There are people who are accumulating gold jewelry like there’s no tomorrow. I will laugh hard when gold poops the bed and everyone demands their money back… But I’m guessing when that happens, our government will bail out everyone who suffered severe losses through gold speculation! 
ManMythLegend Wrote: ------------------------------------------------------- > But I’m guessing when that happens, our government > will bail out everyone who suffered severe losses > through gold speculation! I have been thinking the exact same thing. Because whenever you hear gold marketed everyone calls it a “safe haven” right? So the average Joe thinks that means it is safe when it is really not in any sense. But it has gone up for almost the entire time that retail investors have been able to get exposure to it through GLD etc. When the bubble pops I have little doubt there will be massive lawsuits and maybe bailouts of the naive. Caveat emptor.
Unless big banks are hurt by speculating in gold, there will be no bailout, and certainly not for the average Joe.
bchadwick Wrote: ------------------------------------------------------- > Unless big banks are hurt by speculating in gold, > there will be no bailout, and certainly not for > the average Joe. But there were bailouts for the average Joe who held uninsured money market funds during the financial crisis right? If I remember it was only a small impact. At the bank I worked for I believe we backstopped some losses for a fixed income product that imploded after being marketed as “safe” even though it had the proper disclosures. Auction rate securities blew up and investors started suing left and right because they thought they were just slightly higher yielding deposit accounts. Every time I hear a commercial from gold companies on the radio I listen to how they word it and often think to myself: “these guys deserve it if they get sued”. I wouldn’t touch gold with a ten foot pole right now just personally. In my view a paradigm shift will happen eventually and the collateral damage could be large.
There is a great working paper by oxford economics on gold recently, where among other things a regression model on forecasting the price of gold was tweaked from prior working papers and introduced. The main reason gold bullion should be considered in a LT portfolio is its negative correlation to other asset classes. However, that is not to say it can’t correct in the short term. But its hard to argue against certain stats comparing it over time to say dow jones and more recently various currencies. But when valuing it though to identify a whether it’s in a bubble or not, let me just suggest refer to stats from L1 to practically apply a a formula we were taught.
I don’t think anybody mentioned this yet: if you buy and sell physical from local dealers, like the OP said, then you usually pay 105% of spot or even more to buy, and you usually get like 95% spot when you sell back to these same dealers. the percentages may be different based on your location, you’ll have to check. So I guess you also have to compare that against the cost of commission on your ETFs. In that sense ETFs should be a better value.
hardasset Wrote: ------------------------------------------------------- > There is a great working paper by oxford economics > on gold recently, where among other things a > regression model on forecasting the price of gold > was tweaked from prior working papers and > introduced. The main reason gold bullion should be > considered in a LT portfolio is its negative > correlation to other asset classes. However, that > is not to say it can’t correct in the short term. > But its hard to argue against certain stats > comparing it over time to say dow jones and more > recently various currencies. Right but everything that goes into a “bubble” is uncorrelated with everything else. Real estate was uncorrelated with the stock market… until 2008… Gold bugs are arguing that “it is different this time” and gold will not correct back to the mean level of tracking inflation as it has many times over the past century. My argument is that the main thing that is different now is that ETFs have enabled huge conversions of retail investors who formerly could not be gold bugs into gold bugs, or at least duped them into including a portion for diversification, which has become a self-fulling benefit. Could have just as easily been an ETF for sea shells or space rocks. If you look at the marginal demand for gold it is almost all from GLD and other ETFs. > But when valuing it though to identify a whether > it’s in a bubble or not, let me just suggest refer > to stats from L1 to practically apply a a formula > we were taught. Didn’t understand this part. What are you talking about? Is there a formula being taught in level 1 for identifying bubbles?
Dwight Wrote: ------------------------------------------------------- > space rocks. If you look at the marginal demand > for gold it is almost all from GLD and other ETFs. > > Interesting point, where is the info from btw?
