One of the traits for every asset class we have at my firm is it must have an expected return. Can someone explain to me the expected return on Gold and where it comes from? This is a serious question.
^^ this is what i’ve talked of. gold’s price is based on the probability of fiat currency implosion, either with the USD or all currencies worldwide. in either scenario, we will likely not have enough gold to use it as a currency for 7 billion people anyway and so in turn, we will have to re-establish a new fiat currency. in both the worriless and a worrisome scenarios, gold’s value/utility is thereby nil. i’ll reiterate once again, goldbugs should honestly reconsider being goldbugs and consider being gun-toting apocalyptos b/c that’d be the smarter thing to do, in both the short- and long-term.
Its very simple. If you expect currency A to depreciate, you buy currency B. If you expect both currency A and B to depreciate, you buy gold. Considering just about everyone gov’t has been handing out money like candy, I think the thesis of expecting all currencies to depreciate is pretty sound.
You’re right that expected return needs to be positive. Not only positive, but also higher than the risk-free return. However, when you are talking about real purchasing power, risk free return becomes much more problematic. In fact, the only risk-free return would be a zero-coupon inflation indexed return by a security issued by a sovereign government with seignorage (ability to print money). Expected returns can come in the form of profitability from intelligent business management and organization, or in long-term shifts in supply and demand, or both. With commodities, you generally don’t have the business aspect, but you can make judgements on likely supply and demand dynamics. Remember that the lower the correlation with other assets in a portfolio, the lower the expected return needs to be in order to become an attractive portfolio addition. But low correlation is never a justification for buying something with a negative expected return (unless you are using the security to hedge another one).
There is a saying that if you are long gold, you are short man.
Buying gold makes you well prepared for times for which you could do the same much cheaper by buying bullets !!
When I think of the price for gold, unlike other precious metals which have some real consumed value, I think of the relationship between gold, inflation, the US$ currency value, oil price, and all kind of events/shocks that affect gold prices. While other commodity prices are more affected by supply/demand fundamentals (prices go up when market is in deficit and vice versa) gold price is not. It is more about how much do people want to keep gold as bars/coins/jewelry and how much central bank keep gold as reserves. And I don’t think the concept of keeping gold (instead of say platinum) as an investment will change anytime soon so yes I still go for gold.
At this point it’s only gold’s demand as a safe haven that is driving its value. The correlation coefficient for gold vs risk compared to gold vs inflation shows that gold vs risk is higher. Gold is very simply put, a very poor inflation hedge. Stocks or housing, excluding the recent housing insanity, outstrip gold, by far, in their ability to provide superior returns. I do have to laugh at people who point at any 10 year period and say “well, gold is superior to stocks in the last 10 years”, yet they forget that gold was at 872 in 1982 or so, what happens if we take those 27 years and compare gold to stocks? Anybody who read Snowball, or any other biography of Buffet, knows that his upbringing leaned towards being a gold bug. His father and uncle were both doomsdayers. His father, a devout Republican, thought FDR and the Democrats were destroying the currency and country. His hedge against this collapse was to stock flour and sugar in the attic, as well as purchasing a farm in the boonies with the uncle. While his father didn’t retire penniless, he certainly didn’t rack up tens of billions like his son. When it comes down to it, times aren’t great right now. That doesn’t mean it won’t get worse, but it WILL get better at some point. When it does and people seek more risk, gold will fall.
spierce Wrote: ------------------------------------------------------- > At this point it’s only gold’s demand as a safe > haven that is driving its value. This is why I was asking questions above. I have the same feeling right now.
spierce Wrote: ------------------------------------------------------- > At this point it’s only gold’s demand as a safe > haven that is driving its value. The correlation > coefficient for gold vs risk compared to gold vs > inflation shows that gold vs risk is higher. Gold > is very simply put, a very poor inflation hedge. > Stocks or housing, excluding the recent housing > insanity, outstrip gold, by far, in their ability > to provide superior returns. > > I do have to laugh at people who point at any 10 > year period and say “well, gold is superior to > stocks in the last 10 years”, yet they forget that > gold was at 872 in 1982 or so, what happens if we > take those 27 years and compare gold to stocks? > > Anybody who read Snowball, or any other biography > of Buffet, knows that his upbringing leaned > towards being a gold bug. His father and uncle > were both doomsdayers. His father, a devout > Republican, thought FDR and the Democrats were > destroying the currency and country. His hedge > against this collapse was to stock flour and sugar > in the attic, as well as purchasing a farm in the > boonies with the uncle. While his father didn’t > retire penniless, he certainly didn’t rack up tens > of billions like his son. > > When it comes down to it, times aren’t great right > now. That doesn’t mean it won’t get worse, but it > WILL get better at some point. When it does and > people seek more risk, gold will fall. Nice post. I agree with the sentiment. Gold provides you with no income so it has an infinite P/E (or is that undefined?). That’s enough of a reason for me to avoid it.
