Expected Return of Gold

[rhymenocerous]

I've seen it quoted in many places that the expected real return of gold is 0%.  Where does this come from exactly?  I looked at the actual data craigr posted in his blog here: https://web.archive.org/web/20160324133 ... l-returns/

We can calculate the geometric expected return by taking [(1 + Return_1972) * (1 + Return_1973) * ... * (1 + Return_2012)] ^ (1/41) - 1.  Based on the data, the expected return for gold is about 8.9%.  This doesn't take inflation into account.

Edit: Okay, we can take inflation into account as follows: [(1 + Return_1972 - Inflation_1972) * (1 + Return_1973 - Inflation_1973) * ... * (1 + Return_2012 - Inflation_2012)] ^ (1/41) - 1.  Adjusting the data in craigr's blog, we get that the real expected return is 4%.

[Kshartle]

If gold were functioning as money instead of FIAT paper the nominal return would depend on prevailing interest rates. The real return would be higher though as prices would tend to fall rather than rise due to technology and greater productivity. This would mean gold today would in general have less purchasing power than gold in the future, with allowances for additions to the gold supply or possibly war or some other calamities affecting production.

A penny saved would really be a penny earned.

The additional benefit of money gaining in value rather than losing it would be to encourage savings rather than over consumption. The "spend everything now on junk" economy would transform into an economy with much greater capital investment, enabling greater productivity gains, more rapidly falling prices, more incentive to save etc. etc. and humans would grow extremely wealthy. Prices for goods and services would fall so much due to high productivity that the only poor would in general be voluntary poor.

Of course the FIAT paper that rolls off the presses and is created out of thin air is just a license to rob and steal through counterfieting. It makes us all poorer in general in order to enrich a very small percentage. The funny thing is, the gang of theives tries to convince everyone that this is what using gold as money would do and they cite their printing as a way to keep the masses fed and clothed.....as if printing slips of paper can  make us richer or more productive.

Many on this forum believe in this concept. They truly believe you can get something from nothing, you can prints slips of paper or stamp 1 trillion on a platinum coin and that will somehow improve the economy. They can't comprehend that you can't get something from nothing, and that if "money" is printed out of thin air, the purchasing power it has must have come from somewhere else. To be more specific, it was stolen from somewhere and someone else......and nothing good can come from stealing.

[Pointedstick]

Getting back to the subject of gold's expected return...

I think the 0% figure is one of those intuitive "this just feels right" sort of things. It makes sense to a lot of people that the expected return would be zero since it's just a lump of inert metal rather than the representation of some sort of income or growth potential the way bonds and stocks are.

[stuper1]

Wouldn't gold become more valuable if the total number of ounces available were decreasing relative to the total number of gold buyers?  So, if the number of gold buyers goes up faster than the number of ounces available, then the expected rate of return would be greater than zero.  Does this make any sense?

FYI, I don't know which of those numbers is actually increasing faster, but my gut feeling is that the number of buyers is increasing faster, due to more people worldwide joining the middle class and wanting a place to put savings.

[Kshartle]

The main reason gold rises in dollar terms over the long run (decades) is due to supply of dollars growing much faster than the supply of gold. In the short run it's more to due with inflation expectations and trends, the idea that other investments are much more desirable (i.e. stocks this year).

Non-US demand and the increased wealth of the rest of the world should continue to push up prices as an emerging lower-middle class around the world become buyers and holders also.

I think the growing wealth around the world combined with the growing supply of dollars relative to gold make the case for gold as a safe long-term bet for a nominal and real return.

To put a number on it........well I think the foreign demand and supply of dollars will at least be as strong in the next 40 years as it was in the last 40 so the 8% average or whatever should hold up or increase.

Needless to say this is all my opinion but I wouldn't state it if I thought it was wrong.

[Gumby]

The additional benefit of money gaining in value rather than losing it would be to encourage savings rather than over consumption. The "spend everything now on junk" economy would transform into an economy with much greater capital investment, enabling greater productivity gains, more rapidly falling prices, more incentive to save etc. etc. and humans would grow extremely wealthy. Prices for goods and services would fall so much due to high productivity that the only poor would in general be voluntary poor...Many on this forum believe in this magic. They truly believe you can get something from nothing.

