What have we learned over last 10 years?

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LazyInvestor
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What have we learned over last 10 years?

Post by LazyInvestor » Thu May 23, 2019 1:33 am

This forum has been active for the last 10 years or so. There've been many interesting discussions. I'm curious what new have we learned with respect to the theoretical foundations behind the PP?

It seems to me it's standing the test of time despite its lower performance compared to the generally recommended passive portfolios. At the same time, I'm having difficulty figuring out which economic conditions we were going through based on the performance of the different components of the portfolio. While it seems it is prosperity based on the performance of the stock component, it's difficult to accept it given daily news we've been receiving during these times.
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Re: What have we learned over last 10 years?

Post by dualstow » Thu May 23, 2019 6:23 am

I don’t know if I learned a fundamental new thing, but it’s been an interesting ten years for long bonds. Harry’s deceased. He’s not around to guide us. Would he have said this time it’s different? Could bonds really go lower?

All we needed to do was stick to the bands.

If Medium Tex hadn’t posted his insightful posts about a game of tennis becoming a game of ping pong, I might’ve completely bailed on bonds. (bond bailsman?) I’m grateful that he wrote what he wrote.
RIP Marcello Gandini
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Re: What have we learned over last 10 years?

Post by pmward » Thu May 23, 2019 8:56 am

Haha, yeah and if people sold their long bonds or didn't rebalance when they were down would be seriously missing out this year. Long bonds are the strongest asset at the moment, and just hit a new yearly high today, the highest they've been since the end of 2017.

In real after inflation terms the PP is still chugging along in its typical tight, consistent, and dependable range of return. It's returned a bit lower in nominal terms over the last decade though, simply because inflation has been so low. As for where we are right now? Geez, I have no clue to be honest. Stocks have been moving sideways for a year and half now so it's hard to argue we are in prosperity. I think 2018 was a year for "tight money", but I really have no idea where we are at right now or where we are going from here. We very well could be at a turning point. Then again, the bull could just be taking a breather. I could make an argument for prosperity, deflation, or even inflation over the next couple of years. It's a great time to be hedged against all the above!
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Re: What have we learned over last 10 years?

Post by Cortopassi » Thu May 23, 2019 11:39 am

What the PP has taught me:

** Not to obsess about my investments. 5 years ago I was scrambling. I was out of the market for a while, and into gold and gold stocks, which were not doing well. I rotated into and out of strategies, all ended up being losers. The PP has allowed me to removed 99% of my thinking about money. Maybe some of that comes with getting older, but not dealing with the market on a daily, hourly or minute basis as I used to do.

Regardless of whether this is the "correct" strategy, (we know it isn't for a lot of people), it works for me because I feel more comfortable with a larger than typical allocation to precious metals and I don't think there's any (??) others that approach 25%.

I know Harry talks about the different economic conditions, but that is a moot point to me. To me, the two emotional conditions are more important: fear and greed. The PP has effectively muted both.
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Re: What have we learned over last 10 years?

Post by Cortopassi » Thu May 23, 2019 11:43 am

And given my reply about not dealing with the market, what's going on today causing the swings? More tariff BS?
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Re: What have we learned over last 10 years?

Post by dualstow » Thu May 23, 2019 11:49 am

Pretty much.
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Re: What have we learned over last 10 years?

Post by Kbg » Thu May 23, 2019 2:39 pm

I think the PP is behaving pretty closely to how it's supposed to theoretically. The one asset I'm not so sure about is gold. I'd have to go back and reread the gold section of "Best Laid Plans" to see if I'm missing/not remembering something.

One simple example; in theory gold should not have been a great deflationary asset but then we have 2008-2011/13ish where it went on a tear. Double kicker, and the dollar did quite well during the same time frame. It does appear that people were anticipating eventual inflation due to QE and therefore the run up.

IDK really, but the most recent cycle doesn't seem to be conforming. Personally I find gold a bit of a mystery but stick with it because it is weakly correlated to the other assets and therefore a good diversifier.

I haven't even checked...how we doing on real returns since 2008. Is the PP hanging?
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Re: What have we learned over last 10 years?

Post by pmward » Thu May 23, 2019 3:05 pm

Kbg wrote:
Thu May 23, 2019 2:39 pm
I think the PP is behaving pretty closely to how it's supposed to theoretically. The one asset I'm not so sure about is gold. I'd have to go back and reread the gold section of "Best Laid Plans" to see if I'm missing/not remembering something.