I think the P/E would be undefined since it is a vertical line. Right? RIGHT???
Re: the expexted return on gold – it has none. Same with put and call options – they have no expected return either. Gold, like a put or call option, should be used as a hedge.
Carson Wrote: ------------------------------------------------------- > spierce Wrote: > -------------------------------------------------- > ----- > > At this point it’s only gold’s demand as a safe > > haven that is driving its value. The > correlation > > coefficient for gold vs risk compared to gold > vs > > inflation shows that gold vs risk is higher. > Gold > > is very simply put, a very poor inflation hedge. > > > Stocks or housing, excluding the recent housing > > insanity, outstrip gold, by far, in their > ability > > to provide superior returns. > > > > I do have to laugh at people who point at any > 10 > > year period and say “well, gold is superior to > > stocks in the last 10 years”, yet they forget > that > > gold was at 872 in 1982 or so, what happens if > we > > take those 27 years and compare gold to stocks? > > > > > Anybody who read Snowball, or any other > biography > > of Buffet, knows that his upbringing leaned > > towards being a gold bug. His father and uncle > > were both doomsdayers. His father, a devout > > Republican, thought FDR and the Democrats were > > destroying the currency and country. His hedge > > against this collapse was to stock flour and > sugar > > in the attic, as well as purchasing a farm in > the > > boonies with the uncle. While his father > didn’t > > retire penniless, he certainly didn’t rack up > tens > > of billions like his son. > > > > When it comes down to it, times aren’t great > right > > now. That doesn’t mean it won’t get worse, but > it > > WILL get better at some point. When it does > and > > people seek more risk, gold will fall. > > > Nice post. I agree with the sentiment. > > Gold provides you with no income so it has an > infinite P/E (or is that undefined?). That’s > enough of a reason for me to avoid it. I take it equities is the only class you invest in then since it is the only one with a P/E
Most asset class pay out some sort of earnings, not just equities. MM pays interest, bonds pay coupons , equities pay dividends, real estate pays rent etc. Typically, the higher the risk, the lower the P/E. Those that don’t - e.g. commodities - tend to be bought and sold on the basis that they are useful inputs into the world economy, thus one can speculate on the supply/demand balance now and into the future. I don’t think any of that applies to gold. You are buying on the basis that you hope someone else will pay more for it in the future than you do now. It’s a bet on human psychology more than economic fundamentals.
Carson Wrote: ------------------------------------------------------- > Most asset class pay out some sort of earnings, > not just equities. MM pays interest, bonds pay > coupons , equities pay dividends, real estate pays > rent etc. Typically, the higher the risk, the > lower the P/E. > > Those that don’t - e.g. commodities - tend to be > bought and sold on the basis that they are useful > inputs into the world economy, thus one can > speculate on the supply/demand balance now and > into the future. > > I don’t think any of that applies to gold. You are > buying on the basis that you hope someone else > will pay more for it in the future than you do > now. It’s a bet on human psychology more than > economic fundamentals. I understand your point but the speculation of supply and demand for other commodities is similar to that of gold. While others can be traced to a view on the economy, gold can be traced to people’s view of currencies, mining output, and demand. India just announced a major purchase of gold. Mining has been relatively stangnant from what I’ve read. Clearly there is a strong case for depreciating currencies across many of the developed nations. All of this bodes well for gold. So while it’s not as easy to forecast, there is a certain amount of analysis that can be done. Much of it is speculative but you could make that argument across a host of securities. Where will bond yeilds be two years from now, what should the P/E of the S&P be, what should the P/E be of emerging stock markets are all questions that are answered in a speculative way. You can look to historical metrics but these might change. GLD is the only investment I’ve made since the summer. Stocks are arguably expensive since a credible read on the economy is so hard right now. A significant portion of the economy is functioning with the help of the US govt, not the sort of thing that makes you want to put money in stocks, especially when the S&P is trading at a premium to its historic levels. The only thing I can see happening for the foreseeable future is the US govt devaluing the dollar in order to imrpove the economy. Thus gold seems like a decent place to park my money. The alternatives available to an individual investor aren’t overly appealing. MM’s are yielding very little and you may even be losing money on a purchasing power basis. HY corporates have shot up to really high levels considering the amount of refinancing that needs to be done over the next few years. IG corporates are a decent place to be. I don’t like US equities at these multiples. I like emerging market stocks but they have also gotten to be expensive, couldn’t see putting money in at this point. I don’t fully understand where I would want to be in foreign fixed income. I still would buy an individual security if I thought it made sense but I don’t get too much time to do that kind of work these days.