Not sure you need to make every topic into an anti-political statement, but you should start a new thread on this subject because a lot of people would agree with you that buying "junk" and overconsumption isn't exactly a good thing. However, nobody on this forum believes in "magic" — those kinds of mischaracterizations don't sway anyone to understand your viewpoint.

The main reason gold rises in dollar terms over the long run (decades) is due to supply of dollars growing much faster than the supply of gold.

In nominal terms, sure. But, I'm not sure that's what would make it rise much in real terms unless people were overly concerned about the amount of dollars — in which case it would be more about perception and confidence. The question was about real terms.

[Kshartle]

The additional benefit of money gaining in value rather than losing it would be to encourage savings rather than over consumption. The "spend everything now on junk" economy would transform into an economy with much greater capital investment, enabling greater productivity gains, more rapidly falling prices, more incentive to save etc. etc. and humans would grow extremely wealthy. Prices for goods and services would fall so much due to high productivity that the only poor would in general be voluntary poor...Many on this forum believe in this magic. They truly believe you can get something from nothing.

You should start a new thread on this subject because a lot of people would agree with you that buying "junk" and overconsumption isn't exactly a good thing. However, nobody on this forum believes in "magic" — those kinds of mischaracterizations don't sway anyone to understand your viewpoint.

The main reason gold rises in dollar terms over the long run (decades) is due to supply of dollars growing much faster than the supply of gold.

In nominal terms, sure. But, I'm not sure that's what would make it rise in real terms. The question was about real terms.

I edited out the term "magic".

If the long-term rise in gold prices (in USD) is a function of a greater dollar supply and rising use as a store of value around the world....then the gain in real terms would have to come exclusively from the latter, as well as increased utility in industry.

Does anyone know where you can obtain the average annual M2 increases? I beleive they stopped posting M3 years ago.

It might be interesting to see how close the long-term average growth of M2 or M3 compares to the long-term average growth of the gold price.

[frommi]

I've seen it quoted in many places that the expected real return of gold is 0%.  Where does this come from exactly?  I looked at the actual data craigr posted in his blog here: https://web.archive.org/web/20160324133 ... l-returns/

We can calculate the geometric expected return by taking [(1 + Return_1972) * (1 + Return_1973) * ... * (1 + Return_2012)] ^ (1/41) - 1.  Based on the data, the expected return for gold is about 8.9%.  This doesn't take inflation into account.

Edit: Okay, we can take inflation into account as follows: [(1 + Return_1972 - Inflation_1972) * (1 + Return_1973 - Inflation_1973) * ... * (1 + Return_2012 - Inflation_2012)] ^ (1/41) - 1.  Adjusting the data in craigr's blog, we get that the real expected return is 4%.

The problem with this calculation is that you are assuming that the current gold price is in the mean. 0% real return would be just logical, why should 1 gold bar buy more food/house/land etc. in 1900 than today? It can have nothing todo with money supply because in this comparison there is no money involved. With this logic you can calculate which price for gold would be "fair" or the mean to which it should return. ( and this is a lot lower than today  )

[Kshartle]

0% real return would be just logical, why should 1 gold bar buy more food/house/land etc. in 1900 than today? It can have nothing todo with money supply because in this comparison there is no money involved. With this logic you can calculate which price for gold would be "fair" or the mean to which it should return. ( and this is a lot lower than today  )

Why does the price of electronics drop every year in dollar terms despite increases in the money supply? Improved technology, better organization of humans to produce, free trade permitting labor to move where it is cheapest. This is why prices for practically everything should drop in gold terms in the long run.

[frommi]

0% real return would be just logical, why should 1 gold bar buy more food/house/land etc. in 1900 than today? It can have nothing todo with money supply because in this comparison there is no money involved. With this logic you can calculate which price for gold would be "fair" or the mean to which it should return. ( and this is a lot lower than today  )

Why does the price of electronics drop every year in dollar terms despite increases in the money supply? Improved technology, better organization of humans to produce, free trade permitting labor to move where it is cheapest. This is why prices for practically everything should drop in gold terms in the long run.

Ok, take median us household income. According to http://www.multpl.com/us-average-income it was 15000 in 1975 and is now 70000. Thats a factor of 4.6. Gold in 1975 was at 140$, so when you assume that gold in 1975 was fairly valued, today that number would be 644$.
And when you want to determine it by real cash yields, in 2004 we had real cash yields of around 0.5%, today we are at 0.05%. In 2004 gold was at 435$, multiplying with the median household income factor a fair price of gold would be around 510$ today.

