Gold is sinking. Don't look!

[MediumTex]

Meanwhile, I'm enjoying Craig's post over at bogleheads.
http://www.bogleheads.org/forum/viewtop ... 0&t=111314

That's a good discussion.

Craig is like a samurai facing down a mob of slow-thinking villagers.

[dualstow]

It annoys me that an intelligent person like nisiprius continues to bring up gold prices from before the decoupling with the dollar and employ them in his argument. I guess a case could be made that government intervention could again change the playing field, but come on!

[dragoncar]

It annoys me that an intelligent person like nisiprius continues to bring up gold prices from before the decoupling with the dollar and employ them in his argument. I guess a case could be made that government intervention could again change the playing field, but come on!

I was wondering when someone would point that out.  But the first reply was actually agreement.

[MachineGhost]

I believe that is a screenshot from Yojimbo, one of the many classics from Kurosawa.  It is well worth watching!  http://www.imdb.com/title/tt0055630/

[dualstow]

It annoys me that an intelligent person like nisiprius continues to bring up gold prices from before the decoupling with the dollar and employ them in his argument. I guess a case could be made that government intervention could again change the playing field, but come on!

I was wondering when someone would point that out.  But the first reply was actually agreement.

I suppose that one unspoken reality is that a rise in the price of gold is more likely to bring more flighty investors over to the pp strategy from bogleheads, and vice versa. If we could all maintain calm like Toshiro Mifune* maybe we'd never switch strategies. I was a happy Boglehead, and I certainly would not have even considered the pp if stocks had kept rising and gold had plummeted, so I will admit that I joined for all the wrong reasons.

However, and this is the important part, I'm not going to be that guy that jumps ship if gold goes down, even down to $450 an oz. I'll rebalance into it like I'm supposed to. And if I die of old age without seeing gold come back up, my heirs are going to love their uncle's foresight. Gold is weird. It's bound to disappoint us at some point and I knew that going in.

*Toshiro Mifune is the actor who plays the samurai above. I liked to say his Japanese name and my Chinese-speaking companion naturally read the characters in a Chinese way (the same way we pronounce P-A-R-I-S our way, English, and not the French way, even though it's written the same). Finally, we compromised and started both using the English "translation" of the characters: Three Ships Sensitive Man. So, that samurai will always be Three Ships Sensitive Man to me. ;-)

[rocketdog]

Don't think of it as "sinking"... think of it as "going on sale". 

Also, remember that the different parts of a portfolio are like planets, each with its own orbit.  At times those orbits will converge in seemingly strange ways where they appear to be aligning.  At other times they will diverge as if being repelled by one another.  In the end, the only thing you can be certain of is the certainty of change. 

Patience, grasshopper.

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[notsheigetz]

Well, if you're in a situation like mine and have been putting off the transition from ETF to physical gold because of the capital gains tax implications, this might be the "golden" opportunity to make the move.

[kapoios]

Some at that boglehead thread have worst understanding of survivorship bias than my skills at English grammar. Yes cash and bonds have better real returns from 1800 to 2012 if you didn’t invest in confederate bonds – notes, you didn’t live in Austria or Germany after ww1 or ww2 etc. etc. . As a Greek citizen I know a few things about risk of default and the real return on bonds. For first you have to invest money to get yield and second the issuer of the money must not default on them. Gold is money at hand and without an issuer so no real yield is expected because no risk of investing is taken by you to deserve it.

Another thing that one must note about gold is the statistical properties of its price. If an asset has no real return but enough volatility to have a net positive arithmetic return (what I mean by this is that 2*0.5 has zero growth but 0.25 positive arithmetic return when you rebalance) then it can have its position on a portfolio because it produces positive growth through rebalancing even if it doesn’t have growth by itself.

Anyway though I don’t follow as an investment strategy a permanent portfolio allocation, I find that a 10% or 20% allocation in gold is advantageous for any portfolio.

Best regards.

[Pointedstick]

Outstanding first post, kapoios. Welcome to the forum! I think many here (myself included) would be very interested in hearing your perspectives given the unfortunate situation your country finds itself in. Would you be comfortable sharing your investment portfolio?

[charliemckelvey]

Yes.  Fantastic first post kapoios.  I face planted on my first post.    But now I'm all better. 

[kapoios]

Thank you both.

As for my investing portfolio I have a more active approach and I don’t hold any bonds because I agree with Buffett’s view that at these levels they are priced to deliver “return-free risk”? instead of risk free return. So I am aprox. 20% gold, 20% stocks, 60% cash. I don’t know if the deleveraging on the balance sheets worldwide on one hand plus QEs and fiscal stimulus on the other hand will be inflationary or deflationary but I think there will be volatility like the 1970’s and opportunities to allocate more cash at stocks at lower prices.

