Should one invest in gold? If so, how and how much?

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psh
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Should one invest in gold? If so, how and how much?

Post by psh »

Read this article today where the author is suggesting people to invest in gold. https://www.marketwatch.com/story/infla ... 1643208818. Should one invest in gold? If so, how and how much? Thanks!
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David Jay
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Re: Should one invest in gold? If so, how and how much?

Post by David Jay »

Just stop reading Marketwatch articles. You will be much less conflicted.
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Re: Should one invest in gold? If so, how and how much?

Post by Sufferlandrian »

I wouldn't personally, but it's your money.
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Re: Should one invest in gold? If so, how and how much?

Post by exodusNH »

psh wrote: Thu Jan 27, 2022 1:23 pm Read this article today where the author is suggesting people to invest in gold. https://www.marketwatch.com/story/infla ... 1643208818. Should one invest in gold? If so, how and how much? Thanks!
Only if your timeframe for the holdings is 100s of years.

Ben Felix's take: https://youtu.be/ulgqlQWlPbo
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psh
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Re: Should one invest in gold? If so, how and how much?

Post by psh »

Based on the responses so far it looks like it's not a great idea to invest in gold. Just for my education I would love to hear why or point me to any document :-).
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Re: Should one invest in gold? If so, how and how much?

Post by exodusNH »

psh wrote: Thu Jan 27, 2022 1:32 pm Based on the responses so far it looks like it's not a great idea to invest in gold. Just for my education I would love to hear why or point me to any document :-).
Watch the video above for the primer. He cites a paper that you can look up. He also has a longer podcast discussing inflation in general, and have a segment on gold:

https://youtu.be/_f0dns9fHFs
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Re: Should one invest in gold? If so, how and how much?

Post by ivgrivchuck »

Gold is not part of the traditional Bogleheads philosophy.

It can however be a part of carefully designed portfolio:
https://portfoliocharts.com/2021/12/16/ ... ortfolios/
https://portfoliocharts.com/portfolio/golden-butterfly/

The problem with this forum is that it can become an echo chamber, so most responses that you are going to get are against gold.

I wouldn't recommend gold for a beginning investor though...

Disclosure: I currently don't hold any gold since I'm in accumulation phase. I will consider adding some gold for my retirement portfolio.
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
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Re: Should one invest in gold? If so, how and how much?

Post by richard.h.gao »

ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.

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Re: Should one invest in gold? If so, how and how much?

Post by ivgrivchuck »

richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.

Image
You can practically show any asset class to beat any other asset class by picking the right time interval...
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Re: Should one invest in gold? If so, how and how much?

Post by retired@50 »

richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.
As always, with back testing, start dates matter quite a bit.

See link comparing Gold to US Stocks from 1972 - 2022.
https://www.portfoliovisualizer.com/bac ... ion2_2=100

Gold - Compound annual growth rate 7.60%
US Stocks - Compound annual growth rate 10.93%

Regards,
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Re: Should one invest in gold? If so, how and how much?

Post by bertilak »

psh wrote: Thu Jan 27, 2022 1:32 pm Based on the responses so far it looks like it's not a great idea to invest in gold. Just for my education I would love to hear why or point me to any document :-).
I guess one needs to define "investing."

If you are investing and expecting some return, gold is not the answer as it has NO expected return since it does not produce anything. If you are looking for a place to safely store value, gold is AN answer but may not be the best answer because of its volatility.

Many people who claim to be "investing" in gold are actually speculating, that is, counting on (or hoping) that the volatility will move in their favor. This is a high-risk proposition.
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Re: Should one invest in gold? If so, how and how much?

Post by abc132 »

Gold is a play in hopes that gold will shine when stocks and bonds underperform. The choices would be 5% for little harm, and over 10-30% if you are making a bet on this really helping your portfolio.

My concern would be that all the past analysis has gold earning 6% real, which in my opinion is not sustainable. Gold needs really poor periods of performance to have those periods of outperformance, and I'm skeptical we will get as big of declines or as big of upswings as in the past. Combine that with not getting 6% real returns, and I do not expect a repeat of the past. I see a potential benefit, but I am very skeptical of the magnitude of the potential benefit as portrayed by those showing past analysis.
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Re: Should one invest in gold? If so, how and how much?

Post by LFS1234 »

psh wrote: Thu Jan 27, 2022 1:32 pm Based on the responses so far it looks like it's not a great idea to invest in gold. Just for my education I would love to hear why or point me to any document :-).
Here you go. Read pages 17-19 of Warren Buffett's 2011 letter to shareholders, beginning with the heading "The Basic Choices for Investors and the One We Strongly Prefer". Gold is mentioned.

https://www.berkshirehathaway.com/letters/2011ltr.pdf

To reinforce Buffett's conclusions as to preference, I can mention that I purchased three ounces of gold in 1981 or 1982, at around $400/ounce. I still own these three ounces, and they're now worth around $1800/ounce. Obviously, since gold pays no dividends or rents, there has been no income from this investment over the past 40 years. By my calculations this works out to about a 350% total return (over the 40 year period, so not very impressive).

Now compare the return on the S&P500 over that same period, which did include dividends and which according to an online calculator was approximately 3,900% (assuming reinvested dividends).

3,900% vs. 350%. Nothing close about it.
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Re: Should one invest in gold? If so, how and how much?

Post by Elysium »

You can fondle it, but it will not respond
:-D

On that cube of Gold from the BRK report linked above, who said Buffett & team don't have sense of humor.
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Re: Should one invest in gold? If so, how and how much?

Post by arcticpineapplecorp. »

only if you like higher risk and lower returns:

Image

Image
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Re: Should one invest in gold? If so, how and how much?

Post by arcticpineapplecorp. »

this article is by Noureil Roubini, or Dr. Doom as he is belovedly called.

what do we know:
But here’s another thing about him: For a prophet, he’s wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003.

source: http://archive.boston.com/bostonglobe/i ... en_to_him/
Nice timing! Roubini wrote that when the S&P 500 was at around 750, just days after it hit its cyclical low of 666. In the fullness of time, we now know his comments were a sort of Grand Slam of wrong calls. S&P 500 earnings in 2009 came in at $56.47, the far upper end of the broad, $40-to-$60 range Roubini had in mind. And (since the recession wasn’t U-shaped, as Roubini said it would be) the right multiple to put on those earnings wasn’t 10 or 12, but something quite a bit higher. So instead of falling by 20% as Roubini predicted, stock prices have risen by 49% over the subsequent twelve months—one of the greatest one-year rallies in the history of publicly traded equities. Roubini’s clients must have been pleased with his advice.

Then again, that Forbes column last year wasn’t just a one-off bad day. In reviewing the Roubinian oeuvre of the past year or so, one can’t help but get the impression that the Doctor has taken obsessive gloom to new heights (or, if you prefer, depths). Here’s a sampling of some of the headlines of his Forbes columns from the first quarter of last year:

January 08, 2009: 2009 Will Be Very, Very Bleak
January 22, 2009: The Worst Is Yet To Come
February 12, 2009: Nationalize Insolvent Banks
February 19, 2009: Laissez-Faire Capitalism Has Failed
March 05, 2009: The U.S. Financial System Is Effectively Insolvent
March 12, 2009: How Low Can The Stock Markets Go?

Yowp! It’s a wonder he didn’t stockpile bottled water and shotgun shells.

You don’t need to be a 24/7 CNBC news junkie to know that the headlines above turned out to be wrong, wrong, wrong.

source: https://seekingalpha.com/article/191984 ... -and-again
viewtopic.php?t=42260

and so on...

perhaps you should read this instead:

speech by Michael Crichton:
"Why speculate?"

http://web.archive.org/web/200707142041 ... ulate.html
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Re: Should one invest in gold? If so, how and how much?

Post by willthrill81 »

Despite all the negative comments frequently laid on this forum against gold, it's actually been a useful asset for investors over the last 50 years, as discussed in this recent thread.

Far too many focus on gold's performance as a standalone asset class, which makes it look highly questionable indeed, rather than as a small part of a larger portfolio, in which gold has been an effective component.

I like a little cayenne pepper in many of the dishes I eat, but I don't want much of it. The same analogy applies to gold.
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Re: Should one invest in gold? If so, how and how much?

Post by GRP »

20% as per Golden Butterfly. :happy
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Re: Should one invest in gold? If so, how and how much?

Post by DesertDiva »

:idea: gold is for jewelry
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Re: Should one invest in gold? If so, how and how much?

Post by Patzer »

Gold has historically been a horrible investment by itself, but an excellent diversifier in a well balanced portfolio.
Gold often acts as a flight to safety asset and a hedge against the fear of inflation. Since it tends to go up when other things are going down it significantly improves the worst case scenario withdrawal rates in many time periods.

Backtesting math shows that gold has a positive impact on SWR in the 1-10% range for a portfolio, with most of the benefit realized in the first few percent. The ideal amount varies depending on what the other assets are.

No one knows if the diversification benefit will continue for Gold, but the same could be said for any other asset class.
For me, a diversified portfolio includes US Stocks, International Stocks, Bonds, and Gold.
I have 5% in gold.

People saying gold compares poorly to stocks or bonds in different time periods are missing the point. We want an uncorrelated asset. Gold will have horrible runs, but the same conditions that make gold have horrible runs also tend to make stocks and bonds have great runs. I won't care if my gold hedge is down 30% in a decade where my stocks tripled and my bonds doubled.

Owning gold is not about maximum return, it is about improving the returns of the worst retirement scenarios.
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Re: Should one invest in gold? If so, how and how much?

Post by gougou »

No. But I believe gold is better than bonds. But I wouldn’t invest in bonds either.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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Re: Should one invest in gold? If so, how and how much?

Post by firebirdparts »

It’s already high. I’m kinda okay with 10% and not okay with 20.
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Re: Should one invest in gold? If so, how and how much?

Post by windaar »

I do not invest in gold but know some who do. An ounce, like an American Eagle, every 2 months over many years would be the best way to go. Worst way would be to buy a bunch at the same time as a reaction to one moment's economic or political news, when everyone else is doing it. That's a recipe for buy high sell low.
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Re: Should one invest in gold? If so, how and how much?

Post by WhiteMaxima »

No and yes, just buy couple of 24k gold chains to all your family members. In case if emergency, they can sell the chain for food.
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Re: Should one invest in gold? If so, how and how much?

Post by buckeye7983 »

richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.

Image
Dividends? :mrgreen:
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Re: Should one invest in gold? If so, how and how much?

Post by Elysium »

willthrill81 wrote: Thu Jan 27, 2022 4:14 pm Despite all the negative comments frequently laid on this forum against gold, it's actually been a useful asset for investors over the last 50 years, as discussed in this recent thread.

Far too many focus on gold's performance as a standalone asset class, which makes it look highly questionable indeed, rather than as a small part of a larger portfolio, in which gold has been an effective component.

I like a little cayenne pepper in many of the dishes I eat, but I don't want much of it. The same analogy applies to gold.
Usefulness of that entire article was based on someone wanting a portfolio that can guarantee a hypothetical better lower 15th percentile outcomes. A very specific doomsday prep investing approach. Most of us do not invest for best possible lower 15th percentile returns. The default position of stock markets are positive returns, that's what most portfolios are designed to achieve. Therefore, even in the portfolio context it doesn't help unless you take the niche use case of achieving best 15th percentile outcome.
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Re: Should one invest in gold? If so, how and how much?

Post by exodusNH »

Patzer wrote: Thu Jan 27, 2022 4:24 pm ... Gold will have horrible runs, but the same conditions that make gold have horrible runs also tend to make stocks and bonds have great runs...
This is only a true statement if the assets are strongly negatively correlated. A correlation near 0 means what it does is unrelated.

Gold is useful for generational wealth. Over the course of a single investor's lifetime, it's a crap shoot.
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Re: Should one invest in gold? If so, how and how much?

Post by willthrill81 »

Elysium wrote: Thu Jan 27, 2022 4:55 pm
willthrill81 wrote: Thu Jan 27, 2022 4:14 pm Despite all the negative comments frequently laid on this forum against gold, it's actually been a useful asset for investors over the last 50 years, as discussed in this recent thread.

Far too many focus on gold's performance as a standalone asset class, which makes it look highly questionable indeed, rather than as a small part of a larger portfolio, in which gold has been an effective component.

I like a little cayenne pepper in many of the dishes I eat, but I don't want much of it. The same analogy applies to gold.
Usefulness of that entire article was based on someone wanting a portfolio that can guarantee a hypothetical better lower 15th percentile outcomes. A very specific doomsday prep investing approach. Most of us do not invest for best possible lower 15th percentile returns. The default position of stock markets are positive returns, that's what most portfolios are designed to achieve. Therefore, even in the portfolio context it doesn't help unless you take the niche use case of achieving best 15th percentile outcome.
Considering that people wring their hands about 4% withdrawals all the time, despite that representing only about 3 of the worst historic starting years in the U.S. record, I'm not sure that the 15th percentile doesn't matter to many investors. Much of the time, investors did best with no bonds, but you don't see very many here advocating that AA.
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Re: Should one invest in gold? If so, how and how much?

Post by richard.h.gao »

retired@50 wrote: Thu Jan 27, 2022 2:12 pm
richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.
As always, with back testing, start dates matter quite a bit.

See link comparing Gold to US Stocks from 1972 - 2022.
https://www.portfoliovisualizer.com/bac ... ion2_2=100

Gold - Compound annual growth rate 7.60%
US Stocks - Compound annual growth rate 10.93%

Regards,
You can practically show any asset class to beat any other asset class by picking the right time interval...

Anyway your interval still shows it's a good diversifier.
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Re: Should one invest in gold? If so, how and how much?

Post by nisiprius »

I don't think he's recommending gold, exactly. I don't think he's recommending TIPS or short-term government bonds, either. (One of the odd things about the piece is that after stating that one of the "three options" for protecting against inflation is "to invest in inflation-indexed bonds" and then, having said that, simply says nothing more about them).

The title of the piece is "Inflation will hurt both stocks and bonds, so you need to rethink how you’ll hedge risks."

The author is "Nouriel Roubini... chief economist at Atlas Capital Team, an asset-management and fintech firm specializing in hedging against inflation and other tail risks."

Image

"Atlas" is an acronym for America's Trust for Land Acquisition and Settlements.

I think he's recommending his firm's services. The Atlas Team website is a little vague about exactly what investments they recommend, but they say
Our mission is to mitigate the impacts of ensuing risks by supporting the development of climate resilient communities across North America, while also insulating against inflation and the potential decline in the real value of the US dollar.
With regard to his accuracy as a forecaster, a 2011 Boston Globe article notes that
For a prophet, he’s wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003.
And that was just 2008 through 2011.
Last edited by nisiprius on Thu Jan 27, 2022 6:42 pm, edited 1 time in total.
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Re: Should one invest in gold? If so, how and how much?

Post by Jack FFR1846 »

Do your own research on prices. It can be fun and informative. I am always amused by any analysis that starts before 1975, when gold became legal to own in the US. I mean....I could go back to 1900 and look for cocaine prices as it was legal then.

Also look at what it costs to buy, above what the value of the gold is and then what it costs to sell and how it's taxed if you have gains (collectible = 28% long term cap gain).
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Re: Should one invest in gold? If so, how and how much?

Post by Elysium »

willthrill81 wrote: Thu Jan 27, 2022 5:50 pm Considering that people wring their hands about 4% withdrawals all the time, despite that representing only about 3 of the worst historic starting years in the U.S. record, I'm not sure that the 15th percentile doesn't matter to many investors. Much of the time, investors did best with no bonds, but you don't see very many here advocating that AA.
I don't see why people wring hands about the SWR despite evidence, it's their behavioral mistake and these same folks would bolt if Gold performs very poorly, instead of buying the look at whole portfolio argument. As for avoiding bonds, yes, you can when you're young and more of your working capital and investing capital is still ahead of you, and I see them as a "I need to make money" bucket transfer to "I have made money" bucket to preserve what you made. Bond portion to me is something you build up as you grow your nest egg to transfer wealth from risk bucket to preserve bucket, don't think Gold can be that unless it's for multi-generational wealth preservation.

That said, acknowledge that there is a niche case for investors who prefer avoiding worst case scenarios for an opportunity cost that limits their portfolio growth potential. How many folks are really willing to do it for this specific case. If you tell them your best case with a 20% Gold portfolio is +8% while your downside is -5% and for the one without is is +11% with downside of -9% then I would think most people want the second one, granted it really gets down to how much risk averse people are, but we have folks here investing in HEFA strategies and SCV/EM and other higher risk allocations because they do even better, show me the equivalent of HEFA and SCV rejoice mega threads for Golden Butterfly and I may get convinced :wink:
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Re: Should one invest in gold? If so, how and how much?

Post by retired@50 »

richard.h.gao wrote: Thu Jan 27, 2022 6:03 pm
retired@50 wrote: Thu Jan 27, 2022 2:12 pm
richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.
As always, with back testing, start dates matter quite a bit.

See link comparing Gold to US Stocks from 1972 - 2022.
https://www.portfoliovisualizer.com/bac ... ion2_2=100

Gold - Compound annual growth rate 7.60%
US Stocks - Compound annual growth rate 10.93%

Regards,
You can practically show any asset class to beat any other asset class by picking the right time interval...

Anyway your interval still shows it's a good diversifier.
I agree that gold can be a diversifier.
My issue was your statement about gold beating the S&P 500 over the long term (See above in red). You showed 17 years of history, and gold outperformed stocks, but I showed 50 years of history and stocks outperformed gold. So which is really long term...

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Should one invest in gold? If so, how and how much?

Post by arcticpineapplecorp. »

buckeye7983 wrote: Thu Jan 27, 2022 4:48 pm
richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.

Image
Dividends? :mrgreen:
was thinking the same thing.

for those who don't understand the comment, oftentimes people post charts which are price and not total return charts. The difference can be significant because dividends can make up a significant part of one's total return over time. And as we know when dividends are paid the price of the stock or fund drops by the amount of the dividend paid out. So to show Gold Price compared to S&P 500 price but not S&P500 total return including dividends reinvested is apples to oranges.

I'm not suggesting the person who posted the chart is intentionally trying to mislead that Gold outperformed S&P500 over that time period (when it may not have when one accounts for dividends reinvested). It may have been an honest mistake on the poster's part. Oftentimes, people don't understand and post a price rather than total return chart is all.

however, it also hasn't been mentioned that even if the chart is a total return for S&P500 it shows the greater volatility of gold compared to the S&P500. They ended up in similar places but gold gave up most of it's outpeformance in 2011 over time until 2020.
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Re: Should one invest in gold? If so, how and how much?

Post by David Jay »

buckeye7983 wrote: Thu Jan 27, 2022 4:48 pm
richard.h.gao wrote: Thu Jan 27, 2022 2:05 pm
ivgrivchuck wrote: Thu Jan 27, 2022 1:43 pm Gold is not part of the traditional Bogleheads philosophy.
It should be if Boglehead philosophy is long term investing. Gold has outperformed the S&P 500 in the long term and is a good diversifier.

Image
Dividends? :mrgreen:
Yeah, it looks a bit different with dividends, as follows:
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ivgrivchuck
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Re: Should one invest in gold? If so, how and how much?

Post by ivgrivchuck »

Patzer wrote: Thu Jan 27, 2022 4:24 pm Gold has historically been a horrible investment by itself, but an excellent diversifier in a well balanced portfolio.
Gold often acts as a flight to safety asset and a hedge against the fear of inflation. Since it tends to go up when other things are going down it significantly improves the worst case scenario withdrawal rates in many time periods.

Backtesting math shows that gold has a positive impact on SWR in the 1-10% range for a portfolio, with most of the benefit realized in the first few percent. The ideal amount varies depending on what the other assets are.

No one knows if the diversification benefit will continue for Gold, but the same could be said for any other asset class.
For me, a diversified portfolio includes US Stocks, International Stocks, Bonds, and Gold.
I have 5% in gold.

People saying gold compares poorly to stocks or bonds in different time periods are missing the point. We want an uncorrelated asset. Gold will have horrible runs, but the same conditions that make gold have horrible runs also tend to make stocks and bonds have great runs. I won't care if my gold hedge is down 30% in a decade where my stocks tripled and my bonds doubled.

Owning gold is not about maximum return, it is about improving the returns of the worst retirement scenarios.
Well said!
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Re: Should one invest in gold? If so, how and how much?

Post by RubyTuesday »

psh wrote: Thu Jan 27, 2022 1:32 pm Based on the responses so far it looks like it's not a great idea to invest in gold. Just for my education I would love to hear why or point me to any document :-).
Three responses from anonymous people on the internets and a market watch article… you really should reconsider your approach to financial education.

Try the wiki and some of the books recommended in the wiki.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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Re: Should one invest in gold? If so, how and how much?

Post by 000 »

I do and think it is a reasonable diversifier for a stock and bond portfolio but land and physical stuff will be more useful if a real doomsday happens. Gold is still good IMO for a financial but not total civilization colllapse.

10% is probably where it starts to have a meaningful impact on returns and anything above 20% is probably where you will find that impact too meaningful.

The biggest mistake people make with gold is trying to model it like other assets when it is the only thing that it is. Stocks and bonds have cashflow risk, gold does not. Other metals are predominately industrial, gold is not.
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Re: Should one invest in gold? If so, how and how much?

Post by NiceUnparticularMan »

People make many different arguments in favor of investing in gold. As a general note, I would be very skeptical of any argument for investing in gold today that depends on what happened when people invested in gold before it was fully free-floating (circa 1980), or generally from periods when gold had a very different legal and institutional status. From my perspective, you might as well be talking about a totally different asset, once you are no longer talking about gold in its current legal and institutional context.

Anyway, that article suggests gold might be part of an unexpected inflation hedging strategy. Vanguard has a nice white paper on this subject, and my suggested takeaway is that gold as it is available today is inferior to other available options for that purpose:

https://institutional.vanguard.com/VGAp ... tiesSTTIPS

I note that article does not include consideration of some other notable possibilities for such a hedging strategy, including nominal fixed debt (like a fixed-rate mortgage), unmarketable options like stable value funds and the TSP G Fund, or value investing (there is evidence, and some logic, behind the idea that value investments should provide some hedge against unexpectedly high inflation).

So personally, I have thought about the need for an unexpected inflation hedge, and I have implemented that as part of my investment plan. But I have not invested in free-floating gold, because I think there are obviously superior tools to use for that purpose.
Last edited by NiceUnparticularMan on Fri Jan 28, 2022 10:45 am, edited 1 time in total.
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Re: Should one invest in gold? If so, how and how much?

Post by NiceUnparticularMan »

000 wrote: Fri Jan 28, 2022 12:31 am The biggest mistake people make with gold is trying to model it like other assets when it is the only thing that it is. Stocks and bonds have cashflow risk, gold does not. Other metals are predominately industrial, gold is not.
The easiest way to model speculative assets like free-floating gold is to model them like a sequence of bets in a casino. Similar expected return of close to zero, similar high volatility as you random walk around, and a similar lack of economic fundamentals to ground their value.

Now of course it isn't exactly the same mechanism in the sense with gold you are speculating on the outcome of complex sociopsychological processes with a lot of "chaos" (in the technical sense) involved, whereas casino games have a better-defined randomization mechanism (roulette wheel, dice throw, shuffled deck, etc.). But functionally it ends up pretty similar.

In that sense it is also a bit like betting on the weather. Will we get more or less rain over the next year than predicted? There is a complex, chaotic process that will determine the answer to that question, but to us it is more or less equivalent to a random process.
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Re: Should one invest in gold? If so, how and how much?

Post by ivgrivchuck »

NiceUnparticularMan wrote: Fri Jan 28, 2022 10:44 am
000 wrote: Fri Jan 28, 2022 12:31 am The biggest mistake people make with gold is trying to model it like other assets when it is the only thing that it is. Stocks and bonds have cashflow risk, gold does not. Other metals are predominately industrial, gold is not.
The easiest way to model speculative assets like free-floating gold is to model them like a sequence of bets in a casino. Similar expected return of close to zero, similar high volatility as you random walk around, and a similar lack of economic fundamentals to ground their value.
As it have been pointed out repeatedly in this thread, during the last 40 years, gold has been an excellent stabilizer of a portfolio. When the combination of stocks/bonds has gone significantly down, gold has gone up.

Of course, it could be just a coincidence, and we have only 40 years of floating gold data, but I don't think so: gold has been considered the safe haven during very turbulent times.

This is not that important during the accumulation phase (when a person has a plenty of time to recover from losses), but it can be a significant factor during the retirement.

So your casino bets example doesn't really resonate with the reality.

To be clear: Nobody knows the future, asset class correlations can change rapidly. I don't currently hold any gold. I'm just of opinion that gold shouldn't automatically be dismissed as an asset class...
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NiceUnparticularMan
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Re: Should one invest in gold? If so, how and how much?

Post by NiceUnparticularMan »

ivgrivchuck wrote: Fri Jan 28, 2022 10:59 am As it have been pointed out repeatedly in this thread, during the last 40 years, gold has been an excellent stabilizer of a portfolio. When the combination of stocks/bonds has gone significantly down, gold has gone up.
This supposed rule of thumb has been violated many times in that period. Free-floating gold went through an extended 20+ year period in which it went down more than it went up, and frequently in this period it went down at the same time other assets were going down.

For example, from 1980 through 2000, a simple 75/25 TSM/Intermediate Treasury portfolio was negative in 1981, 1990, 1994, and 2000. Gold was negative in every one of those years as well.

Gold then went up more than down over the next long period. That same 75/25 portfolio was negative in 2001, 2002, 2008, and 2018. Gold was positive in three out of those four years, the miss being 2018 (although it was also barely positive in 2001).

All that is happening here is gold goes up or down in ways that are not really predictably related to how other assets are performing. So if gold is going down a lot in a period, unfortunately odds are it will also be going down the same years other assets go down. If gold is going up a lot in a period, odds are better it will be going up the same years other assets go down.

OK, so over the next 20 years, will gold go more up than down, or more down than up? I don't know. If it is the former, then some years it might be going up when other assets are down. If it is more the latter, then most or all years other assets go down, so will gold.

Place your bets and take your chances . . . .
This is not that important during the accumulation phase (when a person has a plenty of time to recover from losses), but it can be a significant factor during the retirement.
Right, speculating by putting a significant amount in gold around the time of retirement, and then having that speculation go poorly, could be seriously harmful. In its bad 20 year period, free-floating gold cumulatively lost almost 80% of its real value. Fortunately for gold investors at the time, that coincided with what was overall a pretty good period for US stocks and bonds (the latter particularly because rates had a long way to drop, and valuations a long way to go up).

If early retirees put a lot in gold and it experiences a similar long drop in value, and this time other assets do not help as much (including because rates don't have far to drop, and valuations are high), then it could be quite harmful.

Place your bets and take your chances . . . .
So your casino bets example doesn't really resonate with the reality.
It starts with the same observation you noted--the vast majority of gold's value today is not because it is productive in some way. Instead, the vast majority of gold buyers today are speculating that future gold buyers will pay as much or more for it in real terms whenever they want to sell it, despite the fact gold still will not have anything close to that sort of productive value.

That's the reality of the situation, and the data is not in fact inconsistent with that reality.

And actually, it is somewhat charitable to even assign a near-zero real return to gold. That makes sense for commodities where their value is based on their productive use. Based on rational economic principles, at some point people should just wake up to the fact gold's price today is basically a version of a greater fool theory, and its prices should collapse to something consistent with its productive value (probably around 10% or less of what it is priced today).

But it is true free-floating gold has so far had around a zero real return, and it is also true one can make the case for not investing in it even assuming it does have a near-zero real return. So I don't feel the need to try to predict the extent or timing of such a collapse.

But I do think understanding that is the actual reality of the situation is potentially helpful.
I'm just of opinion that gold shouldn't automatically be dismissed as an asset class...
Definitely not automatically. People who are going to make their own investment decisions should make a point of trying to understand what they are really buying, and why it has value. They should definitely not be persuaded to invest, or not invest, in anything based on backtesting, because backtesting is systematically a bad way to try to devise forward-looking investment strategies. And in fact, backtesting results can be very sensitive to new samples of data, such that assets will fall in and out of favor as backtesting involving them looks better or worse, all of which can lead to very adverse changes in strategy.

Applying these principles to free-floating gold, one should understand it is essentially a greater fool asset, and generally those are a good idea to avoid. And they should not be persuaded to change their opinion by backtests currently being performed after a relatively good period for gold, because the same backtests may show something quite different the next time gold goes through a relatively bad period.
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Re: Should one invest in gold? If so, how and how much?

Post by willthrill81 »

000 wrote: Fri Jan 28, 2022 12:31 am I do and think it is a reasonable diversifier for a stock and bond portfolio but land and physical stuff will be more useful if a real doomsday happens. Gold is still good IMO for a financial but not total civilization colllapse.

10% is probably where it starts to have a meaningful impact on returns and anything above 20% is probably where you will find that impact too meaningful.

The biggest mistake people make with gold is trying to model it like other assets when it is the only thing that it is. Stocks and bonds have cashflow risk, gold does not. Other metals are predominately industrial, gold is not.
Good post.
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Re: Should one invest in gold? If so, how and how much?

Post by chuckwalla »

Then the next usual big question on gold is in what form do you hold it?
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Re: Should one invest in gold? If so, how and how much?

Post by seajay »

LFS1234 wrote: Thu Jan 27, 2022 2:37 pm
psh wrote: Thu Jan 27, 2022 1:32 pm Based on the responses so far it looks like it's not a great idea to invest in gold. Just for my education I would love to hear why or point me to any document :-).
Here you go. Read pages 17-19 of Warren Buffett's 2011 letter to shareholders, beginning with the heading "The Basic Choices for Investors and the One We Strongly Prefer". Gold is mentioned.

https://www.berkshirehathaway.com/letters/2011ltr.pdf

To reinforce Buffett's conclusions as to preference, I can mention that I purchased three ounces of gold in 1981 or 1982, at around $400/ounce. I still own these three ounces, and they're now worth around $1800/ounce. Obviously, since gold pays no dividends or rents, there has been no income from this investment over the past 40 years. By my calculations this works out to about a 350% total return (over the 40 year period, so not very impressive).

Now compare the return on the S&P500 over that same period, which did include dividends and which according to an online calculator was approximately 3,900% (assuming reinvested dividends).

3,900% vs. 350%. Nothing close about it.
Berkshire Hathaway Chairman letter 1979 ...
One friendly but sharp-eyed commentator on Berkshire has
pointed out that our book value at the end of 1964 would have
bought about one-half ounce of gold and, fifteen years later,
after we have plowed back all earnings along with much blood,
sweat and tears, the book value produced will buy about the same
half ounce. A similar comparison could be drawn with Middle
Eastern oil. The rub has been that government has been
exceptionally able in printing money and creating promises, but
is unable to print gold or create oil.
Adding to that ...

BRK share price at the end of 1999 would have bought a
similar amount of gold as the BRK share price would have bought
twenty-one years later at the end of 2020, after having ploughed
back all earnings along with much blood, sweat and tears.

Combined near two-thirds of the years since 1965 where Buffett's blood/sweat/tears saw BRK yield no better than gold. Wasted time. He hates gold (but has at times bought large quantities of silver).

Longer term gold tends to store value, a one ounce coin might as equally have bought a Roman soldier a nice suit as it might but a nice suit today. Prior to decoupling money from gold, formerly convertible at a fixed/constant rate, and when on the gold standard it was better to hold money, deposited into treasuries that paid interest, which was like the state paying you for it to securely store your gold. Since decoupling and as in all fiat currency cases the currency tends to progressively decline relative to gold, surplus capital has to be invested to otherwise avoid it losing purchase power, devaluing (inflation) - such investing incurs costs/taxes. In contrast gold doesn't have to pay any interest. Some prisoners use both (fiat) currency and cigarette commodity currencies. A packet of 20 hidden away 20 years ago might buy much the same today as it did back when it was hidden. A $10 bill hidden alongside the cigarettes buys much less today as it did back when it was hidden.

BUT the purchase power is volatile, trends through some wild extremes. In 1980 a Dow Industrial Average index share bought a ounce of gold. In 1999 a Dow index share bought 40 ounces of gold. Given such volatility trading seems reasonable, a blend of fiat and commodity currencies, where the fiat currency is invested in stocks to help offset 'inflation' (devaluation).

How much gold to hold? Some is better than none, even if just for diversification purposes. Trading is appropriate, which can be achieved via simple target % weighting and rebalancing. But its a long term asset, similar to stocks, not for < 10+ years. Maybe at a minimum enough for a event such as the forthcoming quantum apocalypse - potentially much worse than the millennium bug risk. Or enough to bribe your family through a Afghan gate and onto a plane rather than being left behind.

PV for 50/50 stock/gold versus 100% stock

Some rich families hold generational wealth via land, art, gold. You can't roll/bag up land, but a later generation might be able to reclaim lost land. A preference for physical in-hand commodity currencies with no counter party risks, no regular income streams.
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Re: Should one invest in gold? If so, how and how much?

Post by Nandonomous »

Gold tends to be non-correlated with equities. It is useful to own in small quantities as a hedge for the times when stocks and bonds collapse. This is regardless of it's short-term performance. I definitely wouldn't build a portfolio that centers on it.
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Re: Should one invest in gold? If so, how and how much?

Post by burritoLover »

Gold is going to crash once we start mining it from near-earth Asteroids. Duh.
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Re: Should one invest in gold? If so, how and how much?

Post by seajay »

chuckwalla wrote: Fri Jan 28, 2022 1:01 pm Then the next usual big question on gold is in what form do you hold it?
Powdered, as I've heard it suggested to always keep some dry powder :)

Seriously: legal tender gold coins as in the UK there's no purchase tax, no capital gains tax on sale. As is there no purchase or sales tax on other legal tender copper/whatever coins. But then again, I don't hold any, as rule 1 of gold is that you don't own any other than perhaps a filling or wedding band. But if I did I'd suggest holding a ETF first, and then later use some of 'other peoples money' (gains) to convert ETF holdings to physical gold holdings. If for instance a 5% spread (buy/sell price difference) on physical gold and gold is 20% of your portfolio and the portfolio is up +10% one year, then count that as a +9% year and convert the ETF to physical gold holdings.
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Re: Should one invest in gold? If so, how and how much?

Post by seajay »

burritoLover wrote: Fri Jan 28, 2022 1:18 pm Gold is going to crash once we start mining it from near-earth Asteroids. Duh.
Not as much as stocks will crash when the extinction event asteroid behind it arrives.

A factor with a large new find asteroid mining situation is that the price of gold would collapse before the project blasted off, making the venture a nonviable certain loss-event. But if somehow a large find event did land then yes, other precious metal would take over the lead.

Could see a case of where energy was so inexpensive that turning lead into gold became financially viable to similar effect. Until then gold is the preferred periodic table element as a commodity currency due to its relative rarity and pretty much the most boring element, doesn't rust, doesn't kill you, isn't a liquid/gas ...etc.
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Re: Should one invest in gold? If so, how and how much?

Post by burritoLover »

seajay wrote: Fri Jan 28, 2022 1:40 pm
burritoLover wrote: Fri Jan 28, 2022 1:18 pm Gold is going to crash once we start mining it from near-earth Asteroids. Duh.
Not as much as stocks will crash when the extinction event asteroid behind it arrives.

A factor with a large new find asteroid mining situation is that the price of gold would collapse before the project blasted off, making the venture a nonviable certain loss-event. But if somehow a large find event did land then yes, other precious metal would take over the lead.

Could see a case of where energy was so inexpensive that turning lead into gold became financially viable to similar effect. Until then gold is the preferred periodic table element as a commodity currency due to its relative rarity and pretty much the most boring element, doesn't rust, doesn't kill you, isn't a liquid/gas ...etc.
The initial hauls for asteroid mining will likely be limited until technology catches up with the process - likely resulting in a gradual reduction in gold prices as that improves each year.
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