Rick Ferri Dissing HBPP

[goodasgold]

Over at the Bogleheads list, usually sensible Rick Ferri is continuing a campaign of disparagement against gold:


http://www.bogleheads.org/forum/viewtop ... 3&start=50

Libertarian666 has tried to set him straight, but more ammunition is needed. Please feel free to contribute to the BH debate, especially regarding Ferri's claim that owning gold is senseless because, over the long term, the price of gold remains constant.

[Khisanth]

I don't buy it, literally.

Like others have suggested, just getting over the hump and buying that first gold coin can be a game changer. I just might start collecting some junk silver just to have smaller units of value too!

[craigr]

Rick wants all assets in a portfolio generating cash flow. He does not like assets that do not have cash flow.

I like having assets that generate cash flow as well. But I also like having assets that everyone wants when the cash flow assets are having problems or there is an emergency.

So Rick basically assumes that an investing portfolio is going to go swimmingly and currencies never have serious hiccups. I assume that things may go swimmingly, but if not I want to have a backup option and the Permanent Portfolio allows for that.

I think the Permanent Portfolio worldview on this topic is more realistic when you read financial history and see what really happens when you invest over long time horizons.

[MediumTex]

Lots of people hate gold and no amount of evidence regarding strategic allocations that work such as the PP is going to change that.

I'm okay with that.  I don't feel the need to straighten out the thinking of everyone in the world who (in my view) has a faulty understanding of something.

I don't argue with parrots either.

[Early Cuyler]

Lots of people hate gold and no amount of evidence regarding strategic allocations that work such as the PP is going to change that.

I'm okay with that.  I don't feel the need to straighten out the thinking of everyone in the world who (in my view) has a faulty understanding of something.

I don't argue with parrots either.

Wisdom.

[craigr]

I used my six month quota up today by responding. Now I can't respond to another gold thread until February. Actually, in 2014 my quota drops down to one a year with an option for zero depending on how busy I am. It is not useful to debate with others about gold in a diversified portfolio to convince them, I post mainly for the lurkers that are considering the merits.

[dragoncar]

I used my six month quota up today by responding. Now I can't respond to another gold thread until February. Actually, in 2014 my quota drops down to one a year with an option for zero depending on how busy I am. It is not useful to debate with others about gold in a diversified portfolio to convince them, I post mainly for the lurkers that are considering the merits.

Thanks, not everyone is a parrot, some people legitimately try to think it through.  I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

[MediumTex]

I used my six month quota up today by responding. Now I can't respond to another gold thread until February. Actually, in 2014 my quota drops down to one a year with an option for zero depending on how busy I am. It is not useful to debate with others about gold in a diversified portfolio to convince them, I post mainly for the lurkers that are considering the merits.

Thanks, not everyone is a parrot, some people legitimately try to think it through.  I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

Why wouldn't there be a real return to gold?

People always seem to assume this without explaining why it would be the case.

How do we define "real return"?

Even if gold didn't provide any real return, if its volatility offered appealing opportunities to consistently capture gains from its volatility, wouldn't that alone be a good reason to own gold so long as you had other assets that dampened the effects of gold's volatility on the overall portfolio?

[melveyr]

"Never try to teach a pig to sing. It wastes time and annoys the pig"

I feel like I should tattoo this inside of my eyelids.

[craigr]

Thanks, not everyone is a parrot, some people legitimately try to think it through. 

Often when debating you are not doing it to win against the other person, but to reach the audience that is not saying anything. I never get into an e-argument with someone to convince them. It will never happened (has it ever happened in the history of the Internet?). But those answers sit in the search engine and people come across them and do get something from seeing both sides of the discussion.

But the debate does get old. I literally have blown my quota of gold debates. In fact, I've blown my quota on most of these kinds of debates!

I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

Not that I'm big conspiracy buff, but it could also be because the CPI values being used are not matching what people experience for actual inflation.