Anyway, if someone was "brave" enough for holding a permanent portfolio only with Greek assets and rebalanced annually the returns would be (assuming I didn't make a mistake) something like

stocks bonds cash gold portf (starting value = 1)
2008 -65.51% 4.00% 5.00% 9.00% 0.88123
2009 22.96% 4.00% 5.00% 25.00% 1.006709
2010 -35.66% -50.00% 5.00% 37.00% 0.896838
2011 -51.88% -80.00% 5.00% 15.00% 0.646002
2012 33.38% 300.00% 5.00% 4.00% 1.198952

[buddtholomew]

That's remarkable volatility, both positive and negative in each of the individual assets. The max drawdown over the period was 35% and the investor recouped losses and had a 20% gain after bonds rose 300% in 2012. There are quite a few of Browne's philosophies bourne out in these returns - namely that an asset can have returns of 100,200 or even 300% to offset losses incurred in the other assets. The winners gain more than the decliners lose.

If you didn't rebalance into LTT at the end of 2011 to restore to 4x25, the PP value could have been significantly less. The question is whether one had the intestinal fortitude or means to rebalance into an asset that had already fallen 50 and 80% on consecutive calendar years.  Stocks were no bed of roses either. Cash steady at 5% throughout all this turmoil seems a little awkward.

[MachineGhost]

If you didn't rebalance into LTT at the end of 2011 to restore to 4x25, the PP value could have been significantly less. The question is whether one had the intestinal fortitude or means to rebalance into an asset that had already fallen 50 and 80% on consecutive calendar years.  Stocks were no bed of roses either. Cash steady at 5% throughout all this turmoil seems a little awkward.

I'm surprised gold didn't perform better.  Were there capital controls or other restrictions?  But we must keep in mind in a non-inflationary situation like Greece, the preferred currency to be held by the populace would have been the US dollar or German mark.  That has historically been the case in a crisis.  I feel gold is ultimately a hedge against the world's core economy (i.e. Rome) going belly up because there is simply no alternative.  No one on this planet has as liquid or as deep markets as the US for financial paper.

Still, I'd really hate to be in the situation after 2-years and being down 40% you realize you should have done it right from the outset.  If you cry Uncle and sell at the bottom you would not have benefitted from the recovery.

[kapoios]

As cash returns I used an approximate average of what you could get from 3month certificate of deposit at a bank. It fluctuated in the range of 4% - 6% depending on the amount you had available and how desperate was the bank for deposits at that precise time. Usually threatening to take the cash to another bank was sufficient to negotiate a good rate. Government 3month notes fluctuated in the range of 3% to 5% most of this period.

Government Bonds had a complicated default arrangement. Every old bond was replaced with several new government bonds with maturities from 2023 to 2042 plus some EFSF bonds (backed by the European Union) with one and two year maturities. Also at times those new government bonds had low transactions volume and wide bid – ask spread. Realistically I think it’s better to approximate the performance with no rebalancing. One euro at the start of 2008 was approximately 40 – 45 cents at the end of 2012 (market value plus coupons received).

Actual stock returns could be a little better than the index because first of the dividend yields and second of the high bank sector weighting of the index at the start of 2008. A more balanced stock portfolio would not drop 80% during this period. The banks where leveraged on government bonds, lost 95% - 99% and took the index down with them.

Gold returns was the typical denominated in euro returns. If Greece exited the euro after the default I suppose gold returns would be double that.

There were no capital controls etc. The only consequence is that now the state is informing everyone that exported large amounts of cash from Greek banks to foreign banks that according to some calculation algorithm of their incomes during the last ten years, the amount seem bizarre so they will tax it unless the taxpayer prove somehow with paper trails that he had sufficient income from the 80’s or the 90’s to justify the amount.

[Ariadne22]

There were no capital controls etc. The only consequence is that now the state is informing everyone that exported large amounts of cash from Greek banks to foreign banks that according to some calculation algorithm of their incomes during the last ten years, the amount seem bizarre so they will tax it unless the taxpayer prove somehow with paper trails that he had sufficient income from the 80’s or the 90’s to justify the amount.

Confiscation, clearly.

An interesting series of posts.  Thank you.

[portart]

It's pretty simple to figure out. We own 25% gold. When gold goes down, as it is now and no one knows how much, you can't make any money because it is so volitle. The equity side of things can't make up the difference and the rest (bonds and cash just crawl along). So you can't have it both ways, be safe and make money at the same time after a ten year run up in gold. Either take and wait (and it could be a long wait) for gold to recover significanty or move on.

