What if Gold drops to $300.00 per ounce?

[barrett]

Interesting how gold did not really react at all like a safe haven during the latest Greek news, but it did recently react to China... which when you look at the GDP ratio of China:Greece, that sure makes sense.

Has it in fact reacted to China or are we just seeing what Desert has referred to as "gold's random walk?" It may just be that China devaluing the Renminbi and gold jumping a bit was a pairing of events with no causation, no?

The asset I expected to react to Greece was the long bonds, and I believe they did in fact do so during the sketchiest of Grexit times.

I should point out that I am just playing devil's advocate with regard to China & gold. My read is that China has just upped the currency war stakes which should translate to dollar uncertainty & at least some flow of money to gold.

[ochotona]

I am really beginning to wonder if gold is an intergenerational purchase at this point. Gold took 21 years go from peak to trough, 1980-2001.

2011 + 21 years = 2032. I'll be 71 years old. Or let's speed it up to 10 years peak to trough. In 2021, I'll be 60.

Then how long do we wait for it to go up... 2001 - 2011 was 10 years.

Low at age 71... high at age 81?

Would I be buying it for me, or for my heirs?

It it speculation... or is it just patiently waiting "for the optimum natural environment in which 15/35 rebalancing can function"?

[Libertarian666]

I am really beginning to wonder if gold is an intergenerational purchase at this point. Gold took 21 years go from peak to trough, 1980-2001.

2011 + 21 years = 2032. I'll be 71 years old. Or let's speed it up to 10 years peak to trough. In 2021, I'll be 60.

Then how long do we wait for it to go up... 2001 - 2011 was 10 years.

Low at age 71... high at age 81?

Would I be buying it for me, or for my heirs?

It it speculation... or is it just patiently waiting "for the optimum natural environment in which 15/35 rebalancing can function"?

My analysis is that the reason that gold took so long to bottom out after 1980 is that it had been discounting hyperinflation that didn't show up.

This slump is not even remotely comparable, since no one expects or has expected hyperinflation any time recently.

In addition, while everyone is frantic about the possibility of rate increases pushing gold down, if you look at the history of the 1970's, rates were increased many times during the big upswing in gold. So even if the Fed does start raising rates, which I don't expect they will, that should not be taken as an indication that there will be another plunge in gold.

Of course, all of this is just my opinion (well, not the rate history of the 1970's) and should not be taken as investment advice, etc.

[lazyboy]

Concerning the uncertainty of gold- this is an interesting analysis:
http://www.etf.com/sections/index-inves ... nopaging=1

I don't always tend to agree with or fully trust Larry Swedroe, btw, and I currently hold about 20% in gold. That said, this article brings to light a sobering analysis and is worth a sobering look.

[Libertarian666]

Concerning the uncertainty of gold- this is an interesting analysis:
http://www.etf.com/sections/index-inves ... nopaging=1

I don't always tend to agree with or fully trust Larry Swedroe, btw, and I currently hold about 20% in gold. That said, this article brings to light a sobering analysis and is worth a sobering look.

If you mean the very recent "study" by Erb and Harvey, according to the way it is described, it is totally meaningless, as I determined from just this section:

"The authors explain: “One way to think about the golden constant perspective is as a collection of statements that assert that: 1) over a very long period of time the purchasing power of gold remains largely the same; 2) in the long run, inflation is a fundamental driver of the price of gold; 3) deviations in the price of gold relative to inflation will be corrected; and 4) in the long run, the real return from owning gold is zero.”

The study covered the period beginning in January 1975."

How can anyone refer to a 40-year period as "a very long period of time" or call that "in the long run", when discussing an asset class that has several thousand years of history? It's ridiculous on its face.

[Libertarian666]

Concerning the uncertainty of gold- this is an interesting analysis:
http://www.etf.com/sections/index-inves ... nopaging=1

I don't always tend to agree with or fully trust Larry Swedroe, btw, and I currently hold about 20% in gold. That said, this article brings to light a sobering analysis and is worth a sobering look.

If you mean the very recent "study" by Erb and Harvey, according to the way it is described, it is totally meaningless, as I determined from just this section:

"The authors explain: “One way to think about the golden constant perspective is as a collection of statements that assert that: 1) over a very long period of time the purchasing power of gold remains largely the same; 2) in the long run, inflation is a fundamental driver of the price of gold; 3) deviations in the price of gold relative to inflation will be corrected; and 4) in the long run, the real return from owning gold is zero.”

The study covered the period beginning in January 1975."

How can anyone refer to a 40-year period as "a very long period of time" or call that "in the long run", when discussing an asset class that has several thousand years of history? It's ridiculous on its face.

