-term investment is for demand loans/call loans secured by stocks or bonds (bonds--especially high grade railroad issues--were the usual security for these loans; LTVs rarely were more than 45 or 50% and the loan could be called at any time if the lender felt the security was deteriorating in quality; as such, these were pretty secure...certainly more so than commercial paper). Rates on these fluctuated quite a bit--the rate was reset quite often and as such these were more like an ARM that reset every month than like a fixed rate loan--and could soar during times of market stress and then come down just as quickly when things went back to normal....but over the 1879-1915 period they averaged 3.73%.

1915-1917 - Prime banker's acceptances; over this period the rates on these ranged from 2.38% to around 3.90%.

1918 onward to 1934 - Actual short-term Treasury notes--Treasury Certificates of Indebtedness with maturities ranging from two to nine months--for 1918 to 1929 and then actual Treasury Bills from late 1929 onward. Except for a brief period in mid-1920, rates on these never hit 5% or above.

The only other option for short-term "safe" money during this time period would've maybe been buying short-term (less than one year remaining) super-prime grade corporate or municipal/state/local debt (although after 1917 or 1918 municipal yields would've been artificially depressed--vs corporate or Treasury yields--by the tax privileges they offered that other types of bonds didn't; as such, only wealthy high tax bracket investors would've bought state and municipal bonds after that date and thus after then they cease to be a reliable benchmark for rates) which typically carried rates at or maybe just a hair above banker's acceptances rates; rates on these only broke 5% from mid-1919 to very early 1922; otherwise from 1879-1934 they were well below that. Of course, minimum purchases on such bonds were as a general rule either $500 or $1000 dollars (or in some cases higher) since most bond dealers/brokers at the time only dealt in "even lots" or "whole lots" of quantities of 100 bond multiples (i.e. you could easily buy 100 bonds, 200 bonds, 800 bonds, etc but not, say 54 bonds or 9 bonds or 173 bonds, etc) and most bonds carried par face values of $50, $100, or even $1000. FWIW $4 or $5 a day was a pretty good wage for factory work in the 1910s--Henry Ford's auto plants paid $5 a day in 1913 and this was almost double what most other manufacturing jobs typically paid--and farmers generally made less still (Maybe $450 to $700 a year....possibly even less than that in the poorer parts of the US south and west); as such, amassing $500 or $1000 to buy a round 100 bond lot would've been very difficult if not impossible for the average American at the time. If you were lucky maybe you could find a bond dealer operating on "the curb" (i.e. off of and outside of the official exchange) who would sell you an "odd lot" of only a few bonds but if he did, you can bet the commission would probably be ten or twenty percent of the total sale amount.

Because of all of the above factors, most Americans at the time either kept their money in local savings banks (rates on these were typically 2 to 4% on accounts at the banks that were conservative and soundly run....5 or 6% rates and up were almost without exception an indication that the bank was either making risky loans or buying risky bonds--until 1936 banks could invest their entire assets into what we would now call "junk bonds" if they had so desired--which would not be something you would want a part of....remember, this was before FDIC insurance...put your money into an unsound bank and you could lose everything in the blink of an eye if the bank failed) or either as coins/bills under the mattress or in a cookie jar.

Savings and Loans/Building and Loans were another option but until the late 1910s/early 1920s when you bought a "share" in one of them it wasn't anywhere near as liquid as cash held in a savings account (you typically could only cash it out once or twice a year; any time other than that the S&L might buy it back from you but there was no guarantee it would be worth the face value...i..e they might buy back a $100 share for $65 or $70 if money was tight; they didn't have the liquidity that banks had because most of their money was invested in long-term mortgages and there wasn't really a secondary market for most mortgages until the mid-1930s)...also, S&Ls pre-1934 were subject to the same risk banks were in regards to losing all your money if they went belly up.

Finally, after late 1911 you could put it into US Postal Savings (the Postal Savings system existed from mid-1911 to 1967 in the US) which was government-backed and as such as safe as modern FDIC-backed accounts are today but these accounts were capped at $500 at first--by 1918 it had been raised to $2,500--and never paid more than 2% interest at any point.