One simple example; in theory gold should not have been a great deflationary asset but then we have 2008-2011/13ish where it went on a tear. Double kicker, and the dollar did quite well during the same time frame. It does appear that people were anticipating eventual inflation due to QE and therefore the run up.
I can't remember where he said it, but I did hear him say that in a deflation gold would likely get a bid because of the fear factor, but that it wouldn't be sustainable or the best performing asset.

I think the main reason why gold went on such a tear from 2009-2011 was because of QE. I think that people were expecting it to have a larger effect on inflation. Inflation aside, Ray Dalio has a theory that the price of gold is heavily influenced by the money supply, and we don't count "inflation" as the money supply these days we count it as the consumer price index. So gold went up when money supply increased, even though there was no "inflation" as we commonly define it these days.

Like you, I don't feel anybody fully understands gold. This is all just conjecture. But that's part of it's allure and a great reason why it's such a potent diversifier. Harry Browne was MPT before MPT was a thing. I buy and hold gold mostly because of how well it compliments a portfolio of stocks and bonds. The reasoning behind it doesn't matter as much to me, so long as it continues to stay uncorrelated to stocks and bonds over the long haul.
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Re: What have we learned over last 10 years?

Post by Tortoise » Thu May 23, 2019 3:29 pm

Periods of different economic conditions are only identifiable in retrospect. If it were otherwise, Harry Browne's recommendation would have been to go all-in on a single asset (stocks, bonds, gold, or cash) depending on the current economic condition. He didn't recommend that approach, because we never really know what economic condition we're in until probably a few years after the fact when that period of time can be viewed in the full context of everything that came before and after it.

So HB recommended owning all four assets all the time in a fixed allocation. And that works pretty well.

What I've learned about the HBPP over my first 9 or 10 years invested in it is that it consistently does pretty much what it was designed to do: Provide a reasonable inflation-adjusted return with far less volatility than just about any other portfolio I've seen.
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Re: What have we learned over last 10 years?

Post by Kbg » Thu May 23, 2019 10:27 pm

Pm...a big ditto on gold. My thoughts exactly.

I should start the kbg portfolio...40/40/20. It’s all history of course but this has been a very good mix.

(S/LTT/G)
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Re: What have we learned over last 10 years?

Post by Tyler » Thu May 23, 2019 11:43 pm

pmward wrote:
Thu May 23, 2019 3:05 pm
Like you, I don't feel anybody fully understands gold. This is all just conjecture. But that's part of it's allure and a great reason why it's such a potent diversifier. Harry Browne was MPT before MPT was a thing. I buy and hold gold mostly because of how well it compliments a portfolio of stocks and bonds. The reasoning behind it doesn't matter as much to me, so long as it continues to stay uncorrelated to stocks and bonds over the long haul.
Well said.

Gold is a lot more complicated than even its biggest fans often give it credit for. I like to think of it as the "chaos asset" (in contrast to stocks as the "prosperity asset"). Runaway inflation, stock market crashes, political instability -- lots of things can drive up the price and to single out one does it a disservice. Stop thinking about dry macroeconomic factors and start thinking about the feeling of raw financial desperation, and it will start to make more sense why gold will always have a place in a well-balanced portfolio.
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Re: What have we learned over last 10 years?

Post by jhogue » Fri May 24, 2019 4:53 pm

I would like to shift the focus of this thread and speculate on what the NEXT 10 years of the PP will bring:

-I hold most of my gold in tax-deferred ETFs, and therefore not as much physical as I would like. Gold ETFs seem to have performed its uncorrelated role in these “normal” times, but they have not really been tested in a serious crisis. Will they be tested and will they survive?

-Perhaps the most hopeful development in gold in the last 10 years is the creation of the Texas Bullion Depository. Will other states follow? No geographical diversification, but “Don’t Mess with Texas” attitude is a powerful signal of where (and who) you want to keep your gold. I don’t own any gold there yet, but I am watching it and hope Libertarian666 and others will report on developments on this forum.

-I predict that the Treasury will start phasing out Series I and Series EE savings bonds. They have done it before with Series E and Series H bonds so there is nothing stopping them from doing it again. Pugchief will shed no tears, but I will be sad to say a long goodbye to Deep Cash.

-Despite the recent collapse of talks between Democrats and Trump, I think there will be a bipartisan infrastructure bill. If so, it reopens the opportunity for Treasury to sell ultra-long 50 or 100 year bonds. If a flatter long term yield curve is here to stay for a long time to come, it will make sense for both the federal budget deficit and investors.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: What have we learned over last 10 years?

Post by ochotona » Fri May 24, 2019 4:58 pm

jhogue wrote:
Fri May 24, 2019 4:53 pm

-I hold most of my gold in tax-deferred ETFs, and therefore not as much physical as I would like. Gold ETFs seem to have performed its uncorrelated role in these “normal” times, but they have not really been tested in a serious crisis. Will they be tested and will they survive?