I agree that the 40 years is not a "very long period of time."  But I do expect the purchasing power of gold to remain essentially constant over long periods of time.  Isn't that a central claim of most fans of gold ownership?  It's a reliable store of value, in a world of fiat currencies.  And I don't see that as a downside of gold, rather I think it's really pretty amazing and a fun fact to consider in our high tech world; one little ounce of gold will still buy a good men's suit 500 years from now.  Or perhaps 10 men's suits from Joseph A Banks.

I don't know what "most fans of gold ownership" claim. As for me personally, I see no reason that anything should maintain constant purchasing power over time. Actually, because purchasing power cannot be determined with any accuracy, it isn't even meaningful to say that it is constant over time.

The reason I hold gold is simple: it is money that no one can print. The reason that it became money in the first place is of historical interest only, not relevant to the question of whether one should hold it. All that matters for that purpose is whether it will remain money for the rest of my lifetime; my answer to that is "yes".

[mathjak107]

as mentiomed in my other thread , just rolling over 1 month t-bills since 1975 has been a better inflation hedge than gold

[Libertarian666]

I agree that the 40 years is not a "very long period of time."  But I do expect the purchasing power of gold to remain essentially constant over long periods of time.  Isn't that a central claim of most fans of gold ownership?  It's a reliable store of value, in a world of fiat currencies.  And I don't see that as a downside of gold, rather I think it's really pretty amazing and a fun fact to consider in our high tech world; one little ounce of gold will still buy a good men's suit 500 years from now.  Or perhaps 10 men's suits from Joseph A Banks.

I don't know what "most fans of gold ownership" claim. As for me personally, I see no reason that anything should maintain constant purchasing power over time. Actually, because purchasing power cannot be determined with any accuracy, it isn't even meaningful to say that it is constant over time.

The reason I hold gold is simple: it is money that no one can print. The reason that it became money in the first place is of historical interest only, not relevant to the question of whether one should hold it. All that matters for that purpose is whether it will remain money for the rest of my lifetime; my answer to that is "yes".

Well, I agree with what I think is your central point; that gold can't be printed, and that it will be valuable for the rest of your lifetime. 

I don't agree that gold is money, however.  In the 1970's, it became a commodity, and I doubt it will ever be money again.

Nope. Commodities have a stored inventory that is small compared to yearly production, and consumption is roughly the same as yearly production, whereas the stored inventory of gold is at least 50 years worth of extraction or consumption, and very little is actually used up even in "consumption"; that is, gold can be recovered from most of its uses, primarily jewelry, if the price goes up sufficiently.
For this reason, the rate of gold extraction is almost irrelevant to the price.

With commodities, most of the supply is from producers, who don't have any use for the commodity other than to sell it, whereas the consumers want to use it. This means that there isn't much conflict in their interests.

But as Harry Browne has explained, gold is different, because most of the gold in the world is supplied not by producers, as is the case with commodities, but by people who hold it for many of the same reasons that other people want to buy it. That is, inflation, monetary insanity, and other sorts of chaos. This makes the price extremely volatile, because an event that makes people want to buy gold also makes those who have it less eager to sell.

And as for whether it is money, yes, it is. You can trade it for any major currency at roughly the same bid/ask spread as any other currency transactions, in sizable trades. It is also handled by the currency exchange departments of banks, not the commodity departments.

Finally, it is held as money of last resort by all major central banks, which is of course not true of any commodity.

The fact that you can't use it to buy groceries at the supermarket is irrelevant, as you also can't use currency other than the currency of the country where the supermarket is located for that purpose.

Hope that helps.

[MediumTex]

It's also important to remember that gold is a backstop to political instability and political transition.

It's no surprise that T-bills have outperformed gold when we consider that T-bills are essentially a series of promises being made by one of the most successful political organizations in the history of the world (i.e., the U.S. government).

But history shows that however potent a political entity may be at a point in time, they are all ultimately transitory, and when a political entity moves into decline, the quality of its promises also declines.

Harry Browne was always clear that the U.S. dollar is Number One, but his theoretical framework also recognized that this might not always be the case, and since we don't know when a political transition may begin, we should be ready for it at all times.

We should all be happy that the price of gold isn't rising because it suggests things are going well in our world, which they are for the most part, but the fact that they may be going well at a certain point in time shouldn't be the basis for the belief that that will always be the case.

Think of all of the prosperous and stable societies in the 20th century that fell into chaos and in many cases never really recovered.

