Telegraph : Gold is the final refuge against universal currency debasement

[Clive]

?

[MediumTex]

Of course, gold can go higher.

I would say that the central banks WANT gold to go higher.

[rickb]

Clive - Since this is clearly copyrighted material, please replace the content with a link to the source, i.e.  http://www.telegraph.co.uk/finance/comm ... ement.html.

[Reido]

For me - Gold was the most challenging portion of the PP to understand.  Superficially, it seems like an outdated resource - with no underlying value.  Gold was originally valuable because it was maleable, an excellent counductor, and resisted oxidation.

IMO - Today's value seems to be it's constant supply.  By that, I  mean that all the gold ever mined in the world could fit into a 20.4M cube and is 5.3 Billion ounces in total weight.  It does have uses in dentistry and some electronic/industrial uses as well, but generally it's purchased and used as a store of value.  Yearly production (in 2008) was about 72M ounces (less than 1.5% of current gold available in the market).  Basically the gold supply is growing slower than the population is growing - and since industrial uses are minimal - it seems to be an element independent of the economy - unlike other commodities that crash when the economy slows and their demand drops.

I now understand why it is such an important element of any portfolio...
In fact, I really don't think that the Bogle-style idea of investing internationally to hedge against a weakening dollar is sufficiently effective.  The US economy is, in large part, tied to the international economy - Total international stocks have a correlation of 0.62 with the S+P versus a correlation of -0.23 between TSM and Gold.

Is there more to the Bogle-style portfolio's than I understand?

[MediumTex]

I now understand why it is such an important element of any portfolio...
In fact, I really don't think that the Bogle-style idea of investing internationally to hedge against a weakening dollar is sufficiently effective.  The US economy is, in large part, tied to the international economy - Total international stocks have a correlation of 0.62 with the S+P versus a correlation of -0.23 between TSM and Gold.

Is there more to the Bogle-style portfolio's than I understand?

Remember, though, that the PP doesn't necessarily hold gold because it is a good hedge against a weak dollar--rather, the PP holds gold because of its volatility and its non-correlation with other PP assets.

It is probably safe to say that gold IS a hedge against a weak dollar, but it's not JUST a hedge against a weak dollar.

If you look at the dollar today, it is 10% or so higher than it was in 2008 compared to other currencies.  In other words, the dollar has held up very well compared to other currencies in the last two years.  If gold were just a hedge against a weakening currency, one wouldn't have expected it to perform that well in dollar terms since 2008 (since the dollar has not been weak--it's actually been very strong compared to other currencies).

If anything, think of gold as an uncertainty hedge.  The more uncertainty, the better gold will do.  I believe that we are currently in a secular bull market in uncertainty.

[Pkg Man]

For me, gold is one of the easiest components of the PP to hold.  It is LT Treasuries that I have the most angst about.

[Reido]

Medium Tex,
That brings up an interesting point...  Now, I've heard that Gold correlates inversely with a weakening dollar, and is not significantly correlated with inflation.

Interesting that you point out the strengthening dollar in this scenario...  then again, other currencies may be floundering as well, as their economies weaken like the dollar, and therefore the dollar appears to be stronger than it truly is...  which, I guess by definition, means that not much changes in terms of valuation, other than the growing uncertainty - subsequently driving gold higher.

Thanks.

[Wonk]

Generally speaking, gold's cycles are inverse to stock cycles.  Under a gold standard, cash is as good as gold--so investors flock to cash because they don't fear losing their purchasing power.  Outside of a gold standard such as the 70s-80 and 00s-present, investors flee to the strongest currency available--usually the reserve currency.  If the reserve currency's solvency is being called into question, investors prefer to hedge (or even opt out) with gold to protect purchasing power.  The key point is that when a stock market is overvalued in real terms, investors will flee to the safety of cash/bonds/gold, depending on what looks strongest.

The USD can rally along with gold if investors are trading other currencies for both USD and gold.  A few people have asked how a government devalues a currency outside of a gold standard--an easy way is for their central bank to buy their government's bonds (printing money) when there are no other buyers available.  For years, China has sold yuan and purchased dollars in order to keep their currency artificially low for export purposes.  When (not if) China cuts back on dollar purchases, the Fed can step in and purchase in order to devalue the purchasing power of the dollar.  This is obviously bullish for gold and will be the only means of resetting the imbalances in international trade that currently exist.  China & Japan will be the main losers as they collectively hold about $1.5T of U.S. gov't bond assets.  The "when" is yet to be determined--almost certainly under the next 10 years.

Here's a recent interview with Jim Rickards discussing China/Gold.  Clip at about 15 minute mark:

http://www.cbc.ca/video/#/News/TV_Shows ... 1602476688