Look at this chart and believe me, there is potentially a lot of pain for gold owners ahead:

[img height=430 width=600]http://goldsilverworlds.com/wp-content/ ... r_2012.png[/img]

[Kshartle]

Ok, take median us household income. According to http://www.multpl.com/us-average-income it was 15000 in 1975 and is now 70000. Thats a factor of 4.6. Gold in 1975 was at 140$, so when you assume that gold in 1975 was fairly valued, today that number would be 644$.

Gold hit $195 in '74, so that would imply $897 at least based on the median US household income theory you're putting forward. You can pick any date and any price and compare it against something else to come up with a fair value price....but what is the basis of the assumption? Why should the US dollar price of gold track the US median income? I suppose it makes some sense if you think US hosehold incomes have risen by the same amount of dollar debasement but I'm pretty sure incomes have lagged the increase in the money supply by a fairly significant amount.

Their might be pain ahead. It looks like we're getting tax-loss selling today. I hope it doesn't break the June lows. If it doesn't.....who will be selling in Jan or Feb? If you're thinking about selling your gold, why not do it today? Can you sell in Jan and still book the tax-loss?

[frommi]

When you are a short term trader, today is possibly a good day to buy gold. But when 1180 is falling, don`t expect that you can sell anywhere near that price. But in the long run based on the above assumptions a gold price of 600-800 would be the mean to which it normally should return. There is one thread in this gold forum where one could see the correlation between real cash yields and the gold price. We are now near positive real cash yield territory again, because inflation is very low.

[Kshartle]

It's setting up a huge reversal day........I expect some fireworks before 2013 closes out.

[ns2]

Their might be pain ahead. It looks like we're getting tax-loss selling today. I hope it doesn't break the June lows. If it doesn't.....who will be selling in Jan or Feb? If you're thinking about selling your gold, why not do it today? Can you sell in Jan and still book the tax-loss?

I sold the last of my taxable ETF gold yesterday to lock in the loss. According to my understanding, you have to lock it in no later than Dec. 31. Could be wrong but I don't think so. If nothing else, the brokers have to have time to get the tax statements ready.

Plan on buying in January or early February when I re-balance. I normally fund our Roth IRA's for the year at this time but my thinking is I will buy gold instead this year. It's the one asset class I don't cringe at buying when it's down.

[Kshartle]

Their might be pain ahead. It looks like we're getting tax-loss selling today. I hope it doesn't break the June lows. If it doesn't.....who will be selling in Jan or Feb? If you're thinking about selling your gold, why not do it today? Can you sell in Jan and still book the tax-loss?

I sold the last of my taxable ETF gold yesterday to lock in the loss. According to my understanding, you have to lock it in no later than Dec. 31. Could be wrong but I don't think so. If nothing else, the brokers have to have time to get the tax statements ready.

Plan on buying in January or early February when I re-balance. I normally fund our Roth IRA's for the year at this time but my thinking is I will buy gold instead this year. It's the one asset class I don't cringe at buying when it's down.

This is what I think a lot of people have been doing and are going to do. I've got some gold and silver ETFs as well as gold miners and I'm contemplating a last minute sale for tax purposes.

I don't want to miss out on a giant January though and I kind of have this suspicion we'll see a boatload of buying here in Jan. I think I'll just hold on.

Who would want to sell next week or next month when they could have just sold in Dec? I think there'll be a lot of buyers and few sellers to match the orders. I am definately biased though.

[Reub]

I believe that you can sell GLD or IAU and immediately turn around and buy GTU, or vice versa. This should not trigger the wash sale rule as they are different.

[Kshartle]

Is anyone else doing this?

[Libertarian666]

I believe that you can sell GLD or IAU and immediately turn around and buy GTU, or vice versa. This should not trigger the wash sale rule as they are different.

I believe this is correct also.

[Kshartle]

I ended up selling GDX and buying GDXJ. As you can imagine, with FIFO it didn't take long to make out my capital loss. I originally bought at $42. It's $21 now so the math was pretty easy.

Hey they both had nice days. I will be shocked if they don't have a phenomenal Jan and 2014.