[notsheigetz]

It's pretty simple to figure out. We own 25% gold. When gold goes down, as it is now and no one knows how much, you can't make any money because it is so volitle. The equity side of things can't make up the difference and the rest (bonds and cash just crawl along). So you can't have it both ways, be safe and make money at the same time after a ten year run up in gold. Either take and wait (and it could be a long wait) for gold to recover significanty or move on.

I've only been in the PP for a couple of years so it is a new experience to see the stock market making big gains and my portfolio going down (though only slightly for now). I wonder if I'm alone in this. Seems to me that government actions of late have been geared towards pumping up the stock market and only the stock market and if they finally succeed it's not going to be the best of times for the PP (Being the government I don't give them that much chance of success so I'm not really all that worried about it).

[Kshartle]

Finally succeed at what? They can blow up a bubble, but they can't print a vibrant economy. Either they've debased the dollar, or the economy is dependant on ultra-low rates and 85 billion created a month. The question is, how long will it go on. Everyone is scared that Bernenke will stop pouring fuel on the fire. At some point they'll realize there's no end in sight for the QE. It will take bigger and bigger does though to keep the bull market going.

You should read some of Harry Browne's books from the 70's on how inflation pushes up the stock market. They are his best IMHO.

I do think PPers are going to have a rough time. I am overweight gold and recently bought a lot of GDX at $42 and doubled it today under $38. So what do I know.........

[notsheigetz]

Finally succeed at what?

In "kickstarting" the economy, of course. Arousing the animal spirits. All that stuff!

Personally, my main goal right now is converting a lot of my ETF gold to physical. Since gold is down it seems like a good opportunity to get out of the ETFs without capital gains.

[globalcash]

I'm very new to pp too.  Please correct me if I'm mistaken, but why should we regularly monitor the price of gold?  Isn't the presence of gold more like an insurance component, rather than an active investment?  Wouldn't it be just depressing to continually watch it?  I think the value of gold will have a flat or downward trajectory for the next few years, but I will still be buying...only to sleep well at night, rather than to make significant appreciation.

Wouldn't monitoring and tweaking the three other components be a better use of our time?

[MediumTex]

I'm very new to pp too.  Please correct me if I'm mistaken, but why should we regularly monitor the price of gold?  Isn't the presence of gold more like an insurance component, rather than an active investment?  Wouldn't it be just depressing to continually watch it?  I think the value of gold will have a flat or downward trajectory for the next few years, but I will still be buying...only to sleep well at night, rather than to make significant appreciation.

It sounds like you are saying that if you plant a tree you probably shouldn't dig it up every week or two to inspect the roots to make sure that they are actually growing.

[globalcash]

I'm very new to pp too.  Please correct me if I'm mistaken, but why should we regularly monitor the price of gold?  Isn't the presence of gold more like an insurance component, rather than an active investment?  Wouldn't it be just depressing to continually watch it?  I think the value of gold will have a flat or downward trajectory for the next few years, but I will still be buying...only to sleep well at night, rather than to make significant appreciation.

It sounds like you are saying that if you plant a tree you probably shouldn't dig it up every week or two to inspect the roots to make sure that they are actually growing.

Exactly.  I think when the 2007-2009 crisis happened, there was worldwide panic that lasted a few years, and that's what boosted the value of gold.  Everyone was hanging on to USD and all of a sudden, it's intrinsic value was put into question.

Now, I don't think the world is as dependent on the US dollar, and have taken steps to lessen their exposure or dependence.  And so, if the USD declines, people will run to the yuan, euro, peso, or any other currency that seem less weak.

And gold would only be a last resort.

[Reub]

Finally succeed at what?

In "kickstarting" the economy, of course. Arousing the animal spirits. All that stuff!

Personally, my main goal right now is converting a lot of my ETF gold to physical. Since gold is down it seems like a good opportunity to get out of the ETFs without capital gains.

Is it possible to declare a capital loss on the sale of GLD, GTU, or gold?

[notsheigetz]

Finally succeed at what?

In "kickstarting" the economy, of course. Arousing the animal spirits. All that stuff!

Personally, my main goal right now is converting a lot of my ETF gold to physical. Since gold is down it seems like a good opportunity to get out of the ETFs without capital gains.

Is it possible to declare a capital loss on the sale of GLD, GTU, or gold?

Interesting question. I just assumed that you could. If it's an ETF or mutual fund, why not? I only had a small loss selling the portion I'm converting so it's not really going to be a big deal either way.

I suppose another question, if you're going to have a loss, would be whether the 30-day wash sale rule applied. I would think not.

[notsheigetz]

If you swap IAU or GLD for GTU, or vice-versa: no wash sale. If you swap GLD for IAU, that would probably be considered 'substantially identical' if you got audited.

I was swapping ETF gold for physical. Is that 'substantially identical'? An interesting question. Like I said, I suspect not but I haven't read all the fine print. Even if it is, how would they know?