-I predict that the Treasury will start phasing out Series I and Series EE savings bonds. They have done it before with Series E and Series H bonds so there is nothing stopping them from doing it again. Pugchief will shed no tears, but I will be sad to say a long goodbye to Deep Cash.
I have a to-do item set in the distant future which asks: "Physical vs ETF gold... was physical worth it?" So I paid a premium for physical, but wonder if it will have been worth it in the end.

Agree about the risk of I-Bonds going away.
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Re: What have we learned over last 10 years?

Post by stuper1 » Fri May 24, 2019 6:41 pm

ochotona wrote:
Fri May 24, 2019 4:58 pm
jhogue wrote:
Fri May 24, 2019 4:53 pm

-I hold most of my gold in tax-deferred ETFs, and therefore not as much physical as I would like. Gold ETFs seem to have performed its uncorrelated role in these “normal” times, but they have not really been tested in a serious crisis. Will they be tested and will they survive?

-I predict that the Treasury will start phasing out Series I and Series EE savings bonds. They have done it before with Series E and Series H bonds so there is nothing stopping them from doing it again. Pugchief will shed no tears, but I will be sad to say a long goodbye to Deep Cash.
I have a to-do item set in the distant future which asks: "Physical vs ETF gold... was physical worth it?" So I paid a premium for physical, but wonder if it will have been worth it in the end.

Isn't this like lying on your death bed and wondering why you paid all those homeowner's insurance premiums when your house never burned down? You buy insurance just in case something bad happens, but that doesn't mean that you really want something bad to happen.
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Re: What have we learned over last 10 years?

Post by ochotona » Fri May 24, 2019 8:04 pm

stuper1 wrote:
Fri May 24, 2019 6:41 pm
Isn't this like lying on your death bed and wondering why you paid all those homeowner's insurance premiums when your house never burned down? You buy insurance just in case something bad happens, but that doesn't mean that you really want something bad to happen.
Yes!
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Re: What have we learned over last 10 years?

Post by mathjak107 » Sat May 25, 2019 8:31 am

however if that insurance cost 25% of the price of the house it was insuring i would think twice about it , especially with the odds of it burning down so low..
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Re: What have we learned over last 10 years?

Post by pmward » Sat May 25, 2019 8:38 am

I personally think the only real risk in gold ETF's in a crisis is that the holding company decides to cash you out and hold the gold for themselves. At the very least, they have to cash you out for fair value, the SEC will make sure of this in the very least. I think ETF's are safe. But I still have a number in mind I want to build up to and hold physical just because I think there is value in having some of your assets in physical form. The gold I hold physical I plan on holding for life and never selling, except in a crisis scenario. Over a lifetime hold, the cost is nil.

As for the next 10 years... here's my speculative guess of a base case scenario:

Economy: I think we start the decade off struggling with deflationary forces caused by corporate debt deleveraging. I predict there will be at least 1 major company that gets bailed out or goes bankrupt in this time. This won't be as bad as 2008, but will still be a decent recession. The Fed lowers rates back to 0 and it does all of squat, so they have to start the QE machine back up again. In line with that MMT gets a test run in congress since the Fed is not able to reflate the economy with their limited firepower. We get some form of tax cuts, infrastructure spending, and/or helicopter money in unison with the QE (i.e. MMT the legal way here in the U.S.) and that successfully reflates the economy and gets things moving again. The problem being, that while it works to reflate the economy in the next recession, politicians take that as a green light to start abusing it after and we get back up into mid to upper single digit inflation by decades end. I also think the odds of war in the next decade are also high, just by looking back at the history of growing nationalism and populism tending to lead to war. Wars tend to be inflationary in the economy. This makes it hard for the Fed to fight the inflation, as they have to be easy for the sake of funding the war efforts.

Stocks: Going to be a volatile decade. At the end of the decade, in real inflation adjusted returns, this decade will return much lower than average. I think value stocks wind up out performing growth in the 2020's as bottom line growth starts to become scarce and valuations start to matter again for safety reasons. I also think we will have some antitrust proceedings against some of the large growth tech companies early to mid-2020s and that will put a wet blanket on growth temporarily. Late 2020s - 2030's will be gangbusters for growth stocks however as the deflationary forces provided by the boomers retiring will have finally run its course, millennials will finally be fully into the work force and spending/investing at a large clip, AI technology (as well as some other yet to be thought up technology that comes in the next 10 years) starts to finally work its way into our daily lives and prove profitable, the potential breakup spinoff companies from any tech antitrust proceedings start getting their footing and start growing at a faster clip than they did when they were a part of the large monolith, and of course an uptick in inflation helps over leveraged "growth" companies to delever and further invest in growth that finally starts hitting the bottom line in the late 2020's to early 2030's (and that means 2030's are going to be a monster decade for stocks obviously).