[dragoncar]

I used my six month quota up today by responding. Now I can't respond to another gold thread until February. Actually, in 2014 my quota drops down to one a year with an option for zero depending on how busy I am. It is not useful to debate with others about gold in a diversified portfolio to convince them, I post mainly for the lurkers that are considering the merits.

Thanks, not everyone is a parrot, some people legitimately try to think it through.  I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

Why wouldn't there be a real return to gold?

People always seem to assume this without explaining why it would be the case.

How do we define "real return"?

Even if gold didn't provide any real return, if its volatility offered appealing opportunities to consistently capture gains from its volatility, wouldn't that alone be a good reason to own gold so long as you had other assets that dampened the effects of gold's volatility on the overall portfolio?

Return over inflation?  How do you define real return?  I'm guessing you've used the term before. 

Is it incorrect that gold has pretty much tracked inflation historically?  Even rick ferri seems to agree with gold bugs that "an ounce of gold has always bought a nice suit" or somesuch anecdote.  To expect a sustained return over inflation, the supply/demand dynamics would have to change.  Do we have a reason to think it will?  I'm talking about expectation, not possibility as of course anything is possible.

I agree that the rebalancing bonus is a good reason to hold gold, and as I understand it dampens overall portfolio volatility which some consider a plus.

I just don't see a reason to "expect" gold to continue retunrning 2% real over the next 30 years as it has over the last 30.

[craigr]

"Never try to teach a pig to sing. It wastes time and annoys the pig"

I feel like I should tattoo this inside of my eyelids.

Welcome back!

[Libertarian666]

Thanks, not everyone is a parrot, some people legitimately try to think it through.  I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

Why wouldn't there be a real return to gold?

People always seem to assume this without explaining why it would be the case.

How do we define "real return"?

Even if gold didn't provide any real return, if its volatility offered appealing opportunities to consistently capture gains from its volatility, wouldn't that alone be a good reason to own gold so long as you had other assets that dampened the effects of gold's volatility on the overall portfolio?

Return over inflation?  How do you define real return?  I'm guessing you've used the term before. 

Is it incorrect that gold has pretty much tracked inflation historically?  Even rick ferri seems to agree with gold bugs that "an ounce of gold has always bought a nice suit" or somesuch anecdote.  To expect a sustained return over inflation, the supply/demand dynamics would have to change.  Do we have a reason to think it will?  I'm talking about expectation, not possibility as of course anything is possible.

I agree that the rebalancing bonus is a good reason to hold gold, and as I understand it dampens overall portfolio volatility which some consider a plus.

I just don't see a reason to "expect" gold to continue returning 2% real over the next 30 years as it has over the last 30.

I do expect a real return although of course I don't know its magnitude.

My reasoning is:
1. The whole idea of an all-fiat currency regime is inherently absurd and unstable;
2. All central banks are trying to get a "trade advantage" by currency depreciation;
3. It is mathematically impossible for all fiat currencies to depreciate against one another;
4. The ever-increasing rate of money printing by all the major currency issuers will cause people to assign a monetary premium to gold, as the only money that cannot be printed.

The increasing desperation shown by the central banks in the currency wars makes me think we are nearing the expiration date of the current regime.

[MediumTex]

Thanks, not everyone is a parrot, some people legitimately try to think it through.  I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

Why wouldn't there be a real return to gold?

People always seem to assume this without explaining why it would be the case.

How do we define "real return"?

Even if gold didn't provide any real return, if its volatility offered appealing opportunities to consistently capture gains from its volatility, wouldn't that alone be a good reason to own gold so long as you had other assets that dampened the effects of gold's volatility on the overall portfolio?

Return over inflation?  How do you define real return?  I'm guessing you've used the term before. 

Is it incorrect that gold has pretty much tracked inflation historically?  Even rick ferri seems to agree with gold bugs that "an ounce of gold has always bought a nice suit" or somesuch anecdote.  To expect a sustained return over inflation, the supply/demand dynamics would have to change.  Do we have a reason to think it will?  I'm talking about expectation, not possibility as of course anything is possible.