Gold is prone to bubbles, because there really isn’t an economic fundamental that says what it’s value ought to be, so the level of emotion and returns chasing can get extra out-of-hand. That’s true. But what is the “right” value for gold, then? Surely it can’t be $0. People have sailed across seas and launched wars to acquire more of it. That’s expensive stuff. It can get women to forgive men their trespasses, particularly when mixed with other precious jewels. That’s pretty valuable too. For most of the 20th century, the USD was pegged to the value of gold. Only in 1971 did we go off of what was essentially a gold standard. Do we include the years of the peg in trying to find the “natural price” for gold in USD? And do we use raw USD prices, or do we compare it to the GDP deflated value of the dollar? Or the CPI deflated value of the dollar? It’s true that it is a mistake to think of gold as a “safe asset.” It’s price can swing a lot… much more than a 2 year Treasury-note. And yet, I’m pretty confident that gold can’t go to zero. But the dollar could. I don’t think it’s likely that the dollar will go to zero, but if you have a 10 year time horizon, the chance that $1800 in gold today is going to have more real purchasing power than $1800 in matured T-Notes is quite substantial. Not guaranteed, by any stretch of the imagination, and if the world gets its fiscal and monetary act together, resumes GDP growth, and avoids a war between major powers, it almost certainly will fall substantially. But we will have a warning sign that things are getting better, and time to adjust our portfolios. It’s pretty rare that we wake up one day and the world is substantially better than we could have possibly expected, and everyone else can see it too. That’s different from waking up and finding that the world is substantially worse (as we come up on Sep 11th again). So a lot of it depends on whether you think the world will be fiscally and monetarily responsible. What do you think? What’s the track record on committees of relatively uninformed politicians seeking their own career advancement on coordinating economic policies to getting the rich world’s house in order? So yeah, it’s not a riskless asset, but I’d say that there is still a positive expected return, negatively correlated with fixed income, and very likely with stocks. And therefore it has a place in a portfolio.
bchadwick Wrote: ------------------------------------------------------- > Gold is prone to bubbles, because there really > isn’t an economic fundamental that says what it’s > value ought to be, so the level of emotion and > returns chasing can get extra out-of-hand. That’s > true. > > But what is the “right” value for gold, then? > Surely it can’t be $0. People have sailed across > seas and launched wars to acquire more of it. > That’s expensive stuff. > > It can get women to forgive men their trespasses, > particularly when mixed with other precious > jewels. That’s pretty valuable too. > > For most of the 20th century, the USD was pegged > to the value of gold. Only in 1971 did we go off > of what was essentially a gold standard. Do we > include the years of the peg in trying to find the > “natural price” for gold in USD? And do we use > raw USD prices, or do we compare it to the GDP > deflated value of the dollar? Or the CPI deflated > value of the dollar? > > > It’s true that it is a mistake to think of gold as > a “safe asset.” It’s price can swing a lot… > much more than a 2 year Treasury-note. > > And yet, I’m pretty confident that gold can’t go > to zero. But the dollar could. I don’t think > it’s likely that the dollar will go to zero, but > if you have a 10 year time horizon, the chance > that $1800 in gold today is going to have more > real purchasing power than $1800 in matured > T-Notes is quite substantial. > > Not guaranteed, by any stretch of the imagination, > and if the world gets its fiscal and monetary act > together, and avoids a war between major powers, > it almost certainly will fall substantially. But > we will have a warning sign that things are > getting better, and time to adjust our portfolios. > It’s pretty rare that we wake up one day and the > world is substantially better than we could have > possibly expected, and everyone else can see it > too. That’s different from waking up and finding > that the world is substantially worse (as we come > up on Sep 11th again). > > So a lot of it depends on whether you think the > world will be fiscally and monetarily responsible. > What do you think? What’s the track record on > committees of relatively uninformed politicians > seeking their own career advancement on > coordinating economic policies to getting the rich > world’s house in order? > > > So yeah, it’s not a riskless asset, but I’d say > that there is still a positive expected return, > negatively correlated with fixed income, and very > likely with stocks. And therefore it has a place > in a portfolio. No but you could potentially wake up one morning and see Gold down $200 an ounce which will very likely result in HUGE margin calls to the some of the big time speculators out there. This will in turn result in forced selling which will cause it to collapse even further while retail folks are sitting watching in horror wondering if they should get out. Then its down $400 an ounce and retail folks are thinking, “Okay might as well just hold on since it won’t go much lower than this.” Oops it continue to tank. What do you do? Tick Tock.
That’s why I suggested the 4 standard deviation trailing stop. There’s no doubt that it can get risky. It’s a volatile asset. And you can look at the decline in gold after the 1970s and recognize that that sort of thing *could* happen again. But the world really is different now than it was in the 1970s. We don’t have the rampant inflation that was driving the gold fever back then. The US is still a major economic power, but it is not nearly as dominant as it was then. So we can’t look at the 1980s and assume that our future is going to look like that (as comforting as it might be). Gold clearly can’t go up forever (unless the dollar does a Zimbabwe), but that doesn’t mean that it has to go back to its historical average. So yes, we have to realize that it is a volatile asset, and have a sell discipline. That means: 1) If there is a drop in gold prices, you need to have an exit price. 2) After the drop, you must ask yourself if the things that had been making gold rise over the long term have disappeared from the scene or not. If so, you stay out. 3) If not, you get back in when momentum indicators show that gold has stopped dropping precipitously. And if you are not sure, then you re-establish a position that is smaller than your original size. How much smaller depends on how unsure you are.