It’s a bet on human psychology more than economic fundamentals. That would describe every market. Art, wine, and rare gems do not pay income, but they outperform equities consistently. Plenty of things worth owning with lots of upside do not pay income. Gold has been money for thousands of years. It is universally accepted, portable, malleable, and rare. Therefore it is a good medium. Every fiat currency has eventually gone to zero. Mine supply is less than in 2001, though the price has quadrupled. A viable gold mining project is often on the order of 1 gram per tonne. That is right, you have to move 1 tonne of earth for 1/28th of an ounce. All of the gold mining stocks would have to double in value in order to just equal the market cap of Exxon. The total market cap of all silver miners world wide is about $10b. Doesn’t seem bubbly at all to me, but rather smart place to be. Wall of worry phase. Heavily talked about, under-owned.
CorsairIII Wrote: ------------------------------------------------------- > It’s a bet on human psychology more than economic > fundamentals. > > That would describe every market. yes all markets are based on supply and demand, even the stock market. but the demand for equities is based on future expected total return rather than purely speculative zero-sum capital gains expectations. > Art, wine, and rare gems do not pay income, but > they outperform equities consistently. Plenty of > things worth owning with lots of upside do not pay > income. This is true for the truly prized pieces of art, wines and rare gems, but there are countless numbers of all three that yeild no value whatsoever. they are also in the, “they have no consumable value” league, aside from wine, thats a no-brainer. > Gold has been money for thousands of years. It is > universally accepted, portable, malleable, and > rare. Therefore it is a good medium. Every fiat > currency has eventually gone to zero. if they all ACTUALLY went to zero, gold would have no measure of value for 7 billion people to use it properly. in no way would we ever spend endless resources refining gold so that 7 billion people could use it directly as currency. > Mine supply is less than in 2001, though the price > has quadrupled. A viable gold mining project is > often on the order of 1 gram per tonne. That is > right, you have to move 1 tonne of earth for > 1/28th of an ounce. > > All of the gold mining stocks would have to double > in value in order to just equal the market cap of > Exxon. The total market cap of all silver miners > world wide is about $10b. Doesn’t seem bubbly at > all to me, but rather smart place to be. Wall of > worry phase. Heavily talked about, under-owned. true. but Exxon “mines”/produces a consumable NECESSITY to our daily life. oil is in every single thing we touch. gold isn’t consumed thus the supply will always remain and will continue to grow. if there were ten barrels of oil left in the world, exxon could probably charge millions for them. if there were ten ounces of gold left in the world, they would be useless because there wouldn’t be enough to do anything with it. there’s a reason why platinum, though more rare and durable, is not a store of value in anyway, its because its TOO rare. I would never invest in something where the price drops when supply gets too low. but the clearest and most evident point is that gold has no production value and thus in sane society, has no value. what would happen to the price of gold if our world population started to decline… think about that for awhile.
I see you haven’t needed to buy gold jewelry for anyone lately. It is true that one can avoid dying without gold, but without it, you will also avoid living. 
Gold has the advantage of being valued, portable, and accepted as a means of exchange (albeit less easily than fiat currencies in practice) pretty much everywhere in the world. Historically, 1 ounce of gold has bought roughly 400 loaves of bread. Gold probably doesn’t make sense as a long term investment, because its expected change in real purchasing power over the long term is zero. But if the risk free asset actually has substantial inflation risk, then gold can make sense in a portfolio as an alternative to the Rfr and for its diversification possibilities. TIPS maybe can be a substitute for Rfr too, but if interest is taxed at regular income rates and gold appreciation is taxed at capital gains rates, there is another difference between the two. And, not all investments need to be based on long term expected value. If you expect changes in short term value based on psychology, short-term needs, etc., it can also make sense to make a tactical allocation to gold. So, yeah, it probably doesn’t make sense to have gold as a long term part of a strategic asset allocation, but there are lots of tactical reasons to do it and some diversification ones as well.
bchad, clear and concise as always. and you’ve made a point that is much more acceptable than “invest in gold b/c its been around for the last 5000 years… but for the 100 million before that, it wasn’t”. haha. and actually, i bought an engagement ring about 2 weeks ago and will be needing wedding rings in the next couple of months. all platinum baby! now thats a real investment.
but Exxon “mines”/produces a consumable NECESSITY to our daily life. Right, so therefore by that logic most things are unnecessary. You have probably invested or speculated in Apple, Coke, financials etc… none of which are necssary for daily life. Their value, price are determined by what people are willing to pay for their products. I have owned physical gold, silver, and platinum for a long -time. Platinum is very rare, though the substititution effect with palladium (now 20% used in diesel, which was not done in the past) makes it harder to evaluate. I’ve traded platinum for years purely on technicals, quite well. Bash gold all you want, i have heard it since 2005. Doubters clearly show the wall of worry stage. All manias end with certainty that prices will only go higher by the public. Short-term over bought, long-term multiples left to go. Gold was discovered long before platinum. You and I will be long dead before the global population declines, so why do you care? I also would rather not short, Paulson, Einhorn, Tudor Jones, and Bass. If you are comfortable doing so, good luck.