Bonds: Going to be a volatile decade here as well. We are going to rally really hard over the next couple of years while the entire globe struggles with a lot of disinflationary forces. I think we have potential to see a "blowoff top" in bonds to end the long bull run with a bang. As such, bonds will be the best returning asset the first couple of years of the decade. However, we will reach the turning point where inflation will pick up, yields will finally rise, and the long awaited bear market in bonds will finally begin... of course, this will start at the very moment when the markets are most bullish on bonds.

Gold: Going to move sideways in the same boring bullish wedge formation it's been in since 2013. Somewhere around 2020 - 2022 it will finally break out above that strong 1350-1375ish resistance level, and when it breaks out it is going to break out like it stole something. We will start the next official bull market in gold, and by the end of the decade gold will be the best performer of the next 10 years overall. Cryptos might also have a monstrous decade; that is the ones that don't face plant and actually become a legit long term asset. If this happens, cryptos might prove to be a potential digital gold replacement.

TLDR: decade starts with bonds rallying hard, stocks and gold neutral to slightly up. Decade ends with gold out performing, bonds finally in the long awaited bear market, and stocks in real inflation adjusted terms averaging below historic return rates (probably something like 2-4% CAGR when it's all said and done). The PP, of course, continues to chug along and averages it's dependable 3-5% real over the decade.
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Re: What have we learned over last 10 years?

Post by ochotona » Sat May 25, 2019 11:17 am

I run into so many Baby Boomers slightly older than me whose investment worldview is so firmly planted in the years when they were young and hopeful... the 1980s, the 1990s. They are still aggressively long US equities, they scoff at gold, for them it will be Three Strikes You're Out... Tech Bubble, GFC, and the Next Decade of Nada.
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Re: What have we learned over last 10 years?

Post by Kbg » Sat May 25, 2019 12:11 pm

I predict highly confidently that my ability to predict is very poor. :-)

In a SHTF scenario I do not see the particular value of gold. I think gold is a highly marketed piece of metal. If you are truly concerned about a SHTF scenario then go all in and be a survivalist. Or even better, buy some land that is productive from a grow things perspective, learn how things were done before large scale mechanism and electricity (e.g. Raise vegetables, grains and meats, spin basic cloth, tan hides etc.). These are the people who will likely be collecting your gold if they want it for some reason. If this is too much, then buy a year's worth of food, store up some old clothes, shoes and coats that you can use (or buy some durable new ones), store up some fuel and perhaps get some firearms. All in my view, way more likely to be useful than some shiny yellow metal.

OK, I will make a prediction. Mankind is more likely to advance, than regress. The track record is pretty good here with some serious diversions from time to time.
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Re: What have we learned over last 10 years?

Post by mathjak107 » Sun May 26, 2019 5:04 am

i agree ...i use gold as a trading vehicle.. not for visions of a zombie or shtf scenario
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Re: What have we learned over last 10 years?

Post by jhogue » Mon Jun 03, 2019 1:39 pm

mathjak107 wrote:
Sat May 25, 2019 8:31 am
however if that insurance cost 25% of the price of the house it was insuring i would think twice about it , especially with the odds of it burning down so low..
Bad analogy. Gold is a store of value and a hedge against economic chaos; not an insurance policy that costs you 25% of your portfolio. If the price of gold goes nowhere in the next 10 years you would lose the opportunity cost of a better performing investment plus your expense ratio/storage fees.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: What have we learned over last 10 years?

Post by jalanlong » Mon Jul 01, 2019 8:22 am

Tyler wrote:
Thu May 23, 2019 11:43 pm
pmward wrote:
Thu May 23, 2019 3:05 pm
Like you, I don't feel anybody fully understands gold. This is all just conjecture. But that's part of it's allure and a great reason why it's such a potent diversifier. Harry Browne was MPT before MPT was a thing. I buy and hold gold mostly because of how well it compliments a portfolio of stocks and bonds. The reasoning behind it doesn't matter as much to me, so long as it continues to stay uncorrelated to stocks and bonds over the long haul.
Well said.

