Looks like gold is on a retreat. Is this just a blip or the beginning of a downward price adjustment. Thoughts?
What do you think the inflation adjusted annual return of gold is over the past 200 years? I’ll give you a hint: it’s not very high.
200 yrs? How long has Dow been around 100yrs or so. How are you comparing the two over 200 yrs?
I didn’t say anything about the DOW in my post above, though incidentally US stocks have returned about 7% annually over the past 200 years and bonds about 3.5% annually. Gold has had 0.2% inflation adjusted annual returns over the past 200 years including the recent run-up. It moves in boom/bust cycles of varying lengths. Nothing goes up forever. Gold is no exception.
Who said that gold goes up forever?
bchadwick Wrote: ------------------------------------------------------- > Who said that gold goes up forever? Gold bugs.
@ Dwight see your point “nothing goes up forever”. In this instance gold is primarily being used an asset class that outperforms in times of crisis. You are correct that the markets have outperformed gold. The returns you site are nominal. I would imagine that factoring inflation and taxes that rate might be much lower. This too might vary based on your inflation number. However, the comparison may be slightly biased. Up until 1965 or the price of gold was fixed to the dollar and vice versa and for a few years till Bretton Woods, had a two tiered pricing structure. I would think that the convertibility had something to do with little price appreciation. I am not a Gold bug per se, but I see this pull back as a buying opportunity. It is not an “investment” for the long term it will have its run and then…
C3Po Wrote: ------------------------------------------------------- > @ Dwight > > see your point “nothing goes up forever”. In this > instance gold is primarily being used an asset > class that outperforms in times of crisis. You are > correct that the markets have outperformed gold. > The returns you site are nominal. I would imagine > that factoring inflation and taxes that rate might > be much lower. This too might vary based on your > inflation number. That is incorrect. I cited inflation adjusted returns and noted them as such. Gold does not necessarily outperform in times of crisis or in times of high inflation. In the 1980s gold lost 84% of its value despite high inflation, in 2008 gold fell 30% during the financial crisis. Check the history books before buying the next ETF or coin ponzi scheme pitched on conservative talk radio. 
Here’s how gold’s done in varying inflationary conditions since 1980 - 2010 in REAL RETURNS: Contained and falling (inflation <5%) = 1.4% Contained and rising (inflation <5%) = 5.3% High (>5%) and rising = 39.6% High (>5%) and falling = (-19.8%) This is from an internal report generated by Ibbotson Assoc., Barclays, and JPM. And here’s a pretty nifty article about how gold does during a crisis scenario: http://seekingalpha.com/article/295567-how-gold-performs-during-a-financial-crash Is gold done? Probably not. Ask yourself what drove up the price of gold over the last 10 years, and specifically over the last 3 years. Has anything really changed?
Ok. My bad. There are many people who have performed similar calculations and their numbers range from 1.9% to 7.5%. Your pick. Different methodologies, different inflation data etc. I never said that gold “always” outperforms in financial crises and I never mentioned inflation. From 1975 to 1980 Gold went up 16 to 18 times and yes it had a spectacular crash thereafter. So, what is your point. No different from the stock market in the great depression, tech bubble, financial crisis etc. I see that I may have gotten your “hackles” up though I see no reason why. I have read your comments and you come across as an extremely knowledgeable person. There is no reason for you to be short with other members of this forum. I would think that this forum is so that people can improve on their knowledge through open discussion. Contributors like you have much to add. However, just because someone’s point of view is different from yours is no justification for you to be curt. Thanks for the advice. I do not need the books nor the coin ponzi scheme on TV to make my investment decisions. I make the calls based on my understanding and if I am wrong I will learn my lesson from there.
C3Po Wrote: ------------------------------------------------------- > I see that I may have gotten your “hackles” up > though I see no reason why. I have read your > comments and you come across as an extremely > knowledgeable person. There is no reason for you > to be short with other members of this forum. Yeah internet comments are weird like that. I meant to correct a comment about something I said that I felt was misconstrued, not to be short. > I would think that this forum is so that people > can improve on their knowledge through open > discussion. Contributors like you have much to > add. However, just because someone’s point of view > is different from yours is no justification for > you to be curt. > > Thanks for the advice. I do not need the books nor > the coin ponzi scheme on TV to make my investment > decisions. I make the calls based on my > understanding and if I am wrong I will learn my > lesson from there. Yeah I can see how that was a low blow my bad. I meant it as a joke since even today I heard a number of gold-related commercials on the radio during my commute.
@ Dwight No worries!