Palantir Wrote: ------------------------------------------------------- > Dwight Wrote: > -------------------------------------------------- > ----- > > space rocks. If you look at the marginal > demand > > for gold it is almost all from GLD and other > ETFs. > > > > > > > Interesting point, where is the info from btw? Here is a good chart that illustrates the ETF gold holdings. I’ll find another one later that shows in relation to other holders. http://3.bp.blogspot.com/-ZE73vewUPKk/TcQyne6zZpI/AAAAAAAAAvQ/VDpVb1c13gc/s1600/Output.png
bchadwick Wrote: ------------------------------------------------------- > And yet, I’m pretty confident that gold can’t go > to zero. But the dollar could. I don’t think > it’s likely that the dollar will go to zero, but > if you have a 10 year time horizon, the chance > that $1800 in gold today is going to have more > real purchasing power than $1800 in matured > T-Notes is quite substantial. One problem with this analysis: you will still have to trade gold for dollars to buy anything 10 years from now. You cannot buy anything with bullion and assuming we do not desert fiat currency status (a high probability) you will not be able to in a decade either. Try it sometime. 
This guy tried to sell a gold coin for $50 unsuccessfully. Not a perfect scientific experiment but illustrates the point well I believe. http://www.youtube.com/watch?v=Gk5aRIz17fk As Warren Buffet says, the purchasing power of all the gold in the world now is approximately equal to 10 Exxon Mobiles, all the farmland in the US, and a $Trillion dollars of cash. Which is more likely to retain purchasing power over the next decade, the former or the latter?
Incredible, it looks just like the surge in commodities blamed on the GSCI.
Dwight Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > And yet, I’m pretty confident that gold can’t > go > > to zero. But the dollar could. I don’t think > > it’s likely that the dollar will go to zero, > but > > if you have a 10 year time horizon, the chance > > that $1800 in gold today is going to have more > > real purchasing power than $1800 in matured > > T-Notes is quite substantial. > > One problem with this analysis: you will still > have to trade gold for dollars to buy anything 10 > years from now. You cannot buy anything with > bullion and assuming we do not desert fiat > currency status (a high probability) you will not > be able to in a decade either. > > Try it sometime. This guy tried to sell a gold > coin for $50 unsuccessfully. Not a perfect > scientific experiment but illustrates the point > well I believe. > > http://www.youtube.com/watch?v=Gk5aRIz17fk > > As Warren Buffet says, the purchasing power of all > the gold in the world now is approximately equal > to 10 Exxon Mobiles, all the farmland in the US, > and a $Trillion dollars of cash. Which is more > likely to retain purchasing power over the next > decade, the former or the latter? What do you mean by deserting FIAT currency status?
Going back to the gold standard or some other silly idea. Europe deserted fiat with the insane Euro experiment pegging all their currencies together in a misguided currency union with no fiscal union, so there is historical precedent for doing so even if unwise. France went on and off the gold standard at some point. I think we will stick with fiat currency for the long haul but stranger things have happened. Central banks are hooked on fiat because they derive the majority of their power and influence over the economy, inflation, and exchange rates from being able to change the supply of money, which they would be unable to do outside of the current structure. So it would take an act of political takeover like misguided politician like Rick Perry being elected and trying to eliminate the independence of the fed. Such things have happened in the past and never ended well.
Europe just changed who had seignorage rights. Thats different than de-fiating themselves, although some of the dynamics are similar for the former sovereigns.
bchadwick Wrote: ------------------------------------------------------- > Europe just changed who had seignorage rights. > Thats different than de-fiating themselves, > although some of the dynamics are similar for the > former sovereigns. You are right the Euro is a fiat currency. What I meant to say was that the member countries do not control it, so they are required to issue bonds to deficit spend. So any of them can be forced into bankruptcy by the “bond vigilantes”. This can be seen by the examples of France, Spain, and Italy in recent week, which if they had their own currencies would be extremely solvent.
Dwight Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Europe just changed who had seignorage rights. > > Thats different than de-fiating themselves, > > although some of the dynamics are similar for > the > > former sovereigns. > > > You are right the Euro is a fiat currency. What I > meant to say was that the member countries do not > control it, so they are required to issue bonds to > deficit spend. So any of them can be forced into > bankruptcy by the “bond vigilantes”. This can be > seen by the examples of France, Spain, and Italy > in recent week, which if they had their own > currencies would be extremely solvent. Switzerland and Norway must be sitting back and laughing.
Iceland too.