Gold is a lot more complicated than even its biggest fans often give it credit for. I like to think of it as the "chaos asset" (in contrast to stocks as the "prosperity asset"). Runaway inflation, stock market crashes, political instability -- lots of things can drive up the price and to single out one does it a disservice. Stop thinking about dry macroeconomic factors and start thinking about the feeling of raw financial desperation, and it will start to make more sense why gold will always have a place in a well-balanced portfolio.
The question I struggle with is how much of my portfolio should be taken up by a "chaos asset." 25% seems like a lot..equal to stocks, bonds and cash? The fact that it is uncorrelated to stocks and bonds doesn't sway me because there are hundreds of places I could put my money that are uncorrelated with the broad stock and bond market. That doesn't mean I want my money in them. Placing gold on an even level with traditional investments seems a bit risky to me so I am more drawn to the Desert Portfolio and topping my gold at 10%.
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Re: What have we learned over last 10 years?

Post by pmward » Mon Jul 01, 2019 9:36 am

jalanlong wrote:
Mon Jul 01, 2019 8:22 am
Tyler wrote:
Thu May 23, 2019 11:43 pm
pmward wrote:
Thu May 23, 2019 3:05 pm
Like you, I don't feel anybody fully understands gold. This is all just conjecture. But that's part of it's allure and a great reason why it's such a potent diversifier. Harry Browne was MPT before MPT was a thing. I buy and hold gold mostly because of how well it compliments a portfolio of stocks and bonds. The reasoning behind it doesn't matter as much to me, so long as it continues to stay uncorrelated to stocks and bonds over the long haul.
Well said.

Gold is a lot more complicated than even its biggest fans often give it credit for. I like to think of it as the "chaos asset" (in contrast to stocks as the "prosperity asset"). Runaway inflation, stock market crashes, political instability -- lots of things can drive up the price and to single out one does it a disservice. Stop thinking about dry macroeconomic factors and start thinking about the feeling of raw financial desperation, and it will start to make more sense why gold will always have a place in a well-balanced portfolio.
The question I struggle with is how much of my portfolio should be taken up by a "chaos asset." 25% seems like a lot..equal to stocks, bonds and cash? The fact that it is uncorrelated to stocks and bonds doesn't sway me because there are hundreds of places I could put my money that are uncorrelated with the broad stock and bond market. That doesn't mean I want my money in them. Placing gold on an even level with traditional investments seems a bit risky to me so I am more drawn to the Desert Portfolio and topping my gold at 10%.
I have said this many times before, but the fundamental principles of the PP matter much more than the 4x25 breakdown. Harry had multiple variations of the PP, but in his later life he simplified it down to 4x25. Mostly, I think he did this for his own sanity because it eliminated a lot of questions and 4x25 was simple and good enough. There's definitely room for fluctuation. That being said, 10% does seem a bit low to me. That's not really enough to move the needle if you need it. If you're going to include it in your portfolio, it's best to have enough so it can actually matter. I would be more comfortable myself with 15% as opposed to 10%. But that's my own subjective opinion on the matter.
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Re: What have we learned over last 10 years?

Post by dualstow » Mon Jul 01, 2019 10:20 am

Totally agree with Mr Ward above. The Architect himself (Harry Browne, not that guy in The Matrix) had a caller on 'Money Talk' who asked about exactly this. The caller started out with 4x25% but had let his portfolio drift. I forget what was wrong with the other out-of-whack asset, but primarily, he had let gold drift down to 10%. "Hmm", Harry said. You don't really have a Permanent Portfolio."

Still, there are perfectly good portfolios with less gold, and I think PortfolioCharts bears that out.

I keep 25% in the pp to run it properly, but if you add the vp, gold is 10% of my grand total. I guess you could say my pp is permanently in beta, like Google products, and part of the reason for that is that I don't want 25% in gold until I have millions of dollars.

The takeaway, then, is to choose an allocation of gold that you can stick with, give or take a rebalancing range. Like Desert's.
Plenty of people I know offline have 5% in gold. (I think less than 5% in anything is probably not worth discussion). But, they don't stray far from that 5%, ever. Not timing, no sudden switch to 20% in gold at the expense of something else. It's not a pp. It works for them.
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Re: What have we learned over last 10 years?

Post by Thomas Hoog » Tue Jul 02, 2019 9:06 am

Agree, you can vary your allocations but after that you have to stick to it to make it work.
The funny thing is, I have 17 years PP experience (I have a 20 % Gold allocation) and I did my calculations this weekend (I do that quarterly).
And beside the 13 % yield Year to Day, really not normal !, the markets are nuts.
Over 17 years the bruto yield is about 6 %, (cash about 4%, bonds and Gold about 8 % and Stocks about 6 %). So Gold is more that just an asset against catastrophe, it did yield very well.
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