Just because there are bad reasons to buy gold doesn’t mean that all gold buyers have bad reasons. Gold is a volatile asset. It can go up, and it can go down. It is not a safe haven, but it is something that makes sense as part of a portfolio when the there is a strong temptation for central banks to print money indiscriminately. Now that the Fed has decided to Twist as opposed to QE3, there may be a drop in gold reflecting a number if events: 1) The Fed is backing away from QE3, and trying to Twist instead. That may or may not work, but the fact that it is not doing QE3 right now shows that it may hold off on the creation of base money. 2) Margin calls. People selling gold to meet margin calls. Gold has gone up, this is the place where they can liquidate to cover losses incurred elsewhere. 3) Capital redeployment. For some participants, valuations may be attractive enough to redeploy assets from gold into stocks. I personally think it’s a bit early, for that, but rules-based systems may not make that distinction. 4) If the Fed is twisting, it would be good to have some Treasurys to sell to the fed. So there may be a good trade to acquire Treasurys and see how low the Fed will take them. So redeploy capital from Gold to fixed income. 5) Expectations of deflation. Prolonged economic slumps suggest that the inflation-protection aspect of gold (real or perceived) is lessened. So if we expect deflation, people would rather have Treasurys, which tend to be less volatile and pay interest. But the Fed is unlikely to sit back and be content with deflation. So I think the incentive to try to print and helicopter currency into the market is still very strong. The main thing that would get in the way of that would be tea partiers taking both houses of Congress and the presidency. With that, they will try to replace Bernanke and perhaps modify the Fed’s mandates to be inflation-only, like the ECB. That really would be austerity and a signal to reduce gold exposure. I too look at this as a buying opportunity. I got hit hard recently on my gold exposure, but I have to eat that loss, and all that really matters now is my perspective on gold going forward. Well, ok, it’s a little harder than that, because it is best to use portfolio perspective rather than an asset perspective. In fact, I need to go back and look at portfolio construction. The decision to buy or sell gold at this point probably has more to do with how it fits in a portfolio and less about whether gold is going up next week or month or not.
Sweep the Leg Wrote: ------------------------------------------------------- > Here’s how gold’s done in varying inflationary > conditions since 1980 - 2010 in REAL RETURNS: > > Contained and falling (inflation <5%) = 1.4% > Contained and rising (inflation <5%) = 5.3% > High (>5%) and rising = 39.6% > High (>5%) and falling = (-19.8%) > > This is from an internal report generated by > Ibbotson Assoc., Barclays, and JPM. > > And here’s a pretty nifty article about how gold > does during a crisis scenario: > > http://seekingalpha.com/article/295567-how-gold-pe > rforms-during-a-financial-crash > > Is gold done? Probably not. Ask yourself what > drove up the price of gold over the last 10 years, > and specifically over the last 3 years. Has > anything really changed? Thanks! This was good stuff!
@Dwight, You said, “US stocks have returned about 7% annually over the past 200 years”; Again which index or stock are you using as a proxy for US equities over 200 years? If you look at 1950 to now gold inflation adjusted return is about 3.6%. In terms of your conclusion, I agree with it; I think this reiterates the importance of dividends.
@Dwight, If you were to say “from 1950 - Now, US equities have averaged 7% annually inflation adjusted, I would agree with you” but not over the last 200 years.
Zesty Wrote: ------------------------------------------------------- > @Dwight, > You said, “US stocks have returned about 7% > annually over the past 200 years”; > Again which index or stock are you using as a > proxy for US equities over 200 years? I went out and looked up every common stock that has been traded and calculated the returns manually for the 200 year holding period. 
In all serious that’s complete nonsense of course. You threw up the b/s flag and caught me on it - I have not done any calculations on my own, the numbers refer to internal memos and other sources where I have seen those numbers roughly. I believe they are approximately accurate though if you have reason to question them I am happy to listen to the challenge to my assumptions. Long term data is inherently tricky to interpret because of noise and various biases. Jeremy Siegel has 200 years of gold prices, though it costs $100 to buy the data. http://www.jeremysiegel.com/index.cfm/fuseaction/Resources.ViewResource/type/data/resourceID/6488.cfm > If you look at 1950 to now gold inflation adjusted > return is about 3.6%. > > In terms of your conclusion, I agree with it; I > think this reiterates the importance of dividends. Can’t disagree with the dividend plug. There are a variety of reasons why dividends are a huge factor in long run returns.
@ bchadwick Nice Analysis on the Gold sell off and looking at portfolio construction. re: Operation Twist - Unless I am mistaken I think it is the other way around. Fed is going to sell the short end of the curve and buy MBS to keep rates down. Currently, they have in their arsenal apprx $1trill in the short end. So while it is not QE 3 in a way it is. Ultimately the success will depend upon the how hungry the market is for the short end. This may fall flat and the FED having to end up printing.
Hmm… I need to think about the Twist a little more. My understanding is that there is no net change in asset purchases by the Fed (hence not a QE), but that they have shifted their attention to the long end of the Treasury curve and will be balancing it out by reducing their involvement on the short end. In addition, they will reinvest maturing MBSs into new MBSs, helping to facilitate low mortgage rates in the hope that it will help the housing market heal. This is not exactly part of the Twist, but was announced at the same time, so kind of gets lumped in there. There may be minor changes in the quantity of Treasurys vs MBSs purchased, over and above the simple rolling-over of maturing MBSs. I’d have to think about that a bit, since buying more MBSs vs Treasurys may actually be creating new base money after all. Maybe Dwight has a clearer perspective on that.
1980’s is probably the closest situation in recent history that resembles the current Gold market (except that inflation was already high). I would take stocks over Gold any day…check out the graph in the blog below…the price of Gold in 1980 in today’s dollars was over $2,500/oz. Stocks have killed Gold since 1980, even if you bought Gold just prior to its first historically run up. Maybe Gold is just a really, really, really long term investment…your great great grand kids will enjoy your Gold investment, my children will enjoy my stock investments… http://thecrowdedmarket.blogspot.com/2011/08/fools-gold.html