I agree that the rebalancing bonus is a good reason to hold gold, and as I understand it dampens overall portfolio volatility which some consider a plus.

I just don't see a reason to "expect" gold to continue retunrning 2% real over the next 30 years as it has over the last 30.

Those are good points.  I'm going to think about those things.

The thing is, everything you are saying was also true in 2000, and yet owning gold since 2000 has provided significant real returns.  I have a couple of explanations I would offer for why this happened, but it doesn't really matter why it happened, what matters is that it happened, and you either were or weren't able to participate in those real returns depending on whether you did or didn't own gold as part of a diversified investment portfolio.

[Larshus]

The problem with figuring out the real return for gold is two fold:

1) It has to be compared to something... a benchmark. WHAT benchmark? It could be argued the gold itself is the "golden" benchmark and everything else should be compared to it. If we look at it this way, gold has no real return, everything else revolves around it. If we use something besides gold as a bench mark we run into a loop problem with #2.

2) Gold has more inputs than any other financial asset. EVERYTHING is a price input. For instance 20 minutes ago housing numbers came out gold is moving up on those numbers. gold reacts on EVERYTHING. The frustrating part is that we don't know what those weightings are. We do know that the weightings are never constant and are always in flux (hence the reason I and others believe gold is the main benchmark). Anyways if we use another benchmark, that benchmark, in turn, is an input into gold, which creates a feedback loop.

Not considering gold as a benchmark has really only occurred in the last 100 years. Its my opinion (YMMV) that gold is the main benchmark and has no real return. It is what it is. Compared to other financial assets it goes up and down over time... but that the wrong way to look at it. I think instead comparing those assets to gold and stating that they go up and down over time is a more sane way of looking at the big picture.

P.S. for those of you that are following along at home and are still trying to grasp the concept, that does NOT mean gold doesn't go up or down compared to the dollar. Reverse it. Its constant. The dollar goes up or down compared to gold. Since we purchase everything in dollars (why most of the U.S. uses a dollar weighted benchmark of some sort) there are times where it looks like gold is making a real return. Its not. Dollar is losing value, which in turn makes the goods we buy with dollars cheaper compared to the purchasing price of a fixed amount of gold. Re-read this paragraph and think about it for a bit. Most people that hate gold don't understand this fundamental logic.

[Libertarian666]

The problem with figuring out the real return for gold is two fold:

1) It has to be compared to something... a benchmark. WHAT benchmark? It could be argued the gold itself is the "golden" benchmark and everything else should be compared to it. If we look at it this way, gold has no real return, everything else revolves around it. If we use something besides gold as a bench mark we run into a loop problem with #2.

2) Gold has more inputs than any other financial asset. EVERYTHING is a price input. For instance 20 minutes ago housing numbers came out gold is moving up on those numbers. gold reacts on EVERYTHING. The frustrating part is that we don't know what those weightings are. We do know that the weightings are never constant and are always in flux (hence the reason I and others believe gold is the main benchmark). Anyways if we use another benchmark, that benchmark, in turn, is an input into gold, which creates a feedback loop.

Not considering gold as a benchmark has really only occurred in the last 100 years. Its my opinion (YMMV) that gold is the main benchmark and has no real return. It is what it is. Compared to other financial assets it goes up and down over time... but that the wrong way to look at it. I think instead comparing those assets to gold and stating that they go up and down over time is a more sane way of looking at the big picture.

P.S. for those of you that are following along at home and are still trying to grasp the concept, that does NOT mean gold doesn't go up or down compared to the dollar. Reverse it. Its constant. The dollar goes up or down compared to gold. Since we purchase everything in dollars (why most of the U.S. uses a dollar weighted benchmark of some sort) there are times where it looks like gold is making a real return. Its not. Dollar is losing value, which in turn makes the goods we buy with dollars cheaper compared to the purchasing price of a fixed amount of gold. Re-read this paragraph and think about it for a bit. Most people that hate gold don't understand this fundamental logic.