It has always seemed to me that one needs to be more of an anthropologist than a financial analyst to really appreciate the role of gold in a portfolio.

[mathjak107]

even when things go terribly wrong in the world gold does little so it isn't acting as the protector it should . to many other ways to bet on bad world events and gold is not the  recipient of any of that positive action .

gold is  only a bet  on the  failure of the dollar . which so far is the best house in the worst neighborhood and betting against it with gold has been quite costly for 40 years now in lost time and lost compounding  , a resource us humans run out of all to quickly .

well , everyone has to do what they feel right doing  so that is what is important , but i personally have a very strong opinion about including  gold  in my investments .

even a small percentage would be wasteful if you hold the recommended 5 or 10% . when the other 95% of the portfolio craps the bed in the supposed calamity the tiny gold position likely  wouldn't be worth the effort of maintaining it .

yeah , i know , those with gold have this vision of bartering their way some where safe . odds are they will just be robbed of it if things were that bad .

[ochotona]

There is an analogy to health insurance, actually. Why carry health insurance if you can defer the purchase and buy it when you find out you are really sick?

I don't doubt that given the mountains of debt that countries are piling up that they may very well have to inflate away their debts, and the purchasing power of currency to buy a men's suit and a loaf of bread may erode a lot.

The question, until that happens, what kind of opportunity cost is one willing to pay over one's lifetime for that insurance? And will the "insurer pay" when the "claim" is submitted?

Gold didn't really respond AT ALL during two World Wars wherein tens of millions of people died, neither to the Cold War in the 1950s and 1960s when people really thought the USA was going to be nuked. If not then... WHEN? 

Maybe goldbugs have just been sold a fake track record. Maybe HBPP is just flagrantly guilty of 1975-2015 "recency bias". See below. What do you think?

I do want to buy some gold, and the chart below says $400 per ounce is a fair average price, recent decades excluded, and $350 would be a better price. I sit and wait. Maybe for a very long time. But if it water-boards gold owners at -11% for the next decade, and then I will be a happy buyer of the gold you get complete disgusted with and sell to me in 2025 for $350.

[img width=600]http://static.cdn-seekingalpha.com/uplo ... 1790_1.png[/img]

[mathjak107]

you can study all the charts of the past  but all that matters is what  your results with gold are and will be . 
nothing else matters except your outcome .  all we have on our side is time and compounding in the investment world  and if we blow both by owning things that are poor choices not just years but decades that can hurt outcomes .  you reach a point it is to little to late .

[Cortopassi]

Gold to dollar fixed until Nixon in 1971.  Does that not explain the period before 1971 for the 1900s?  In nominal terms, I assume that means gold was flat with the dollar up to that period, except for the devaluation by Roosevelt in 1933.

So any period prior to 1971 for gold, as it behaves now, is relatively immaterial, no?

[mathjak107]

yep , anything prior 1975 is useless .

[dragoncar]

Gold to dollar fixed until Nixon in 1971.  Does that not explain the period before 1971 for the 1900s?  In nominal terms, I assume that means gold was flat with the dollar up to that period, except for the devaluation by Roosevelt in 1933.

So any period prior to 1971 for gold, as it behaves now, is relatively immaterial, no?

Is there another currency that we can use instead of USD?  Like the british pound?  Maybe everyone was on the gold standard back then?

[ochotona]

The price is UKP 739 today. Wake me up when it's UKP 300.

[Libertarian666]

Gold didn't really respond AT ALL during two World Wars wherein tens of millions of people died, neither to the Cold War in the 1950s and 1960s when people really thought the USA was going to be nuked. If not then... WHEN? 

Ok, now it's obvious that you know absolutely nothing about gold. Everyone, and I do mean everyone, who knows anything about gold could answer the question about why it didn't respond to world crises between 1932 and 1972... in their sleep.

Or of course you could be a troll, in which case, congratulations!

[mathjak107]

the problem we have is with the dollar so strong the country's having currency devaluation issues have to spend to much in their currency to want to buy it .

to date it hasn't been the dollar with issues but the rest of the world . it makes other options much more viable to them as alternative places to put money in to .

[ochotona]

Gold didn't really respond AT ALL during two World Wars wherein tens of millions of people died, neither to the Cold War in the 1950s and 1960s when people really thought the USA was going to be nuked. If not then... WHEN? 

Ok, now it's obvious that you know absolutely nothing about gold. Everyone, and I do mean everyone, who knows anything about gold could answer the question about why it didn't respond to world crises between 1932 and 1972... in their sleep.

Or of course you could be a troll, in which case, congratulations!

My second chart shows gold in UKP, not USD. Roosevelt was not King of Great Britain at the time.

