Gyroscopic Investing

A potentially interesting paper:

http://papers.ssrn.com/sol3/papers.cfm? ... id=2078535

Abstract:     
Gold objects have existed for thousands of years but for many investors gold has only recently become a tradable investment opportunity. Gold has been described as an inflation hedge, a “golden constant”?, with a long run real return of zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. Given this situation is it time to explore “this time is different”? rationalizations? We show that new mined supply is surprisingly unresponsive to prices. In addition, authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. As a result investors in gold face a daunting dilemma: 1) embrace a view that “those who cannot remember the past are condemned to repeat it”?, there is a “golden constant”? and the purchasing power of gold is likely to fall or 2) embrace a view that “this time is different”? and the “golden constant”? is dead.

Gold reacts to currency collapse, hyperinflation, negative real interest rates, and a bad stock market. It doesn't react strongly to low-to-moderate inflation, especially when the economy is doing well. Why own gold when you're well-employed, your house is rising in value, your savings account is throwing off decent interest, and the stock market is making consistent gains?

Gold is catastrophe insurance. It's a flight-to-safety asset. There's no magical coupling to inflation. When people are afraid of inflation, it goes up. When they aren't, it just sits there, inert and unwanted, waiting for savvy people to buy it at low prices. 

In June 2012, Boglehead Librarian Barry Barnitz actually posted a link in this forum to what I think is the same paper, even though the abstract is not exactly the same.http://gyroscopicinvesting.com/forum/ht ... ic.php?t=1

PointedStick, you are consistent in your responses. :-)

dualstow wrote: In June 2012, Boglehead Librarian Barry Barnitz actually posted a link in this forum to what I think is the same paper, even though the abstract is not exactly the same.http://gyroscopicinvesting.com/forum/ht ... ic.php?t=1

PointedStick, you are consistent in your responses. :-)

Heh. I just find gold fascinating. It's so… subjective. A lot of people have difficulty wrapping their minds around gold. How could it react to inflation when there's no explicit peg or anything? TIPS are explicitly pegged to inflation, but gold is almost the opposite: there's no central planning, no bureaucrat adjusting the numbers. Now that the whole world is off a gold standard, its value is almost entirely determined by the free market. Gold's price is a reflection of the market's prediction of future inflation and crisis, not the government's measurement (accurate or not) of the actual amount of inflation already experienced.

Pointedstick wrote: Gold reacts to currency collapse, hyperinflation, negative real interest rates, and a bad stock market. It doesn't react strongly to low-to-moderate inflation, especially when the economy is doing well. Why own gold when you're well-employed, your house is rising in value, your savings account is throwing off decent interest, and the stock market is making consistent gains?

This is a very U.S. centric view.  Unlike U.S. stocks or housing, Gold is a worldwide market that is driven by much more than the behavior of the 1-2% of Americans who even know what Gold is.

systemskeptic wrote:

Pointedstick wrote: Gold reacts to currency collapse, hyperinflation, negative real interest rates, and a bad stock market. It doesn't react strongly to low-to-moderate inflation, especially when the economy is doing well. Why own gold when you're well-employed, your house is rising in value, your savings account is throwing off decent interest, and the stock market is making consistent gains?

This is a very U.S. centric view.  Unlike U.S. stocks or housing, Gold is a worldwide market that is driven by much more than the behavior of the 1-2% of Americans who even know what Gold is.

It is a U.S.-centric view because gold is a U.S.-centric market. We have an enormous effect on its price due to our very large and powerful economy whose state affects the entire world. If there's any single nation that what I said is actually true of, I think it's probably the USA. If you're a citizen of Kazakhstan, then yes, gold probably doesn't react as strongly to your local economy's movements, but it will still still hedge your Tenge against inflation.

Pointedstick wrote:

systemskeptic wrote:

Pointedstick wrote: Gold reacts to currency collapse, hyperinflation, negative real interest rates, and a bad stock market. It doesn't react strongly to low-to-moderate inflation, especially when the economy is doing well. Why own gold when you're well-employed, your house is rising in value, your savings account is throwing off decent interest, and the stock market is making consistent gains?

This is a very U.S. centric view.  Unlike U.S. stocks or housing, Gold is a worldwide market that is driven by much more than the behavior of the 1-2% of Americans who even know what Gold is.

It is a U.S.-centric view because gold is a U.S.-centric market. We have an enormous effect on its price due to our very large and powerful economy whose state affects the entire world. If there's any single nation that what I said is actually true of, I think it's probably the USA. If you're a citizen of Kazakhstan, then yes, gold probably doesn't react as strongly to your local economy's movements, but it will still still hedge your Tenge against inflation.

Excuse me? At least concerning physical gold, the U.S. share on the market is at most minor!

http://www.goldmoney.com/gold-research/ ... inant.html

I don't think PointedStick was saying that Americans' own so much gold per capita. He said,

We have an enormous effect on its price due to our very large and powerful economy whose state affects the entire world.

That goldmoney article looks like it's going to refute that statement.

At first glance, it would be reasonable to assume that America probably has the most economic influence on the gold market simply because the USA is the biggest economy in the world.

But then the author merely shows how much the Indians and the Chinese love gold.
There's the price drop which the author links to India's extra taxes and import duties, but as Slotine writes above

A lot of other interesting things happened between q1 2011 and q1 2012...

So far, I am only convinced that Asians love gold, something I was well aware of prior to reading this article. It may very well be that the author is right and that PS is wrong -- I don't know -- but Mueller (goldmoney) hasn't really shown much evidence at all to support his premise.

Here is the presentation to go along with the paper referenced in the OP.  A lot of sacred cows taken for given about gold are sacrificed.

http://faculty.fuqua.duke.edu/~charvey/Gold.pdf

MachineGhost wrote: Here is the presentation to go along with the paper referenced in the OP.  A lot of sacred cows taken for given about gold are sacrificed.

http://faculty.fuqua.duke.edu/~charvey/Gold.pdf

I think they are mixing a ton of historical events and dates to crowbar in a point. Comparing post-gold standard 1971 to gold standard eras of 1933 and earlier is fraught with peril for instance. Then of course there is ignoring historical events over those times that moved the price around (Civil War, WWI, etc.). Finally, there is the idea that in hindsight it's easy to say the market over estimated inflation because we know now what happened. But even in the late 1970s when inflation was double digits and going higher it isn't as certain. Even today the banks are doing a lot of very unprecedented things and you have a major world currency (Euro) constantly looking like it's going to implode at any moment.

However they at least acknowledge that long-term the price of gold is pretty much matching inflation. Problem is, what is "long term"? For the U.S. it's been relatively short since the breaking of the gold standard actually. In places like Argentina it's maybe 10 years. In Japan it could be another 100. Nobody knows. Which is why gold is really more of an insurance asset than thinking it's going to give returns like stocks/bonds will.

They then compare Brazilean cruzeiros/Real against the USD from 1980-2000 and say it fell 70%. But this is really just a reflection of the price of gold in dollars since the dollar dominates as a form of currency ahead of gold. It's also a curious time period to start/stop because it represents the high/lowest points of gold pretty much. What happened if they did the comparison from 1980-2013? Probably would look a lot better.

Standard stuff about mining gold from seawater or gold asteroid striking planet. Interesting, but really what's the bigger threat? An asteroid of gold hitting us (and us surviving), mining sea water for gold in a cost effective way, or a central bank/government doing stupid things with paper money and causing a massive currency crisis?

My bet is on #3 if human history is any guide.