You have most of the answer but there is still another factor: loss of confidence in fiat currencies. In extreme cases, that can raise the real purchasing power of gold to almost unimaginable heights, since it is the only usable money: see Weimar Germany for examples.

[Mdraf]

I was in the anti-gold camp for most of my 25 year investment history.  About 5-6 years ago I took a good look at my investment decisions over that time period. I came to the conclusion that 9 times out of 10 I was wrong in predicting the future. When I made good investments it was mostly luck. So that led me to the "you can't predict the future" philosophy. Once I got there I bought all kinds of ETFs on a buy and hold basis with full diversification in several asset classes.  After a couple of years I found that I was spread out "too thin" because some asset classes were in fact closely correlated. Further research led me to Cuggino and PRPFX and eventually to HBPP. Now I'm agnostic about gold by itself but I see its value AS PART of a larger portfolio

[blackomen]

I can see Rick's point of view as it's pretty common among those with a strong and prestigious academic understanding of Finance.

I only started buying gold in 2009..  mostly as a speculative hedge against the possibility of inflation from QE (which never materialized.)

I'd have to agree with most of Ferri's statements about gold..

BUT..

I still believe Gold has its place in a diversified portfolio (i.e. HBPP)... I'd never own 100% gold (or 100% any single asset.)  Gold provides stability against the unknown, like an insurance plan and that's good enough for me.

[dragoncar]

The problem with figuring out the real return for gold is two fold:

1) It has to be compared to something... a benchmark. WHAT benchmark? It could be argued the gold itself is the "golden" benchmark and everything else should be compared to it. If we look at it this way, gold has no real return, everything else revolves around it. If we use something besides gold as a bench mark we run into a loop problem with #2.

2) Gold has more inputs than any other financial asset. EVERYTHING is a price input. For instance 20 minutes ago housing numbers came out gold is moving up on those numbers. gold reacts on EVERYTHING. The frustrating part is that we don't know what those weightings are. We do know that the weightings are never constant and are always in flux (hence the reason I and others believe gold is the main benchmark). Anyways if we use another benchmark, that benchmark, in turn, is an input into gold, which creates a feedback loop.

Not considering gold as a benchmark has really only occurred in the last 100 years. Its my opinion (YMMV) that gold is the main benchmark and has no real return. It is what it is. Compared to other financial assets it goes up and down over time... but that the wrong way to look at it. I think instead comparing those assets to gold and stating that they go up and down over time is a more sane way of looking at the big picture.

P.S. for those of you that are following along at home and are still trying to grasp the concept, that does NOT mean gold doesn't go up or down compared to the dollar. Reverse it. Its constant. The dollar goes up or down compared to gold. Since we purchase everything in dollars (why most of the U.S. uses a dollar weighted benchmark of some sort) there are times where it looks like gold is making a real return. Its not. Dollar is losing value, which in turn makes the goods we buy with dollars cheaper compared to the purchasing price of a fixed amount of gold. Re-read this paragraph and think about it for a bit. Most people that hate gold don't understand this fundamental logic.

It's a hairy problem, but this makes sense (although I'd argue every good has just as many potential inputs - everything is constantly valued or devalued compared to something else).

Perhaps we can generally say that up until now, things have gotten cheaper due to manufacturing efficiencies and scientific progress.  A few things have gotten more expensive, I believe, like oil.  But overall, the standard of living (from a consumption standpoint) will continue to increase as long as we have innovation and enough materials.

So if the price of the same computer drops every year, and energy increases at "inflation" (ie the se rate as gold), in dollars, with everything else hypothetically constant, then gold had a "real" return because you increased your consumptive standard of living per oz.

The question becomes whether these efficiencies will continue to generate real returns or whether our world becomes too top heavy and the cost of living (in gold) begins to increase.