[MediumTex]

Gold didn't really respond AT ALL during two World Wars wherein tens of millions of people died, neither to the Cold War in the 1950s and 1960s when people really thought the USA was going to be nuked. If not then... WHEN? 

Ok, now it's obvious that you know absolutely nothing about gold. Everyone, and I do mean everyone, who knows anything about gold could answer the question about why it didn't respond to world crises between 1932 and 1972... in their sleep.

Or of course you could be a troll, in which case, congratulations!

My second chart shows gold in UKP, not USD. Roosevelt was not King of Great Britain at the time.

Let's not call each other trolls.

Thanks. 

***

Was GB not on some kind of gold standard as well during a portion of that 1932-1972 period?

[Libertarian666]

Ok, now it's obvious that you know absolutely nothing about gold. Everyone, and I do mean everyone, who knows anything about gold could answer the question about why it didn't respond to world crises between 1932 and 1972... in their sleep.

Or of course you could be a troll, in which case, congratulations!

My second chart shows gold in UKP, not USD. Roosevelt was not King of Great Britain at the time.

Let's not call each other trolls.

Thanks. 

***

Was GB not on some kind of gold standard as well during a portion of that 1932-1972 period?

Every major country was on a fixed exchange rate standard tied to the dollar, which was in turn tied to gold, until 1973, when the "Bretton Woods" system broke down. So the price of gold in any currency could not respond to crises.

But again, this is monetary history 101. It would be best to know something about gold's history as money before criticizing its responses to crises.

[MediumTex]

My second chart shows gold in UKP, not USD. Roosevelt was not King of Great Britain at the time.

Let's not call each other trolls.

Thanks. 

***

Was GB not on some kind of gold standard as well during a portion of that 1932-1972 period?

Every major country was on a fixed exchange rate standard tied to the dollar, which was in turn tied to gold, until 1973, when the "Bretton Woods" system broke down. So the price of gold in any currency could not respond to crises.

But again, this is monetary history 101. It would be best to know something about gold's history as money before criticizing its responses to crises.

If you think about it, though, it was gold that signaled a crisis in the Bretton Woods system itself, right?  As I recall, it was other countries suddenly wanting to convert their dollars to gold that led to Nixon "closing the window".

In other words, even in a strictly controlled fixed exchange rate system, gold is always going to be there waiting to be the last currency standing in the event of political or monetary crises, which would potentially make owning it a good idea even in the 1932-1972 period (assuming it had been legal to do so) even though its value was fixed.

[Libertarian666]

Let's not call each other trolls.

Thanks. 

***

Was GB not on some kind of gold standard as well during a portion of that 1932-1972 period?

Every major country was on a fixed exchange rate standard tied to the dollar, which was in turn tied to gold, until 1973, when the "Bretton Woods" system broke down. So the price of gold in any currency could not respond to crises.

But again, this is monetary history 101. It would be best to know something about gold's history as money before criticizing its responses to crises.

If you think about it, though, it was gold that signaled a crisis in the Bretton Woods system itself, right?  As I recall, it was other countries suddenly wanting to convert their dollars to gold that led to Nixon "closing the window".

In other words, even in a strictly controlled fixed exchange rate system, gold is always going to be there waiting to be the last currency standing in the event of political or monetary crises, which would potentially make owning it a good idea even in the 1932-1972 period (assuming it had been legal to do so) even though its value was fixed.

Yes, of course. In fact, Harry Browne made his name as an investment analyst by predicting the breakdown of the fixed exchange rate system, in How you can Profit from the coming devaluation (http://www.amazon.com/How-you-Profit-co ... 087000073X). Since gold bullion wasn't legal for US Americans (:P) to own at the time, I'm not sure what he recommended, and I don't have a copy of the book to check; maybe Swiss francs, or $20 gold pieces?

(Note: apparently it is also available as a Kindle book: http://www.amazon.com/How-You-Profit-Co ... 8&qid=&sr=)

[Xan]

I think Tech is arguing that charts showing the price of gold over time aren't meaningful pre-1973 (or thereabouts), and certainly he is NOT arguing that gold isn't or wasn't worth owning.  I don't think he'd ever say something like that!

[Libertarian666]

I think Tech is arguing that charts showing the price of gold over time aren't meaningful pre-1973 (or thereabouts), and certainly he is NOT arguing that gold isn't or wasn't worth owning.  I don't think he'd ever say something like that!

Right. I can't imagine how anyone could conclude that I don't think gold was and is worth owning from what I have said. My portfolio allocation would be very hard to understand if that were true!