In short, assuming that a saver in the 1879-1934 era could earn anything approaching a safe 5% return was--except for a brief period in the late 1910s and early 1920s--a fantasy; in order to have the chance of earning 5% or more he/she had to either take bond market risk, stock market risk, commodity risk, or real estate risk.

[vnatale]

Except that pre-1934 cash deposits weren't truly "safe" in the modern sense; this was before the FDIC existed. Deposit your money in a bank and you might lose it all in a bank failure/bank run. In any event, silver shows a far higher correlation with gold than does cash; why not run the backtest with silver from 1871 to 1934? That would be a fairer equivalent to gold than would be using cash.

I suspect that such a backtest would show worse returns than using cash (bank deposits) since silver not only doesn't pay any interest but also got killed in the 1921-mid-1920s period and then again during 1930-1933. Whether gold--with its higher "safe havenness" and its being less of an industrial metal than silver would've done better than silver is an open counterfactual but unfortunately, I am not aware of any simulation of gold returns during the 1900-1933 period.

In a era when gold/silver were money, someone with surplus cash, silver dollar coins for instance, I suspect might have found somewhere for that, with modest safety possibly along with interest rather than keeping it all at home.

There was -10% pa type inflation (deflation) in each of those 1920 and 1930's periods.

measuringworth indicates gold remained at 20.67/ounce 1879 to 1932, inflation broadly flat, gold/silver ratio that around doubled, so yes seemingly silver was a poorer asset over that period, more so as measuringworth also indicate 5% type short term rates over those years. Such that if a saver who deposited/invested their gold/silver coins into that sort of return, rather than keeping the coin at home/wherever, in real terms did OK. Indeed pretty much didn't need anything else. "Stocks! Bah! For speculators only!" ... type era.
[/quote]

You could NOT get 5% safely during most of the 1879-1934 period. IIRC Measuringworth uses commercial paper rates for its short-term rate during this period; commercial paper was nowhere near a risk free investment during this time (especially before late 1914 or early 1915 when the Federal Reserve started to act as buyer of last resort and as an actual central bank and liquidity provider....but even during the recession of 1920-21 commercial paper did experience some defaults and/or lack of liquidity at times; it was only from the mid-1920s onward that the modern very low risk commercial paper market as we know it came into being. In the early 1900s the closest equivalent of Treasury bills they had (actual short-term US Treasury paper didn't exist until late 1916 and wasn't plentiful until April of 1917 when the US started issuing more of it as part of the massive debt buildup around WWI) back then was 60, 90, or 120 day banker's acceptances/trade acceptances (the safety of these was because they were essentially backed by three separate sources of security; these being the credit of the person or company who originated the acceptance, the guarantee by the issuing bank standing behind it, and the goods backing the acceptance; this was unlike most commercial paper of the time which was essentially an unsecured short-term promissory note.,..again, until maybe 1922/1923 or so commercial paper was not the virtually risk-free instrument it is today); I have yield data on these from January 1915 onward (they existed before then but the Federal Reserve didn't start discounting/buying them until late December 1914 so before then yields/rates on them were not recorded anywhere that I know of...at least for USD-denominated acceptances rather than for pound sterling-denominated ones) and rates on them never hit 5% except for a fairly brief period from late Dec 1919 to early August of 1921

As I mentioned before, bank deposits weren't truly secure until 1934 with the advent of the FDIC so that is out as far as risk-free or low risk investments are concerned.

As such, if you had some money you wanted to put in fairly safe and reasonably liquid (and reasonably free of duration risk) investments you had the following choices:

From 1879 to 1915 - The only data I have for this period for what could be called a low-risk short-term investment is for demand loans/call loans secured by stocks or bonds (bonds--especially high grade railroad issues--were the usual security for these loans; LTVs rarely were more than 45 or 50% and the loan could be called at any time if the lender felt the security was deteriorating in quality; as such, these were pretty secure...certainly more so than commercial paper). Rates on these fluctuated quite a bit--the rate was reset quite often and as such these were more like an ARM that reset every month than like a fixed rate loan--and could soar during times of market stress and then come down just as quickly when things went back to normal....but over the 1879-1915 period they averaged 3.73%.

1915-1917 - Prime banker's acceptances; over this period the rates on these ranged from 2.38% to around 3.90%.

1918 onward to 1934 - Actual short-term Treasury notes--Treasury Certificates of Indebtedness with maturities ranging from two to nine months--for 1918 to 1929 and then actual Treasury Bills from late 1929 onward. Except for a brief period in mid-1920, rates on these never hit 5% or above.

The only other option for short-term "safe" money during this time period would've maybe been buying short-term (less than one year remaining) super-prime grade corporate or municipal/state/local debt (although after 1917 or 1918 municipal yields would've been artificially depressed--vs corporate or Treasury yields--by the tax privileges they offered that other types of bonds didn't; as such, only wealthy high tax bracket investors would've bought state and municipal bonds after that date and thus after then they cease to be a reliable benchmark for rates) which typically carried rates at or maybe just a hair above banker's acceptances rates; rates on these only broke 5% from mid-1919 to very early 1922; otherwise from 1879-1934 they were well below that. Of course, minimum purchases on such bonds were as a general rule either $500 or $1000 dollars (or in some cases higher) since most bond dealers/brokers at the time only dealt in "even lots" or "whole lots" of quantities of 100 bond multiples (i.e. you could easily buy 100 bonds, 200 bonds, 800 bonds, etc but not, say 54 bonds or 9 bonds or 173 bonds, etc) and most bonds carried par face values of $50, $100, or even $1000. FWIW $4 or $5 a day was a pretty good wage for factory work in the 1910s--Henry Ford's auto plants paid $5 a day in 1913 and this was almost double what most other manufacturing jobs typically paid--and farmers generally made less still (Maybe $450 to $700 a year....possibly even less than that in the poorer parts of the US south and west); as such, amassing $500 or $1000 to buy a round 100 bond lot would've been very difficult if not impossible for the average American at the time. If you were lucky maybe you could find a bond dealer operating on "the curb" (i.e. off of and outside of the official exchange) who would sell you an "odd lot" of only a few bonds but if he did, you can bet the commission would probably be ten or twenty percent of the total sale amount.

Because of all of the above factors, most Americans at the time either kept their money in local savings banks (rates on these were typically 2 to 4% on accounts at the banks that were conservative and soundly run....5 or 6% rates and up were almost without exception an indication that the bank was either making risky loans or buying risky bonds--until 1936 banks could invest their entire assets into what we would now call "junk bonds" if they had so desired--which would not be something you would want a part of....remember, this was before FDIC insurance...put your money into an unsound bank and you could lose everything in the blink of an eye if the bank failed) or either as coins/bills under the mattress or in a cookie jar.

Savings and Loans/Building and Loans were another option but until the late 1910s/early 1920s when you bought a "share" in one of them it wasn't anywhere near as liquid as cash held in a savings account (you typically could only cash it out once or twice a year; any time other than that the S&L might buy it back from you but there was no guarantee it would be worth the face value...i..e they might buy back a $100 share for $65 or $70 if money was tight; they didn't have the liquidity that banks had because most of their money was invested in long-term mortgages and there wasn't really a secondary market for most mortgages until the mid-1930s)...also, S&Ls pre-1934 were subject to the same risk banks were in regards to losing all your money if they went belly up.

Finally, after late 1911 you could put it into US Postal Savings (the Postal Savings system existed from mid-1911 to 1967 in the US) which was government-backed and as such as safe as modern FDIC-backed accounts are today but these accounts were capped at $500 at first--by 1918 it had been raised to $2,500--and never paid more than 2% interest at any point.

In short, assuming that a saver in the 1879-1934 era could earn anything approaching a safe 5% return was--except for a brief period in the late 1910s and early 1920s--a fantasy; in order to have the chance of earning 5% or more he/she had to either take bond market risk, stock market risk, commodity risk, or real estate risk.
[/quote]

Quite the treatise on this subject. Had never before read anything like this.

Tangentially related to the $4 / $5 per day being good pay for a day's work in a factory in the 1910's ...I had a landlord
neighbor tell me that when he was earning $5 a day in the 1930s that was considered a good paying job for then.

In the early 50s my father was earning $50 a week / $10 a day for the local electric company and that, also, was considered a good paying job for then.

[seajay]

In short, assuming that a saver in the 1879-1934 era could earn anything approaching a safe 5% return was--except for a brief period in the late 1910s and early 1920s--a fantasy; in order to have the chance of earning 5% or more he/she had to either take bond market risk, stock market risk, commodity risk, or real estate risk.

Here in the UK we've had investment trusts with the oldest still running one being what was called Foreign and Colonial (now F&C investment trust ticker FCIT https://www.trustnet.com/factsheets/t/f ... al-inv-tst) renamed more recently for woke reasons) that dates back to 1868. Couldn't find data for earlier years but from 1880 to 1910 for which I did find data that period returned 5% real, investing in a global set of bonds. In effect a fund that opened up a diverse range of assets/investments to the masses. The stability/safety was good, low volatility in real terms across those years. I believe it wasn't until the WW1 years before it started to further diversify into stocks, initially with something like a 5% weighting into railroads that subsequently rose to around 20% by the 1920's ... and onwards/upwards from there, where nowadays its pretty much a global stock index fund.

F&C in effect was the forerunner of a bunch of other investment trusts that started in subsequent years, that each invest in a wide range of manners, somewhat similar to present day ETF's. Basically a stock, whose primary business is investing in stocks/bonds/whatever. Even today you can sill buy/sell/save directly with the F&C trust, no brokerage involved. FCIT is still reasonably solid as a main core holding, if not the only holding for some. There are global stock ETF's that compete with that nowadays, to around similar overall total returns. Some rotate between the two buying FCIT for instance when the price discount to NAV reaches 10%, rotating back into a world ETF when the discount to NAV reverts to 0%.

Measuring worth indicates British inflation 1880 - 1910 to be near 0%, I further see that F&C's yearly price only gains over those years averaged 0.6%, whilst dividends averaged 4.65%.

Safety is relative, alternatives back then was to perhaps keep Pounds (gold sovereign one Pound coins) at home. Rather than a safe some used secret storage areas in furniture such as this https://www.youtube.com/embed/bYvNM0TS3ZQ?autoplay=1 that has 150 odd visible draws, along with hidden sections/draws. I've seen other furniture with hidden areas and cabinet makers were very proficient at creating exceptional furniture that included secret areas back then, so obviously was a sought after feature. Concept I guess in that youtube I linked to being that any time constrained burglar might not hang around any longer than the time it took to inspect some/most of the visible draws, maybe getting away with just a fractional part of the total amount of gold actually being stored.

Another factor is that 1850 to 1910 years saw average house prices decline, however average house sizes also significantly reduced. Larger homes were split into multiple ownership smaller units (flats/apartments) as were newly built houses considerably smaller. A home owner of 1850 that sold in 1910 would more likely not have seen a loss as indicated by declining average house price historic data.

There were also British Console Bonds - government issued perpetual bonds, that date back to 1750's. Paid less, looks broadly like around 3% by eye back in the 1800's https://fred.stlouisfed.org/series/LTCYUK Again inflation tended to average 0% so a 3% real type very safe (government backed) option. I suspect F&C would have held some of those as part of its portfolio, along with other government bonds from across the Empire (India etc.).

Perhaps a conservative investor might have held 25% gold coins, hidden away at home, 25% Console bonds, 50% in F&C. Maybe for a 3.25% real type benefit. Somewhat like a 50/50 stock/bond present day choice that some/many hold. But where some might have been all gold sovereigns in their own keeping (0% real), others might have been all F&C (5% real). All very subjective.

[seajay]

Maybe a PP back then might have been 50% gold/silver coins (both the PP cash and gold elements), 25% F&C ... similar to 25% stock, 25% Consoles (long dated treasury like). 0% inflation, relatively consistent 0% real (gold/cash), 5% from F&C, 3% from Consoles, 2% total portfolio real. Which for a 60 year old with life expectancy of perhaps 20 years being 'good' and a 4% SWR would have had half the inflation adjusted portfolio value still available at the end of 20 years. However more often I guess people didn't think/plan along those lines anyway. I believe UK 65 year old state pension retirement age was set back in 1909 in reflection of average life expectancy/average of a 67 age, a couple of years of state pension payments/retirement years whilst retirees sorted out their personal matters. Generally a relatively low cost thing for the state/taxpayers. Nowadays, a 65 year old retiree might still be drawing a state pension 35+ years later, and generally a average of 20+ years, relatively costing the state/taxpayers a lot more.

[Jack Jones]

There is no substitute for gold. It is a physical (yet compact!), indestructible, decentralized bearer instrument of limited supply.

Crypto and public (albeit encrypted) ledger will at some point hit a wall where it becomes all too obvious that ledgers are best kept private, or otherwise are at risk of being corrupted such that entire values (currencies) might just 'vanish'. A great weapon in the event of wars where a opponent is over-reliant on a distributed/public ledger, 51% attack and hitting that even for a very brief instant and the ledger can be made useless. All of your opponents money ... gone. One such attack algorithm I heard of is where the attacker flagged 'better opportunities here' to the network, such that many systems switched from mining one coin to instead expend the time/effort mining the alternative, that resulted in the 51% attack needing just 10%. Others involve taking down other systems via a common rolled out flaw, or their network links. As ever, security/defence has to be 100% all of the time, whereas a attacker only need a single brief instant of weakness.

Would you trust the supply-side of a private ledger? How do you know someone isn't printing coins illegitimately via a backdoor or vulnerability?

Bitcoin is actually resilient to the attacks you mention. In order to gain control of the network, you need to supply hash power to the network, which makes it more difficult to attack the network. You end up w/ a situation where nation states are building data centers to ensure their rivals don't gain 51% of the network. This is a much better arms race than the usual.

See: https://www.finnotes.org/publications/softwar

[vnatale]

From a book - entitled "Retirement Portfolios" - a footnote in it that I recently read that could have relevance to this topic.

Vinny

Capture.JPG (48.18 KiB) Viewed 63651 times

[dualstow]

Very relevant.
Liquidity of Gold > Liquidity of a pair of classic Adidas

[ppnewbie]

An easy light weight portable item that holds its value and in some cases explodes in value is high end mechanical watches. Some are susceptible to significant swings in value but the classics are a reliable store of value. Like say a Rolex submariner.

[seajay]

There is no substitute for gold. It is a physical (yet compact!), indestructible, decentralized bearer instrument of limited supply.

Crypto and public (albeit encrypted) ledger will at some point hit a wall where it becomes all too obvious that ledgers are best kept private, or otherwise are at risk of being corrupted such that entire values (currencies) might just 'vanish'. A great weapon in the event of wars where a opponent is over-reliant on a distributed/public ledger, 51% attack and hitting that even for a very brief instant and the ledger can be made useless. All of your opponents money ... gone. One such attack algorithm I heard of is where the attacker flagged 'better opportunities here' to the network, such that many systems switched from mining one coin to instead expend the time/effort mining the alternative, that resulted in the 51% attack needing just 10%. Others involve taking down other systems via a common rolled out flaw, or their network links. As ever, security/defence has to be 100% all of the time, whereas a attacker only need a single brief instant of weakness.

Would you trust the supply-side of a private ledger? How do you know someone isn't printing coins illegitimately via a backdoor or vulnerability?

Bitcoin is actually resilient to the attacks you mention. In order to gain control of the network, you need to supply hash power to the network, which makes it more difficult to attack the network. You end up w/ a situation where nation states are building data centers to ensure their rivals don't gain 51% of the network. This is a much better arms race than the usual.

See: https://www.finnotes.org/publications/softwar

But is vulnerable to where states with massive data centers might hack a central software server to roll out a virus/bug/feature whereby other states systems are impeded. Maybe something like where a later version of the software contains a 'bug' that is commonly rolled out, but ignored by the attackers systems that remains on a older version, that then triggers the bug to leave many servers down other than the attackers. A brief instant of a 51% majority condition even though that might be less than 10% of the 'normal' collective global processing power, during which time the ledger could be corrupted/changed to the attackers advantage.

[Jack Jones]

But is vulnerable to where states with massive data centers might hack a central software server to roll out a virus/bug/feature whereby other states systems are impeded. Maybe something like where a later version of the software contains a 'bug' that is commonly rolled out, but ignored by the attackers systems that remains on a older version, that then triggers the bug to leave many servers down other than the attackers. A brief instant of a 51% majority condition even though that might be less than 10% of the 'normal' collective global processing power, during which time the ledger could be corrupted/changed to the attackers advantage.

A 51% majority isn't as disruptive as you're assuming. You can double spend your own coins, and prevent transactions from being confirmed.