[rhymenocerous]

If I am recalling the podcast Craig did with Rick correctly, I believe he did concede that holding hard assets is useful for fighting high inflation.  In his case, however, I believe he prefers to hold real estate (or ranch land) over gold.

[Tyler]

I always find it interesting when someone lists every possible reason why gold shouldn't work as a productive part of a portfolio, but skates over the fact that it does work.  Quite well, in fact.

I enjoy learning as much as I can about the inner workings of the HBPP because it's well thought out.  But more importantly, it works.  And compared to the alternatives, it works quite consistently with very little effort and less risk. 

Smart people have a tendency to eventually outsmart themselves.

[frugal]

"Never try to teach a pig to sing. It wastes time and annoys the pig"

I feel like I should tattoo this inside of my eyelids.

I will use this phrase

perfect

[AgAuMoney]

I'm still not personally sure why we should expect a positive real return on gold unless its becoming more scarce.

Gold is definitely becoming more scarce.  Each oz costs more to mine (ore grades are typically much worse than 50 years ago) and more people in the world wanting gold.

Silver has an even better story.

[Larshus]

Gold is definitely becoming more scarce.  Each oz costs more to mine (ore grades are typically much worse than 50 years ago) and more people in the world wanting gold.

Silver has an even better story.

This is a bit of a misnomer. There are really 2 parts to this.

1) Gold has been more expensive to mine for the last few decades as energy prices increase. The price of extracting gold from the ground is tightly coupled with energy prices. This has nothing to do with scarcity. For instance sea water contains massive amounts of gold.. way more than the entire amount found in the earths crust. Its just very energy intensive to remove it.

2) The population on the earth has been steadily increasing faster than the amount of ounces above ground. So you could say that the amount of gold available per person as a % has been going down making it more "scarce". The problem with this statement is not everyone buys gold. Gold's price is determined at the end of the day by the demand and supply of it. Lets assume a fairly fixed supply with a marginal addition to it each year (destruction+mining operations). The *demand* is what really matters. As I stated before the inputs into that demand are very hard to figure.

The dynamics here are different than say, a stock. Creating more shares is as easy as an accounting entry. Ok, so its not quite as easy as that. But you get the idea. Swaps, or other derivatives are even easier to create. When the price of gold runs because demand peaks there is no way to create more physical. Sure, more futures can be created, but that only works until the real panic sets in and no one wants paper gold. In the equity world when a company such as TESLA runs up, the company has the option to issue more to capitalize on the demand and fund the growth of the company. That doesn't happen for gold.

So gold is rare, and its scarce, but for entirely different reasons that people tend to think.

[AgAuMoney]

Larshus, I do not know what you mean by "misnomer."

I did not name anything incorrectly.

Did I say energy costs did not matter?  Of course not, because they do matter.  However gold production costs have been increasing longer than energy costs.

Did I say population caused increased gold prices?  Of course not.  That would be stupid.

Instead of attacking your strawmen, if you are going to call me out please directly address the points I made.

Energy costs matter, but costs were going up in the 1990's even as energy costs were dropping.  One of the primary if not the main reason why gold is getting more expensive to mine is because the best ore grades are getting worse, and are now much worse than they were 50 years ago. Discarded tailings from 50-100 years ago are now being mined because they have more gold than does a many a "productive" gold mine.  When 7-10 grams of gold per tonne is considered a "bonanza" strike, you know standards have changed to a accommodate this new reality.  Energy costs go up far faster when you double the amount of material you have to handle to get your gold.  (And by the way, your seawater idea is related directly to the concentration of gold in seawater.  Gold in seawater is only milligrams per tonne, by weight it is 1000x worse than any producing mine would consider today.  The appeal of seawater is the ease of access to the raw "ore" and disposal of the waste, but that ease still does not make the cost of recovery feasible - just on a material handling basis.)

Population does not directly affect demand, and that is why I did not bring it up.  What matters is how many people are demanding gold.  That number is increasing significantly faster than population especially since China legalized owning gold.