Diversification a la Markowitz #3: Gold

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GAAP
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

NoRegret wrote: Thu Mar 23, 2023 1:36 am *Most non-gold-bug economist think the gold-standard is deflationary and fiat allows faster real growth. I believe that to be true to a certain extent, but human folly makes it far too easy to over do fiat just a tiny bit.

It's a theory and I have no way of proving it. My main point is that while it's tautological that gold's real return is 0 under a gold standard; in a fiat regime we need to think things thru.
Not proof -- but illustrative: Image
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

seajay wrote: Thu Mar 23, 2023 3:01 am You can deposit as much as you like into T-Bills with them pretty much being totally guaranteed, physical gold in-hand totally eliminates counter-party risk, but has its own risks such as security of storage. Stock/Bond (T-Bill)/Commodity equal exposure diversity - such if concerns were increasing as to brokerages, concentration of wealth via a single counter-party, then the diversity of also holding T-Bills and gold might be more comfortable ...etc.
Don't forget, governments can also make owing gold illegal -- we did here for 40 years.
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Re: Diversification a la Markowitz #3: Gold

Post by halfnine »

GAAP wrote: Thu Mar 23, 2023 1:20 pm
seajay wrote: Thu Mar 23, 2023 3:01 am You can deposit as much as you like into T-Bills with them pretty much being totally guaranteed, physical gold in-hand totally eliminates counter-party risk, but has its own risks such as security of storage. Stock/Bond (T-Bill)/Commodity equal exposure diversity - such if concerns were increasing as to brokerages, concentration of wealth via a single counter-party, then the diversity of also holding T-Bills and gold might be more comfortable ...etc.
Don't forget, governments can also make owing gold illegal -- we did here for 40 years.
Gold doesn't serve the same purpose now as it did. The closest financial instrument probably now TIPS. So, yes, they could probably convert your TIPS to nominals. Although, they'd probably start by changing how they measure inflation for both TIPS and SS. Quite frankly, there are probably a whole host of financial instruments that are probably lower hanging fruit than gold is.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

GAAP wrote: Thu Mar 23, 2023 1:20 pm Don't forget, governments can also make owing gold illegal -- we did here for 40 years.
Only American based physical investment gold had to be submitted (compulsory purchased), most of the rest of the world still traded gold. Americans could have phoned a London or Swiss broker to buy/hold/trade/gold outside of America. Also when gold was money, gold coins, so also was silver, smaller change. Typically there were also paper versions also, but with direct convertibility. For instance a British holder of a One Pound Note could go into a bank and swap that for a One Pound gold Sovereign coin and vice-versa. Silver substituted gold relatively closely.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

halfnine wrote: Thu Mar 23, 2023 3:29 pm
GAAP wrote: Thu Mar 23, 2023 1:20 pm
seajay wrote: Thu Mar 23, 2023 3:01 am You can deposit as much as you like into T-Bills with them pretty much being totally guaranteed, physical gold in-hand totally eliminates counter-party risk, but has its own risks such as security of storage. Stock/Bond (T-Bill)/Commodity equal exposure diversity - such if concerns were increasing as to brokerages, concentration of wealth via a single counter-party, then the diversity of also holding T-Bills and gold might be more comfortable ...etc.
Don't forget, governments can also make owing gold illegal -- we did here for 40 years.
Gold doesn't serve the same purpose now as it did. The closest financial instrument probably now TIPS. So, yes, they could probably convert your TIPS to nominals. Although, they'd probably start by changing how they measure inflation for both TIPS and SS. Quite frankly, there are probably a whole host of financial instruments that are probably lower hanging fruit than gold is.
Nor do bonds serve the same purpose as they did pre 1930's. Broadly under the gold standard inflation averaged 0% (median) gold currency deposited/invested earned interest that was in effect a real rate of return, and that total rate of return also compared to stocks annualized total return. So most investors were content to just hold bonds (stocks were more volatile/speculative).

Following the early 1930's what primarily changed was that prior broad 0% inflation transitioned to being predominately positive, a form of taxation, and where that 'taxation' combined with regular taxation negated the prior positive real returns from bonds (and hence also gold assuming savers wouldn't keep gold coins at home, but deposit them for safety (and interest) instead).

British data, but serves a point ... 1932 onward and a 65 year old retiree with a 25 year (to age 90) horizon, invested in 50/50 US stocks/gold, supported a MaxWR of 4.4%. Yielded a 4.4% long linear regression, 5% CAGR 1932-2022 inclusive. In contrast all US stock alone yielded a 6% log linear, 6.8% CAGR, seemingly more rewarding. BUT! all stock MaxWR was just 3.25%.

Stock/gold 50/50 had a higher r-squared, was less volatile that just stocks. So despite all-stock having the higher annualized, the higher volatility induced a greater risk than that of a lower annualized/less volatile alternative.

I see TIPS as being more of a central bullet, whereas a barbell of 50/50 stock/gold combines to a central bullet, somewhat similar to TIPS, but where nominal volatility is higher. Somewhat like comparing a 10 year treasury bullet to that of a 1 and 20 year (50/50) treasury barbell.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

Gold (finite commodity currency) since the 1930's has been a competitor to the US dollar (unlimited fiat currency) and vice-versa. That competition has somewhat followed a periodic up-spike in gold, followed by prolonged decline type motion. A saw-tooth type progression. 1930's up-spike, another in the 1970's, another more recently. So somewhat a 40 year type interval (that may have changed now that gold is free-traded/market priced). Gold is for the long term investor, or short term speculator.

Between the 1980 up-spike up to the end of the 1990's lows and gold declined in nominal price, let alone in real terms. 50/50 with stocks however and as stocks did well during those gold price declines years there was much repeated selling of some stock shares to add more gold. That considerably expanded the number of ounces of gold a investor held in their portfolio, something like 6 to 10 times more, without adding any additional capital to the portfolio, just from periodic rebalancing.

Then when gold did spike, typically stocks were suffering, and that stack of gold went a long way to offset the impact from stock declines (sold ounces of gold, to buy more stock shares).

A factor there however is that requires considerable patience, it is a long term matter, many/most investors simply don't have that patience. But if they don't have the patience for that, then equally they might not have the patience for stocks (that are also should be considered a long term investment). That shows in actual figures IIRC, where the average investor lags the broad market average by around 2%/year. They profit chase, or make bad decisions (trade from laggards into leaders - that then turn around ...etc.). By the time you factor in inflation and all of the costs (brokers fees, market makers spreads, fund managers fees and in some cases fund of funds fees ...etc.), along with poor decisions - many end up with no better, maybe even worse actual outcome than had they simply held T-Bills.
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Re: Diversification a la Markowitz #3: Gold

Post by Phil DeMuth »

Here's an excellent survey article on the financial economics of gold:

https://www.sciencedirect.com/science/a ... 1915001325

Quote from the section on portfolio diversification:

Bruno and Chincarini (2010) look at optimally weighted portfolios
to assess how much gold investors in various countries should have in
order to maximise their risk return profile. These vary considerably,
with weights from 0.1% to 12%.1
Another characteristic that contributes to gold's diversification abilities
is the skewness of its returns distribution. Lucey, Tully, and Poti
(2006) discuss the importance of considering the moments of a distribution,
rather than just mean and variance, as is the original portfolio
theory. Over the period examined (1988–2003) they show that when
the positive skew of gold is taken into consideration in a multimoment
asset allocation the optimal portfolio weights for gold are lower than
under a simple mean–variance analysis. It is recommended that investors
should hold between 4 and 6% under traditional optimisation and
2–4% when skewness is accounted for.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

Phil DeMuth wrote: Sat Mar 25, 2023 10:24 am It is recommended that investors
should hold between 4 and 6% under traditional optimisation and
2–4% when skewness is accounted for.
State Street estimated the Global Market Porfolio share allocated to gold at 3%.

https://www.ssga.com/library-content/pd ... e-high.pdf
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Re: Diversification a la Markowitz #3: Gold

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Optimal is subject to the time/data/circumstances measured across

Pre 1930's and bonds yielded similar total returns as stocks (money was gold, deposit that gold for interest - returned more gold). From the 1930's and direct gold/money convertibility was ended, after which a 50/50 stock/gold barbell held up well against stocks

Image
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Re: Diversification a la Markowitz #3: Gold

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seajay wrote: Sat Mar 25, 2023 5:29 pm Optimal is subject to the time/data/circumstances measured across

Pre 1930's and bonds yielded similar total returns as stocks (money was gold, deposit that gold for interest - returned more gold). From the 1930's and direct gold/money convertibility was ended, after which a 50/50 stock/gold barbell held up well against stocks
While historically interesting, we're not on the gold standard anymore.
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Re: Diversification a la Markowitz #3: Gold

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watchnerd wrote: Sat Mar 25, 2023 7:24 pm
seajay wrote: Sat Mar 25, 2023 5:29 pm Optimal is subject to the time/data/circumstances measured across

Pre 1930's and bonds yielded similar total returns as stocks (money was gold, deposit that gold for interest - returned more gold). From the 1930's and direct gold/money convertibility was ended, after which a 50/50 stock/gold barbell held up well against stocks
While historically interesting, we're not on the gold standard anymore.
A number of past Fed Chair have indicated that gold was a meaningful factor in their policy setting. More a case of still 'on' but in a more loose manner, with periodic 'off' events (even when on the gold standard periodic 'off' type events occurred). That influence is based on the observation of when not so (not setting policies with gold in mind) bad things tend to happen.

September 21st 1931 and Britain passed law to end the gold standard, many stock markets closed across Europe. Up to that point savers that previously deposited gold/silver coins in return for interest (more gold/silver) were generally content with bonds, as the total returns were comparable if not better (less volatile) than stocks. At the breaking of that news what would savers/investors have done? Withdrawing the gold they had deposited was in effect no longer possible, at least not directly, some I suggest would have drawn their money out and perhaps bought gold indirectly, or maybe split equally between gold and US dollars, investing those dollars into US stocks (that had corrected back down again from the Roaring 20's spike, down to 'more average/reasonable' levels. 50/50 gold/US stocks.

Investors/savers fundamentally put money aside in anticipation of spending it later, ideally where it at least maintains its purchase power, prior to 1932 and bonds consistently supported 30 year 3.33% SWR i.e. the return of your inflation adjusted money via yearly instalments, as has 50/50 US stock/gold for a British investor since 1932 - and often left a decent residual amount at the end of the 30 years. 1932 onward and 3.33% SWR worst case ended with 55% of the inflation adjusted start date amount, median case 135%. For someone who followed ancient Talmud advice of thirds each land (owning a home), business (stocks), in-hand (gold), they didn't have to find/pay rent and had 2.2% SWR of their initial total wealth providing disposable income, and mostly saw wealth preserved. In the extreme worst case having ended 30 years, a 65 year old retiree aged 95, still with their home value and over half of their original 66% invested into stock/gold (in inflation adjusted terms).

On the basis that a stock/gold barbell, US$ fiat and commodity currency extreme opposites, with the US$ invested in stocks, has worked well for the past 90 years, as a replacement to prior (to 1932) all-bond (bearing in mind that a barbell of two extremes combines to a central bullet),

Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. It has served as money for millennia, and should be even more-so considered when someone’s fiat wealth might otherwise potentially disappear in a click. Not diversifying and rely upon either alone (gold or fiat currency) isn't as safe as diversifying to hold some of both. Much can happen during a typical 30 year investment period.

The suggestion that on-average stocks are more rewarding is based upon individual great case outcomes, typically 30 year SWR started at very low stock prices following large declines where the subsequent rewards were fantastic. If 100 individuals bet $1 and only get a $1 back whilst another wins a million, on a average measure that looks great, but that average is something that the majority will not actually see. Measure the actual common average and all-stock versus stock/gold or stock/bond blends often worked out similar. In the worst of cases all-stock was actually worse than stock/bond (or gold) blends. All-stock investors often end up with no different outcome to that of less aggressive investors, in some cases worse, but yes if started after deep declines in stock prices can be exceptionally great - but such timing points are relatively rare/infrequent and more often at such times investors are less inclined to go all-in on stocks after such prior deep declines/losses.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

seajay wrote: Sun Mar 26, 2023 5:57 am
A number of past Fed Chair have indicated that gold was a meaningful factor in their policy setting. More a case of still 'on' but in a more loose manner, with periodic 'off' events (even when on the gold standard periodic 'off' type events occurred). That influence is based on the observation of when not so (not setting policies with gold in mind) bad things tend to happen.
Yes, but if you want to pay attention to that, look at recent central bank purchases of gold (which I posted upthread), not what happened in the 1930s.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

watchnerd wrote: Sun Mar 26, 2023 8:11 am
seajay wrote: Sun Mar 26, 2023 5:57 am
A number of past Fed Chair have indicated that gold was a meaningful factor in their policy setting. More a case of still 'on' but in a more loose manner, with periodic 'off' events (even when on the gold standard periodic 'off' type events occurred). That influence is based on the observation of when not so (not setting policies with gold in mind) bad things tend to happen.
Yes, but if you want to pay attention to that, look at recent central bank purchases of gold (which I posted upthread), not what happened in the 1930s.
Fundamentally however the history indicates the cyclical nature, gold isn't just a post 1970's thing, but has financial history dating back millennia. Fiat (US$) and commodity (gold) currencies have played-off since the 1930's, prior to that and even when on the gold standard there were cycles, where at times the stresses led to 'changes'. The main difference being that pre 1970's and the progression was more step/plateau, brief/large changes followed by years of flatness. Since free-float (1970's) and that's now more market driven/dynamic. 1970s'/80's/90's was the market somewhat finding its feet, similar to the 1920's/30's/40's. Previously near total trust was placed in fiat, but nowadays many countries see the value/benefit of diversifying fiat/non-fiat currencies. Simple diversification across multiple fiat currencies still has concentration risk as any one fiat faltering combined with globalization/interdependence can induce a domino effect.

BTW thanks for those past (up-thread) charts.
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Re: Diversification a la Markowitz #3: Gold

Post by McQ »

Phil DeMuth wrote: Sat Mar 25, 2023 10:24 am Here's an excellent survey article on the financial economics of gold:

https://www.sciencedirect.com/science/a ... 1915001325

Quote from the section on portfolio diversification:

Bruno and Chincarini (2010) look at optimally weighted portfolios
to assess how much gold investors in various countries should have in
order to maximise their risk return profile. These vary considerably,
with weights from 0.1% to 12%.1
Another characteristic that contributes to gold's diversification abilities
is the skewness of its returns distribution. Lucey, Tully, and Poti
(2006) discuss the importance of considering the moments of a distribution,
rather than just mean and variance, as is the original portfolio
theory. Over the period examined (1988–2003) they show that when
the positive skew of gold is taken into consideration in a multimoment
asset allocation the optimal portfolio weights for gold are lower than
under a simple mean–variance analysis. It is recommended that investors
should hold between 4 and 6% under traditional optimisation and
2–4% when skewness is accounted for.
Phil, thanks for that reference. I wasn't aware of it, and it will be important for me to follow up, should I ever attempt to convert these posts into some kind of paper.

Two things concern me about the conclusion:
1. Although mean variance analysis can discriminate more versus less efficient portfolios at any level of precision, I am concerned about an output such as "with 2% gold" is more efficient than "with 0% gold."

Nisiprius, in another thread, resuscitated the century-old idea of "just noticeable difference." If adding gold adds two basis points to my long-term return, do I care? And how could a two percent allocation to anything add more than a handful of basis points to portfolio return?

2. It seems to me that single-digit allocation percentages are hostage to the historical period used--exquisitely sensitive to being cut in half or doubled if one or two new years of data are added to the record.

So informally, and without much mathematical justification, my rubric for adding an asset beyond a Total Stock Market index fund and an Intermediate Treasury fund is, what happens if I add 10% (or more) of the asset?

But I still owe the thread a 3-asset model where 10% of intermediate Treasuries gets swapped out for gold. Forthcoming ..
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Re: Diversification a la Markowitz #3: Gold

Post by McQ »

Yes, an extraordinary individual can clear a put against civilization

The preceding post assumed an ordinary person, like a Boglehead, attempting to clear their put option against civilization. Things didn’t work out very well for, ahem, us little people.

This post loosens that assumption to produce a very different result, and a much more positive picture of what gold in the form of a put option against civilization might offer--if you are extraordinary in the same sort of way as the protagonist described below.

Assume we have a billion dollars

...or at least, a few hundred million dollars, I’ll call it $300 million for numerical analyses. You are at least a multi-centi-millionaire, you extraordinary individual you.

Two things are true when you have three hundred million dollars, more or less:

1. Your wealth far exceeds your spending needs.
2. You have a LOT to lose if civilization goes south.

For this person, a 10% allocation to gold, $30 million dollars, has no impact on spending or lifestyle. They are just as much in surplus at $270 million as at $300 million. And if gold does nothing but store value, while the other $270 million quadruples, octuples, whatever, there is still no impact on how well they can live.

Two more things are typically true at this wealth level:

3. You are used to having a security detail or being under the protection of armed force. You have a number to call upon need. That means you have ready access to armed individuals who are good at what they do.
4. Typically, somewhere along the way, you will have acquired either a ranch or a country homestead with farming productivity.

With these assumptions, everything is in place to be able to self-clear your put option against civilization.

Your exit

Gold is surprisingly compact. A one-kilo bar, at today’s price of $2000/troy ounce, is worth about $60,000, but measures only about 3.5“ X 1.5” X 0.75 inches. Seventeen of these would be worth $1 million and fit into the average hand bag. Unfortunately, the straps of the bag would probably break, if not your arm, given the forty pounds that $1 million of gold would weigh.

No matter. Two pieces of ordinary luggage, each with eight kilos of gold, plus assorted clothing or freeze dried provisions, carried by each member of your security detail, can easily be moved onto the ranch at each vacation visit. After a dozen trips, most of the $30 million will have been moved there inconspicuously, and it will all fit into various quite compact strong boxes or vaults once on site.

No one need know what is there or where it is. And it will be difficult to find any of it on a casual sweep, should intruders gain entry in your absence.

Now the crisis comes. It is time to get out of the city. You kept most of the small gold coins with you there. That means you can pay for armored transportation to the private jetport. You can promise armed men payment in gold (and a haven for their families if they prove loyal). You can pay the pilot in gold. Heck, you can buy the jet.

Now you are at the ranch with an armed retinue. It’s off a side road off a side road: defensible space.

You don’t go shopping yourself like poor Peter—you send an armed group of men into town in two vehicles. They are buying provisions for you and for their families. They are motivated. One team lags behind on exit from the supermarket parking lot. No blacked out SUV is going to follow your team home.

If you are smart, you will also spend freely to support any ex-military who live in town. Let none of their families go hungry. No attack against your redoubt will succeed. There will be no one of any consequence local to mount it, and plenty of warning, plus reinforcements, if outsiders attempt it.

And you will have kilos and kilos of gold available for capital investment when the crisis eases.

See? It is not so hard to self-clear a put against civilization. You just need enough millions in gold to command enough armed force while possessing a defensible space.

I would definitely recommend a 10% allocation to gold to such an extraordinary individual, should they find themselves pessimistic about the prospects for civilization—as long as they own a ranch. (I don’t think there can be defensible space in the city—too many other agents who might command equal or greater armed force, plus no remoteness.)

Caveats

I finessed the exit from the city. That might not be so easy in practice once the crisis hits.

And I implicitly assumed that you have some leadership ability, i.e., that you are able to inspire loyalty, and that you have good judgment in selecting people to trust. Else, your armed retinue may decide to cut out the middleman and take your gold for themselves. Oh that pesky principal-agent problem!

***

Next posts tie up loose ends:
1. What about gold equities in place of physical gold?
2. What if gold were a third asset, replacing some of your Treasuries, per quite a number of posters here and in other threads?
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

What if you stuff $100M into your safe, alongside $100M worth of gold, and drop the remainder $100M into a stock index accumulation fund. Spend that safe money first, perhaps dollars and then gold as dollars are more inclined to deflate. Some years later, the safe is empty, and as you spend the last dollar or gold coin you're at 100% stock, having started at thirds each stock/cash/gold. Fiddly to measure, but a reasonable alternative is to assume the time weighted average, 67/17/17 stock/cash/gold and measure that.

Now instead of hard US dollar bills in the safe, those dollars might be deposited with the treasury, T-Bills, that are fully protected no matter how much you deposit, and in effect pay interest that goes some way to offset otherwise inflationary erosion of the purchase power. Gold like anything that maintains demand is likely to see its price broadly rise with inflation (but waxes and wanes as demand rises/falls over time).

Choices! You could start with thirds each stock/gold/T-Bills, or perhaps 33/67 stock/T-Bills, or 33/67 stock/gold. That respectively time average 66/17/17, 67/33, 67/33. Turning to tools such as PV general and its Monte-Carlo alternative offering the general outcomes/results are all within the same ball-park for the different choices. In that sense gold and T-Bills might be considered as being interchangeable, just a matter of personal preference as to ones own particular circumstances.

With just T-Bills in the safe, then that might all have been spent after just 15 years, likely due to high/fast inflationary erosion, under such circumstances gold tens to do well. In other cases T-Bills might to well, yield rewards faster than inflation, under such circumstances gold tends to do poorly. A more reasonable choice therefore might be some of both, diversify the risk.

PV

For MC perhaps assume the inflation adjusted return of your capital via 30 years of 3.33% SWR MC ... 98% probability/success rate. Probability for some/many with that level of wealth living another 30 years I suspect is lower than 98%.

Might work the same for someone with just a single $1M, drawing a $33.33K/year amount to supplement their pension income, as equally as it might service someone with $300M spending $10M/year. Early years bad sequence of returns risk is pretty much eliminated, but where as the portfolio increasingly becomes stock heavy that risk rises, but so also does the risk of death, and when death does occur the heirs/beneficiaries might decide to de-risk a otherwise stock-heavy inheritance, maybe lumping that inheritance into a thirds each stock/T-Bills/gold portfolio of their own.
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

seajay wrote: Mon Mar 27, 2023 9:47 am What if you stuff $100M into your safe, alongside $100M worth of gold, and drop the remainder $100M into a stock index accumulation fund. Spend that safe money first, perhaps dollars and then gold as dollars are more inclined to deflate. Some years later, the safe is empty, and as you spend the last dollar or gold coin you're at 100% stock, having started at thirds each stock/cash/gold. Fiddly to measure, but a reasonable alternative is to assume the time weighted average, 67/17/17 stock/cash/gold and measure that.

Now instead of hard US dollar bills in the safe, those dollars might be deposited with the treasury, T-Bills, that are fully protected no matter how much you deposit, and in effect pay interest that goes some way to offset otherwise inflationary erosion of the purchase power. Gold like anything that maintains demand is likely to see its price broadly rise with inflation (but waxes and wanes as demand rises/falls over time).

Choices! You could start with thirds each stock/gold/T-Bills, or perhaps 33/67 stock/T-Bills, or 33/67 stock/gold. That respectively time average 66/17/17, 67/33, 67/33. Turning to tools such as PV general and its Monte-Carlo alternative offering the general outcomes/results are all within the same ball-park for the different choices. In that sense gold and T-Bills might be considered as being interchangeable, just a matter of personal preference as to ones own particular circumstances.

With just T-Bills in the safe, then that might all have been spent after just 15 years, likely due to high/fast inflationary erosion, under such circumstances gold tens to do well. In other cases T-Bills might to well, yield rewards faster than inflation, under such circumstances gold tends to do poorly. A more reasonable choice therefore might be some of both, diversify the risk.

PV

For MC perhaps assume the inflation adjusted return of your capital via 30 years of 3.33% SWR MC ... 98% probability/success rate. Probability for some/many with that level of wealth living another 30 years I suspect is lower than 98%.

Might work the same for someone with just a single $1M, drawing a $33.33K/year amount to supplement their pension income, as equally as it might service someone with $300M spending $10M/year. Early years bad sequence of returns risk is pretty much eliminated, but where as the portfolio increasingly becomes stock heavy that risk rises, but so also does the risk of death, and when death does occur the heirs/beneficiaries might decide to de-risk a otherwise stock-heavy inheritance, maybe lumping that inheritance into a thirds each stock/T-Bills/gold portfolio of their own.
And of course under the current tax regime, the heirs get the stepped-up tax basis at death so the capital gain taxes on the remaining gold and/or stock are nullified.
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

McQ wrote: Sun Mar 26, 2023 10:08 pm Gold is surprisingly compact. A one-kilo bar, at today’s price of $2000/troy ounce, is worth about $60,000, but measures only about 3.5“ X 1.5” X 0.75 inches. Seventeen of these would be worth $1 million and fit into the average hand bag. Unfortunately, the straps of the bag would probably break, if not your arm, given the forty pounds that $1 million of gold would weigh.
If you've got that much money, you're buying quality luggage that won't have any trouble with 40 lbs. :wink:
McQ wrote: Sun Mar 26, 2023 10:08 pm Now you are at the ranch with an armed retinue. It’s off a side road off a side road: defensible space.

You don’t go shopping yourself like poor Peter—you send an armed group of men into town in two vehicles. They are buying provisions for you and for their families. They are motivated. One team lags behind on exit from the supermarket parking lot. No blacked out SUV is going to follow your team home.

If you are smart, you will also spend freely to support any ex-military who live in town. Let none of their families go hungry. No attack against your redoubt will succeed. There will be no one of any consequence local to mount it, and plenty of warning, plus reinforcements, if outsiders attempt it.

And you will have kilos and kilos of gold available for capital investment when the crisis eases.

See? It is not so hard to self-clear a put against civilization. You just need enough millions in gold to command enough armed force while possessing a defensible space.

I would definitely recommend a 10% allocation to gold to such an extraordinary individual, should they find themselves pessimistic about the prospects for civilization—as long as they own a ranch. (I don’t think there can be defensible space in the city—too many other agents who might command equal or greater armed force, plus no remoteness.)
There was a place for sale on a Puget Sound Island a few years ago that fit this description pretty much exactly: isolation, farmland (with a manager), extra housing for "staff", etc.
McQ wrote: Sun Mar 26, 2023 10:08 pm And I implicitly assumed that you have some leadership ability, i.e., that you are able to inspire loyalty, and that you have good judgment in selecting people to trust. Else, your armed retinue may decide to cut out the middleman and take your gold for themselves. Oh that pesky principal-agent problem!
It's not just leadership ability, it's a leadership style that works for those people being led. Many extremely rich executives have the ability -- whether they would inspire loyalty or mutiny from their security staff in that situation is something else entirely.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

seajay wrote: Mon Mar 27, 2023 9:47 am What if you stuff $100M into your safe, alongside $100M worth of gold, and drop the remainder $100M into a stock index accumulation fund. Spend that safe money first, perhaps dollars and then gold as dollars are more inclined to deflate. Some years later, the safe is empty, and as you spend the last dollar or gold coin you're at 100% stock, having started at thirds each stock/cash/gold. Fiddly to measure, but a reasonable alternative is to assume the time weighted average, 67/17/17 stock/cash/gold and measure that.

Now instead of hard US dollar bills in the safe, those dollars might be deposited with the treasury, T-Bills, that are fully protected no matter how much you deposit, and in effect pay interest that goes some way to offset otherwise inflationary erosion of the purchase power. Gold like anything that maintains demand is likely to see its price broadly rise with inflation (but waxes and wanes as demand rises/falls over time).

Choices! You could start with thirds each stock/gold/T-Bills, or perhaps 33/67 stock/T-Bills, or 33/67 stock/gold. That respectively time average 66/17/17, 67/33, 67/33. Turning to tools such as PV general and its Monte-Carlo alternative offering the general outcomes/results are all within the same ball-park for the different choices. In that sense gold and T-Bills might be considered as being interchangeable, just a matter of personal preference as to ones own particular circumstances.

With just T-Bills in the safe, then that might all have been spent after just 15 years, likely due to high/fast inflationary erosion, under such circumstances gold tens to do well. In other cases T-Bills might to well, yield rewards faster than inflation, under such circumstances gold tends to do poorly. A more reasonable choice therefore might be some of both, diversify the risk.

PV

For MC perhaps assume the inflation adjusted return of your capital via 30 years of 3.33% SWR MC ... 98% probability/success rate. Probability for some/many with that level of wealth living another 30 years I suspect is lower than 98%.

Might work the same for someone with just a single $1M, drawing a $33.33K/year amount to supplement their pension income, as equally as it might service someone with $300M spending $10M/year. Early years bad sequence of returns risk is pretty much eliminated, but where as the portfolio increasingly becomes stock heavy that risk rises, but so also does the risk of death, and when death does occur the heirs/beneficiaries might decide to de-risk a otherwise stock-heavy inheritance, maybe lumping that inheritance into a thirds each stock/T-Bills/gold portfolio of their own.
The key assumption here is that T-Bills/Treasuries/USD still have value through the entire simulation. If you're truly buying gold to hedge against these sort of scenarios, why would you choose them? Yes, invest the majority of the money for the far-likelier course, but I would rather diversify that disaster fund with something else -- silver perhaps. Any indestructible, yet useful substance would be more likely to store value if the currency has that kind of problem. Iron bars and a good anvil might be worth even more than gold or silver in some situations.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

GAAP wrote: Mon Mar 27, 2023 10:55 am
seajay wrote: Mon Mar 27, 2023 9:47 am What if you stuff $100M into your safe, alongside $100M worth of gold, and drop the remainder $100M into a stock index accumulation fund. Spend that safe money first, perhaps dollars and then gold as dollars are more inclined to deflate. Some years later, the safe is empty, and as you spend the last dollar or gold coin you're at 100% stock, having started at thirds each stock/cash/gold. Fiddly to measure, but a reasonable alternative is to assume the time weighted average, 67/17/17 stock/cash/gold and measure that.

Now instead of hard US dollar bills in the safe, those dollars might be deposited with the treasury, T-Bills, that are fully protected no matter how much you deposit, and in effect pay interest that goes some way to offset otherwise inflationary erosion of the purchase power. Gold like anything that maintains demand is likely to see its price broadly rise with inflation (but waxes and wanes as demand rises/falls over time).
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The key assumption here is that T-Bills/Treasuries/USD still have value through the entire simulation. If you're truly buying gold to hedge against these sort of scenarios, why would you choose them? Yes, invest the majority of the money for the far-likelier course, but I would rather diversify that disaster fund with something else -- silver perhaps. Any indestructible, yet useful substance would be more likely to store value if the currency has that kind of problem. Iron bars and a good anvil might be worth even more than gold or silver in some situations.
But for those that aren't holding gold for total disaster situations, instead holding it as a investment asset, there's not a great step involved in transitioning from a "I wished .." to a "glad I did ..." investor.

British case, thirds initially into stock, half in UK stock index (FT All Share), half in US stock index (S&P500), preferably accumulation funds (dividend auto-reinvested). Other two thirds split equally between T-Bills (Gilts) and Gold. From 1932 (after the gold you deposited into banks as gold sovereign coins, had to be drawn out as Pound note paper currency ... end of gold standard) to the end of 2022, and spending the 'safe' first (gold/T-Bills), and yearly rebalancing UK/US stock holding back to equal amounts, and rebalancing the T-Bills/Gold back to equal amounts ... tended to see each of those pairs zig-zag around each other over varying time lengths, but where generally you added-low/reduced-high ... traded them in a reasonably appropriate/productive manner. Transitioned from 33/67 stock/safe to 100/0, averaging 67/33 at the point of selling the last penny of the safe holdings, but yielded a better worse case outcome than 67/33 constant (yearly) rebalanced. In every case (yearly granularity) you ended not only with your inflation money returned via 30 years of 3.33%/year instalments (SWR), but also ended with the same or more of the inflation adjusted start date portfolio value still available. A have-cake-and-eat-it outcome.

International and domestic stock tend to wax/wane. As does T-Bills and Gold. The degrees can be considerable, such that reducing one (leader) to add to the other (laggard) doesn't require skilled timing/trading, but can be as simple as just yearly rebalance/reviews, that at least in part capture some of those 'trading' gains/benefits. Puts you into the "glad I bought some more gold when prices were cheap, glad I had some gold when prices spiked" group, rather than "wish I'd bought some gold when prices were a fraction of their present day price" regretful group.

In some cases such as the mid 1960's to early 1970's, you were still drawing/spending SWR from the 'safe; holdings near 30 years later, the stocks were left to accumulate across all of those years. In other cases spending from 'safe' lasted as few as 15 years, but typically coincided with when stocks performed very well. 1942 start year for instance, where stocks in the first four years alone gained around 18% in each of those years, whilst inflation was down at less than 4%/year rates. For more regular allocations, even the likes of 60/40 stock/bonds suffered in the mid/late 1960's. A new retiree with a third in gold in their safe/wherever, another third in T-Bills or other such treasuries, and come what may with regard to stocks in earlier years and they might remain relatively disinterested/unconcerned. In later years stock declines are inclined to be more a case of giving back some of prior gains, rather than eating into ones own original capital base. Roaring 1920's and stocks doubled and doubled again, 1930's halved and halved again, for the longer term holder that was in effect averaging in via increasing stock from 33/67 towards 100/0 ... such a event might have been considered trivial, a spike and mean reversion across which more was added. A new retiree with a third in gold, another third in T-Bills and if "Bank-Runs" become headline news ... meh! A relatively trivial current/spending account matter risk only, perhaps less than $10K at risk, and where with time even that would likely be recovered.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

GAAP wrote: Mon Mar 27, 2023 10:55 amThe key assumption here is that T-Bills/Treasuries/USD still have value through the entire simulation.
The dollar will lose near all of its value, just a matter of time with fiat currencies, a certainty. Only the speed is unknown/variable. The dollar is less than 5% of its value a century earlier, so has depreciated at least at a rate of 0.05^0.01 -1 = -3% annualized. Commonly called inflation (of goods/services prices), rather than deflation of fiat-currency value. One hopes that depositing/investing will negate that decline. In contrast another might value a ounce of gold in US dollar purchase power terms much the same if they were buying now, or a century earlier. The price of gold is inclined to increase as the fiat currency value decline of the dollar progresses. No different to any other desired asset/item. In 1946 you could buy a S&P500 share that yielded a 4% dividend yield, as could you 40 years later in 1986. The price per share however had increased around 11 fold in US dollar terms, as had the price of a ounce of gold. In effect 1946 and 1986 stock buyers may have both bought stocks for similar reasons, such as the 4% yield they offered. Gold shouldn't be considered a competitor/alternative to stocks, rather a alternative or supplement of T-Bills.
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

seajay wrote: Mon Mar 27, 2023 1:17 pm
GAAP wrote: Mon Mar 27, 2023 10:55 am
seajay wrote: Mon Mar 27, 2023 9:47 am What if you stuff $100M into your safe, alongside $100M worth of gold, and drop the remainder $100M into a stock index accumulation fund. Spend that safe money first, perhaps dollars and then gold as dollars are more inclined to deflate. Some years later, the safe is empty, and as you spend the last dollar or gold coin you're at 100% stock, having started at thirds each stock/cash/gold. Fiddly to measure, but a reasonable alternative is to assume the time weighted average, 67/17/17 stock/cash/gold and measure that.

Now instead of hard US dollar bills in the safe, those dollars might be deposited with the treasury, T-Bills, that are fully protected no matter how much you deposit, and in effect pay interest that goes some way to offset otherwise inflationary erosion of the purchase power. Gold like anything that maintains demand is likely to see its price broadly rise with inflation (but waxes and wanes as demand rises/falls over time).
.
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The key assumption here is that T-Bills/Treasuries/USD still have value through the entire simulation. If you're truly buying gold to hedge against these sort of scenarios, why would you choose them? Yes, invest the majority of the money for the far-likelier course, but I would rather diversify that disaster fund with something else -- silver perhaps. Any indestructible, yet useful substance would be more likely to store value if the currency has that kind of problem. Iron bars and a good anvil might be worth even more than gold or silver in some situations.
But for those that aren't holding gold for total disaster situations, instead holding it as a investment asset, there's not a great step involved in transitioning from a "I wished .." to a "glad I did ..." investor.
But you were responding to a post that was directly about those total disaster situations -- specifically "what gold in the form of a put option against civilization might offer". Your approach may very well be reasonable in other (hopefully more likely) scenarios. The situation that McQ described is independent from the country of residence, and thus the specific currencies used are not consequential -- it's the use of currency itself that is consequential.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

GAAP wrote: Mon Mar 27, 2023 1:41 pmBut you were responding to a post that was directly about those total disaster situations -- specifically "what gold in the form of a put option against civilization might offer".
Forgive me, went off-rail and forgot. I tend to dismiss such Mad Max worlds as being just fictional, that if ever they did become real likely I wouldn't be around to partake of anyway (I'm past being a potential contender for survival of the strongest). A extreme for me might be like the Afghans - where 10 gold one ounce coins might very well have bought your family though the otherwise locked/guarded gates and onto a plane.
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Re: Diversification a la Markowitz #3: Gold

Post by dml130 »

McQ wrote: Wed Mar 22, 2023 10:05 pm Gold: a deep out-of-the-money put?

The barbarous relic is sometimes described as a put against civilization. To my knowledge, such an option cannot otherwise be purchased, thus perhaps explaining investors’ passion for gold. A Treasury note backed by the full faith and credit of the hegemon does not provide such a put; rather, that Treasury note is civilization incarnate, whose collapse is precisely the thing you are trying to hedge against.

And right here we discover that there is not a single homogenous population of investors when it comes to gold. Consider instead the investor resident in and attempting to build wealth in Argentina. Their government issues a default-free instrument, same as the US Treasury; but of course, it is not the same as a Treasury note. Those Argentine government obligations have become effectively worthless again and again.

When the Argentine investor buys gold, they are not buying a put against “civilization.” They are purchasing insurance against the fecklessness of the local sovereign. Like the homeowner buying fire insurance, at most they can expect to be made whole.

It’s different for US investors, aka investors building wealth in the US in terms of the local currency; which isn’t a local currency at all, but foundational to … civilization as we know it. A US investor who chooses to buy gold may indeed be purchasing a put against civilization.

Contrary to my prior post, which used fire insurance as a metaphor, a US investor who purchases gold as an out-of-the-money put against civilization might reasonably be planning for a big, big payoff. If everything goes south.

Investors in most other domiciles can be arrayed in between the US and Argentina, as to whether gold is like fire insurance for a sturdy brick structure, or flood insurance for residents up a creek, or a deep out-of-the-money put that could give a stratospheric payoff.

Caveat: when I say the dollar is foundational to civilization as we know it, I don’t mean that fluctuations in its foreign exchange rate threaten civilization; I am talking about COLLAPSE of its value. The dollar could fall overnight by half against a basket of Euro and yen, and that wouldn’t qualify as “collapse” as I am using the term. Collapse means “almost no value left.” Like how much you can buy with an Argentine peso from three iterations ago, or what a paper mark was worth in Germany in 1923.

You bought a put on civilization and scored—now what?

There is no Options Clearing Corporation for a put against civilization. There is no financial authority, independent of civilization, who can guarantee that you will collect when you attempt to exercise your put by assigning it to … whomever.

You will have to do your own clearing. A little reflection will show that, per seajay, if you must do your own clearing then you will have to hold gold in hand. But that may not work out either.

The first two demonstrations show the folly of NOT holding gold in hand.

#1: gold on deposit

Everything has gone south. Some kind of worldwide destructive cyber hack, as far as you can tell. Internet and email are intermittent and when up, both the NY Times and the Washington Post sites are unresponsive. Likewise CNN. Not entirely clear what’s happening. Your bank is surrounded by sandbags and armed men. Local post office is boarded up. Rumors are supermarkets are only accepting $100 bills and give no change. If they let you in the door.

No matter. You, James Jones, are an NYC resident with $100,000 in gold in a secure depository, about 50 troy ounces. You have a receipt and you know the Depository address. Time to harvest your winnings.

You take your receipt out of the vault under your bedroom floor and head downtown. To the consternation of passerby, you are whistling. It looks like that put option you bought on civilization has paid off big time.

The sidewalk in front of the depository is deserted. You don’t pay too much attention to the brown stains on the sidewalk—dog owners who don’t pick up after their pets, g__d__n, you’ve always hated that. You also don’t give much thought to those small brass cylinders scattered in the corner.

You climb the stoop to the front door and press the bell. The speaker crackles: “Gold Depository, how may I assist you?”

“Hi, I’m a depositor and I’ve come to withdraw my gold, preferably in coin, but small bars are fine too.”

“Do you have a depositary receipt?”

You take it out, unfold it, and hold it up to the camera lens: “yep.”

“Please hold the receipt against the red light to the left of the door so that we can scan and authenticate.”

“Okay.” You press it up against the red light.

To your horror, a brown burn hole begins to appear in your receipt as soon as you place it against the red light. Before you can snatch it away, the whole piece of paper is aflame.

“WT6th letter!” you exclaim, shaking your burnt fingers as the fragments of ash drift down.

Klaxon sounds. Loud voice now, on bullhorn speakers overhead. “INTRUDER! You do not have a receipt! Back away. We are authorized to use lethal force to protect the depository from unauthorized intruders. