WSJ: "This Should Have Been a Great Year for Gold. Here’s Why It Isn’t."

[GRP]

The ancient Talmud knew of such risk reduction millennia ago, when they suggested dividing ones wealth evenly between in-land, in-business assets and in-hand.

This bit is the most interesting, and I've often seen as the progenitor for modern theories of diversification.

Aside from the detailed work from figures such as Ray Dalio, I also think that a glimpse at Exter's period gives people insight on how the current financial system is structured and where gold's place is in it.

[firebirdparts]

Have this so far:

What I was referring to as a game plan for this is what we called a
“Depression gauge.” Because big debt crises and depressions had happened
many times before and we had the template explained in this study, we had
created this gauge as a simple algorithm based on the proximity of interest
rates to 0 percent, a few measures of debt vulnerability, and indications of the
beginning of debt deleveraging that would lead us to change our overall
portfolio and risk controls (including our counterparty risks).

This paper
https://www.bridgewater.com/big-debt-cr ... -dalio.pdf
Describes a view that a debt crisis (resulting in deleveraging) occurs during the depression and that is what they are watching for (in its entirety). I claim no competence at all, just googling.

Nice find. If the aggregate data they are using is largely publicly available then this practice may be within reach of an individual investor

I am going to read the whole thing and see if it makes any sense to me. He claims in the intro that it will.

[Morik]

My position in gold is for portfolio diversification rather than US meltdown scenarios; for that purpose I think the relatively low counter-party risk of futures contracts and the convenience (gold-backed ETFs are also similarly convenient) them vs holding physical gold, plus the leverage make them pretty nice.

Your position seems reasonable to me.

I have actually changed my mind here. See https://www.reuters.com/article/us-gold ... SKBN23I1M0
It looks like futures actually don't track gold very well compared to physically backed ETFs.
There are also rare events that can happen with physical commodities and cause super contango in the futures market, which can cause big gaps between futures prices and the actual commodity prices.

[GRP]

I am going to read the whole thing and see if it makes any sense to me. He claims in the intro that it will.

I'm slowly making my way through the book as well. It's absolutely first rate. Reading PDFs hurts my eyes though. I want to get a physical copy instead but it's weirdly expensive.

[GRP]

My position in gold is for portfolio diversification rather than US meltdown scenarios; for that purpose I think the relatively low counter-party risk of futures contracts and the convenience (gold-backed ETFs are also similarly convenient) them vs holding physical gold, plus the leverage make them pretty nice.

Your position seems reasonable to me.

I have actually changed my mind here. See https://www.reuters.com/article/us-gold ... SKBN23I1M0
It looks like futures actually don't track gold very well compared to physically backed ETFs.
There are also rare events that can happen with physical commodities and cause super contango in the futures market, which can cause big gaps between futures prices and the actual commodity prices.

Totally agree with you on that point. ETFs with actual gold in the underlying are superior to futures. It's one of the reasons why I don't think a commodity basket fund is enough to replace an explicit gold allocation.

[GRP]

Interesting tidbit about Exter's pyramid:

Exter is known for creating Exter's Pyramid (also known as Exter's Golden Pyramid and Exter's Inverted Pyramid) for visualizing the organization of asset classes in terms of risk and size. In Exter's scheme, gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky. The larger size of asset classes at higher levels is representative of the higher total worldwide notional value of those assets. While Exter's original pyramid placed Third World debt at the top, today derivatives hold this dubious honor.

[seajay]

Interesting tidbit about Exter's pyramid:

Exter is known for creating Exter's Pyramid (also known as Exter's Golden Pyramid and Exter's Inverted Pyramid) for visualizing the organization of asset classes in terms of risk and size. In Exter's scheme, gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky. The larger size of asset classes at higher levels is representative of the higher total worldwide notional value of those assets. While Exter's original pyramid placed Third World debt at the top, today derivatives hold this dubious honor.

So do we allocate 1 to gold, 2 to cash, 3 to bonds, 4 to stocks, 5 to REIT ... and forget about leverage/derivatives, which has REIT at 33% weight, which is perhaps the value of some investors home relative to their total wealth, so discounting home value that's 40% stock, 30% bonds, 20% cash, 10% gold? Or do we reverse that, 40% gold, 30% cash, 20% bonds, 10% stock? Or average those two, 25% each in stocks, bonds, cash, gold?

Consulting PV for data since 1972 and each/any of those were in the same ballpark! (Around 4% real).

Seems like respective choices of somewhat ...

Wellseley
Fat Tail minimization
4x25 Permanent Portfolio

Similar'ish rewards, drawdowns, worst year declines, volatility.

[AlphaLess]

People finally understanding that in year 2022 gold is not a great asset.

You'd have to sell 25% more stock index shares at the end of 2022 to buy the same amount of gold as at the start of 2022.

You might want to put down your narrow goggles, and get a source with a long history of data.

[seajay]

People finally understanding that in year 2022 gold is not a great asset.

You'd have to sell 25% more stock index shares at the end of 2022 to buy the same amount of gold as at the start of 2022.

You might want to put down your narrow goggles, and get a source with a long history of data.

On a 30 year final portfolio value outcome after SWR for all years since 1794 in 40% of years all-stock was bettered by stock/gold 50/50 (assuming when gold was money/coins the investor held bonds instead of gold coins, but when that ended in the early 1930's they opted to hold physical gold). In 40% of start years stock/gold bettered all-stock. In 20% of start years stock beat stock/gold by 2% annualized or more, however stocks tended to do well in start years following deep declines but those start dates clustered. Mostly all-stock investors outcome was little different in outcome to other choices. Such a infrequent great all-stock case outcome cluster occurred after the deep 1970's stock price declines, anyone lumping into stocks since the 1980's has been a fortunate participant of that. In the absence of more recent deep stock declines forward all-stock outcomes are inclined to be more mediocre, similar whether you hold all-stock or stock/gold or stock/bond blends. All stock however gives up the optionality of being able to transfer some/all of a less-down (or even up) asset into stocks if/when deep stock declines do occur. In the case of gold that can be a substantial benefit as the price of gold can spike sharply upwards when stock prices spike deeply downward. If 50 stock value halves, 50 gold value doubles, you have the option to sell gold and increase the number of stock shares you hold to five times as many shares being held, and if bought at relative lows those shares are subsequently inclined to yield potentially great rewards. In contrast a all-stock investor just rides the waves, compounds to no overall additional benefit.

Gold might be considered a Black-Swan/fire insurance hedge, when others may be crying a investor who held some gold might be indifferent or maybe even rejoicing. Over shorter periods holding some gold can be a drag factor, however in 30 year scale that 'insurance' cost is minimal, if any.

Whether you rebalance back to the likes of 50/50 yearly or simply leave as-is and direct withdrawals (or additions) to being taken from the most-up (added to the least-down) and 30 year outcomes were near-as the same. With non-rebalanced you just ended up with more in the asset that performed the best. You might say that the rebalance benefit of yearly rebalancing compares to having held more in the better performing asset. Win the lottery, drop a third into buying a nice house(s), a third into stocks, a third into gold, and just draw SWR from either stock or gold - whichever was the higher value at the time. No other rebalancing/effort required. Historically drawing 3% SWR from a initial stock/gold 50/50 allocation was inclined to end 30 years with your inflation adjusted wealth still intact, if not expanded, whilst during those 30 years there was the option to migrate gold into stocks if/when at any time stocks had declined a lot. Deep declines are more common across 30 year periods so most investors will likely have the potential to make such a transition at some point that can make a substantial difference to overall outcome, such as possibly holding five times more stock shares than held at the start and where the majority of those shares were bought at relative lows.

[firebirdparts]

I am going to read the whole thing and see if it makes any sense to me. He claims in the intro that it will.

I'm slowly making my way through the book as well. It's absolutely first rate. Reading PDFs hurts my eyes though. I want to get a physical copy instead but it's weirdly expensive.

I am on vacation and had to send it to an iPad! He is very plain spoken and I have enjoyed it so far.

[seajay]

I am going to read the whole thing and see if it makes any sense to me. He claims in the intro that it will.

I'm slowly making my way through the book as well. It's absolutely first rate. Reading PDFs hurts my eyes though. I want to get a physical copy instead but it's weirdly expensive.

I am on vacation and had to send it to an iPad! He is very plain spoken and I have enjoyed it so far.

Executive Summary :

Policy makers play a balancing role, and periodically mess up.

"Gold" occurs over 200+ times throughout the document.

[GRP]

I am on vacation and had to send it to an iPad! He is very plain spoken and I have enjoyed it so far.

Right? Full agree there. I remember in an interview once, Ray Dalio described himself as a "mechanic" of the economy. That really comes through in his writing as he describes the economy as a big machine with these moving parts that have clear cause and effect relationships.

[firebirdparts]

Getting back to the question of the algorithm, I don’t suppose it’s all that important to see the “minor” debt cycles coming. We had a “major” one 15 years ago, so if we are due for another one, it would say something loudly about our cluelessness. The last two important events were 80 years apart.

[Fremdon Ferndock]

Whoops. If you compare the returns of the Permanent Portfolio (25% stocks, 50% intermediate treasuries, 25% gold) to a portfolio of 25% stocks, 75% intermediate treasuries, you will see that the latter has done as well or better for the last four decades. Even during the recent 'flation holding 25% gold in lieu of intermediate treasuries didn't do much for you. There's only one period in the 1970s, when gold was unpegged from the dollar, that it was helpful to hold it. The whole case for owning gold pivots on that small window of time. And if TIPs had existed back then, the case would be even weaker. It's hard to convince me, based on these data, that gold is a valuable long-term holding. It can be a valuable short-term holding, if you're good at timing -- but that can be said of every other asset as well.

[Morik]

There's only one period in the 1970s, when gold was unpegged from the dollar, that it was helpful to hold it. The whole case for owning gold pivots on that small window of time.

The whole case for owning gold does not pivot on that small time window.

See https://portfoliocharts.com/2021/12/16/ ... ortfolios/ and https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

[Fremdon Ferndock]

There's only one period in the 1970s, when gold was unpegged from the dollar, that it was helpful to hold it. The whole case for owning gold pivots on that small window of time.

The whole case for owning gold does not pivot on that small time window.

See https://portfoliocharts.com/2021/12/16/ ... ortfolios/ and https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

You make my point. There is no choice of starting date here and data necessarily include the narrow window of time in the 1970-76 time period where the giant gold returns occurred. Take out that window and have another look. You will see that owning simple intermediate treasuries in lieu of gold for the next four decades was all you needed to do. And, anyway, how about showing the returns based on dollar-cost averaging -- who exactly invested a lifetime lump sum in 1970 and let it ride? If we use that more realistic scenario of dollar cost averaging, that means folks had very little riding during the gold rush days in the early 70s. You will find, in this case, that there is virtually no difference in returns between holding gold and holding intermediate treasuries instead.

[firebirdparts]

I actually think it's true enough. You need to exclude that period from your expectations, I mean. It is what it is, but it's super obvious that you can't get that again. You can get something from gold, but you can't get that again.

[Morik]

There's only one period in the 1970s, when gold was unpegged from the dollar, that it was helpful to hold it. The whole case for owning gold pivots on that small window of time.

The whole case for owning gold does not pivot on that small time window.

See https://portfoliocharts.com/2021/12/16/ ... ortfolios/ and https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

You make my point. There is no choice of starting date here and data necessarily include the narrow window of time in the 1970-76 time period where the giant gold returns occurred. Take out that window and have another look. You will see that owning simple intermediate treasuries in lieu of gold for the next four decades was all you needed to do. And, anyway, how about showing the returns based on dollar-cost averaging -- who exactly invested a lifetime lump sum in 1970 and let it ride? If we use that more realistic scenario of dollar cost averaging, that means folks had very little riding during the gold rush days in the early 70s. You will find, in this case, that there is virtually no difference in returns between holding gold and holding intermediate treasuries instead.

I do not agree that I have made your point. These graphs include all starting dates simultaneously. I.e., many of the lines in these graphs are for start dates AFTER 1976.

Lump sum $100k followed by $10k annually.


What if there is no lump sum up front? E.g., someone just starting to save, saving 20k per year:


Compare to 25% total stock, 75% ITT:


And with no lump sum, just 20k a year like the 2nd permanent portfolio graph above:




Baseline return overview for reference:


Baseline return vs ulcer index of portfolios, highlighted are SCV/LT/Gold portfolios.


The bottom one with ulcer index ~8 is the 60% gold one. The others in the upper left are less gold.


From what I can see in these graphs, gold has been beneficial for portfolios outside of the "lump sum in 1970-1976 period" scenario.

[Fremdon Ferndock]

From Portfolio Visualizer:

$20K per year invested (inflation-adjusted) from 1972-2022:

Portfolio #1 -- 25% US Stocks, 50% 10-year Treasurys, 25% Gold (The PP): Final Balance = $25,954,121, Max Drawdown = 16.3%, Sharpe Ratio = 0.45

Portfolio #2 -- 25% US Stocks, 75% 10-year Treasurys: Final Balance = $25,378,740, Max Drawdown = 12.7%, Sharpe Ratio = 0.51

I can't see the difference in the end result, except that Portfolio #2 had less drawdown and better risk-adjusted return.

The vaunted benefit of the Permanent Portfolio is nearly accounted for by the contribution of Treasury Bonds since 1981. Gold had very little to do with it. Let's see if Gold can pick up the slack going forward now that the Bond tailwind seems to be over.

[firebirdparts]

That seems like a really uninteresting argument too. Let me paraphrase.
People made a ton of money if they held stocks
People made a ton of money if they held bonds
People made a ton of money if they held gold

Nobody is going to argue real hard with any of that.

[Fremdon Ferndock]

That seems like a really uninteresting argument too. Let me paraphrase.
People made a ton of money if they held stocks
People made a ton of money if they held bonds
People made a ton of money if they held gold

Nobody is going to argue real hard with any of that.

Seems just a tad vague. Hopefully, you didn't hear this from a financial advisor.

[firebirdparts]

I was trying to paraphrase. I thought that required originality.

[seajay]

People finally understanding that in year 2022 gold is not a great asset.

You'd have to sell 25% more stock index shares at the end of 2022 to buy the same amount of gold as at the start of 2022.

You might want to put down your narrow goggles, and get a source with a long history of data.

Bridgewater analysis summary goes back to 1900 - where gold returns (in global FX) during 60/40 downturns indicated strong inverse correlations.

67/33 stock/gold and if 67 stocks halve down to 33, 33 in gold doubles to 66, rebalancing back to 67/33 has you double up on the number of stock shares being held after prices had halved. Martingale. Reiteratable ad infinitum.

viewtopic.php?p=7014054#p7014054

[secondopinion]

People finally understanding that in year 2022 gold is not a great asset.

You'd have to sell 25% more stock index shares at the end of 2022 to buy the same amount of gold as at the start of 2022.

You might want to put down your narrow goggles, and get a source with a long history of data.

Bridgewater analysis summary goes back to 1900 - where gold returns (in global FX) during 60/40 downturns indicated strong inverse correlations.

67/33 stock/gold and if 67 stocks halve down to 33, 33 in gold doubles to 66, rebalancing back to 67/33 has you double up on the number of stock shares being held after prices had halved. Martingale. Reiteratable ad infinitum.

viewtopic.php?p=7014054#p7014054

I think the key is that it is based in global FX. Protection against country-specific inflation is no better than what a good foreign currency can do, however (for US investors, they are better with TIPS if inflation is the concern). I am not sold on the idea that gold operates exactly as described; however, if one is going to hold foreign currency or hold foreign bonds unhedged, then I think gold is probably not a bad choice if one considers after taxes.

I hold a little bit of precious metal, but the notion of having 1/3 in gold is just far too much. I rather focus on real growth and/or paying for expenses.

[seajay]

People finally understanding that in year 2022 gold is not a great asset.

You'd have to sell 25% more stock index shares at the end of 2022 to buy the same amount of gold as at the start of 2022.

You might want to put down your narrow goggles, and get a source with a long history of data.

Bridgewater analysis summary goes back to 1900 - where gold returns (in global FX) during 60/40 downturns indicated strong inverse correlations.

67/33 stock/gold and if 67 stocks halve down to 33, 33 in gold doubles to 66, rebalancing back to 67/33 has you double up on the number of stock shares being held after prices had halved. Martingale. Reiteratable ad infinitum.

viewtopic.php?p=7014054#p7014054

I think the key is that it is based in global FX. Protection against country-specific inflation is no better than what a good foreign currency can do, however (for US investors, they are better with TIPS if inflation is the concern). I am not sold on the idea that gold operates exactly as described; however, if one is going to hold foreign currency or hold foreign bonds unhedged, then I think gold is probably not a bad choice if one considers after taxes.

I hold a little bit of precious metal, but the notion of having 1/3 in gold is just far too much. I rather focus on real growth and/or paying for expenses.

Holding some gold as a hedge/porfolio-insurance is of course optional. How much insurance as each individual might prefer. Heavier weighting/insurance obviously pays out more as/when a stocks-down/gold-up type event arises, and can have them rejoicing whilst others who held no such insurance are commiserating. How much is that insurance? Historically relatively little, Buffett style 90/10 stock/T-Bills broadly aligns with 100% stock, 90/10 stock/gold much the same, however T-Bills as insurance tends pay out less than does gold, T-bills inclined to remain level, gold in contrast tending to spike as/when stocks sink a lot. For heavier gold weightings stock declines can be a major win. For example at 50/50 stock/gold if 50 stocks halves to 25, 50 gold doubles to 100 then selling gold to buy stocks increases the number of shares held to five-fold. How often might that occur? Well to less extremes often enough for each investor to likely see benefits from holding some insurance during their investment lifetime.

Investment rewards arise out of price appreciation, income/dividends and/or volatility capture. Diversifying across all of those tends to be better than just targeting one of them alone.

1972 - 2001 30 year period and 100/0, 80/20 stock/T-Bill, 80/20 stock/gold ... similar overall rewards, where all-stock ended 2001 with 276.183K value (from 10K start of 1972 date amount), 80/20 stock/gold ended with 275.321K value.

If however at the end of 1974 gold had been sold to load into stocks then at the end of 1974 the stock/gold portfolio that started with 10K, was up to 11.277K value. 11.277K all stock value from the start of 1975 subsequently ran on to end 2001 at 448.345K value. Which was 63% more final value compared to 100/0 having ended 30 years with 275.321K, 1.64% annualized more over the 30 years. But where if even no gold into stock rotation had been applied the insurance cost of holding some gold was negligible, 276.183K final value for 100/0 versus 275.321K for 80/20 stock/gold over 30 years = 0.01% annualized less for 80/20 stock/gold.

67/33 stock/gold is pure Martingale, 66 stock value halves to 33, 33 gold doubles to 66, rebalancing back to 67/33 has you double up the number of stock shares after each halving. Which can be repeated if stocks then go on to halve again ...etc. With 80/20 and if 80 stocks halve to 40, 20 gold value doubles to 40 and you have the option to sell gold to double up on the number of shares held, a one off play, but where stocks halving and then halving again is a very rare natural type progression. Of course the inverse correlations aren't so clear-cut as that model, but tend to be in the same ballpark.