What Drives Gold

[Kbg]

Apologies if posted previously...


Gold’s relationship with US real rates is not linear and is changing.
A high US real rate environment has not been friendly to gold investment demand, but other factors, including the US dollar and emerging market demand, can wield significant influence.


Conclusion
Real rates are an important consideration when constructing the framework for understanding movements in the gold price, but an awareness of when they are important is key. While the relationship is logically and practically a driver of investment demand at times, it is only one of several. In addition, investment demand is not the sole arbiter of gold prices, nor does it originate solely in the US. Gold’s relationship with US real rates is not linear and is arguably changing.
As the dominant influence of both the US economy and the US dollar slowly makes room for emerging markets and their currencies, their macroeconomic factors will become structurally more important in setting prices on the global stage, including that of gold.
Results from our analysis show that contrary to the simplistic view that higher US real rates should lead to lower gold prices, moving to a moderate real rate environment promotes gold’s portfolio characteristics further. Returns in such an environment are in excess of the conservative return estimate used to provide evidence of gold’s portfolio contribution credentials. Volatilities fall as rates move into a moderate real rate environment, as do gold’s correlation with global equities. While it is true that a high real rate environment has not been friendly to gold on average, the underlying data is mixed and obscured by movements in other driving factors, such as the
US dollar. We do not know what a high real rate environment would mean for gold, as it would be contingent on so many other factors, not least of which are those that now originate in emerging markets. It is this last facet of the gold market that lends credence to the idea that the influence of the US real rate on gold has receded over the last couple of decades.

http://www.gold.org/sites/default/files ... 201307.pdf

[MilfordTony]

Gold's price isn't simply driven by the supply-demand ratio, the dollar's movements, inflation, oil price, geopolitical events and so on.  The market's way of functioning is far more complex and less transparent.

[ochotona]

And it's global, not US-centric.

Gold's price isn't simply driven by the supply-demand ratio, the dollar's movements, inflation, oil price, geopolitical events and so on.  The market's way of functioning is far more complex and less transparent.

[goodasgold]

What drives gold? The answer is: greed and fear, just like everything else (plus plain old uncertainty from time to time.)

I have to admit holding gold makes me squeamish occasionally, but then I realize that gold is the ultimate diversifier, which is reassuring.

Why the orthodox Bogleheads, people I admire greatly, fail to comprehend this essential point is something of a mystery, especially when the other markets wobble and collapse in unison, wiping out what previously seemed like incontrovertible non-correlations between them, leaving gold as the only game in town (temporarily, at least), allowing us PPers to rebalance and gain from the subsequent rise in the other assets. Rinse and repeat.

And I will always be grateful to Taylor Larrimore for his sympathetic review/excerpts from Craig and M.T.'s book on the Boglehead list, which led me to adopt the Permanent Portfolio. To quote Mark Twain, a seriously inept stock picker by the way, I now feel "as serenely confident as a Christian with four aces."

Hallelujah, brothers and sisters (although I realize that even the PP has losing years now and then, leading to temporary aggravation.)

[Pointedstick]

Why the orthodox Bogleheads, people I admire greatly, fail to comprehend this essential point is something of a mystery, especially when the other markets wobble and collapse in unison, wiping out what previously seemed like incontrovertible non-correlations between them, leaving gold as the only game in town (temporarily, at least), allowing us PPers to rebalance and gain from the subsequent rise in the other assets. Rinse and repeat.

That gold can improve a portfolio 1) is unintuitive, and 2) requires admitting that this means it can reduce returns during certain times. I think those are the hang-ups.

[ochotona]

And those certain times can be very long. Yes, we're all used to $4+ coffee by now... but if someone offered you a $12 coffee, you'd refuse it! You'd wait for the price to normalize. Problem with gold is that wait time can be extended; but we hit it in real terms in early 1970s and 2001 and maybe again in a few years? But when and what price?

That gold can improve a portfolio 1) is unintuitive, and 2) requires admitting that this means it can reduce returns during certain times. I think those are the hang-ups.

[MachineGhost]

Why the orthodox Bogleheads, people I admire greatly, fail to comprehend this essential point is something of a mystery, especially when the other markets wobble and collapse in unison, wiping out what previously seemed like incontrovertible non-correlations between them, leaving gold as the only game in town (temporarily, at least), allowing us PPers to rebalance and gain from the subsequent rise in the other assets. Rinse and repeat.

'cuz they're cultists, not independent thinkers.

[Mike59]

Gold's price isn't simply driven by the supply-demand ratio, the dollar's movements, inflation, oil price, geopolitical events and so on.  The market's way of functioning is far more complex and less transparent.

Brief and brilliant summary.

It climbs a wall of worry, and anything can serve as that wall when it needs to.

The numerous mainstream articles slamming gold as an investment are so far off base (gold is terrible in low interest rate periods, gold is terrible in high interest rate periods blah blah blah ) 

[HB Reader]

Here is something I posted early last year relating to drivers of gold investment demand.  Just my two cents.....

http://gyroscopicinvesting.com/forum/go ... /#msg89711

[dualstow]

Thanks for that, HB Reader. JI cracked opened the hardcover and read those few pages on gold again. I like the reminder that crises drive people to money, but that money can either be the dollar or gold. When inflation was 1 to 3% in the mid80s, Harry continues, Grenada and other crises didn't do much to budge gold.

..when inflation isn't threatening the U.S. dollar, the price of gold doesn't respond to bad news -- no matter how bad the news may be.

[MachineGhost]

HB is wrong.  Gold didn't go up from 2001 to 2011 because of inflation anymore than gold went up from 2011 to date due to inflation.

But maybe HB was just dumbing it down for his audience.  Inflation has many definitions and several forms.

[ochotona]

... TRUE DAT ...

HB is wrong.  Gold didn't go up from 2001 to 2011 because of inflation anymore than gold went up from 2011 to date due to inflation.

[dualstow]

Why did gold go up?

[sophie]

This makes sense!  People buy gold when they aren't sure that stocks or bonds are safe.  Both were doing horribly in the 70s, and runaway inflation was only part of the story.  That decade also had the Vietnam war and the OPEC-created oil shortages, for starters.

HB described it as a "store of wealth", with the additional advantages of being portable, private, outside the financial system etc.  I think that's a good way to look at it - NOT as an investment.  John Mauldin (http://www.mauldineconomics.com/about-us/john-mauldin) describes it as "insurance" and urges readers to buy physical gold as a slice of their portfolio.

The PP's concept of keeping half your wealth in safe storage (cash + gold) is highly unique, and definitely takes some time to wrap your head around.

[PureSoul]

The reality is U.S. just cannot back it’s currency and economy with gold and we have to accept that.

[Libertarian666]

The reality is U.S. just cannot back it’s currency and economy with gold and we have to accept that.

The US certainly could back its currency with gold, as it did for many years.
But that would require the government to live within its means, which it has no interest in doing.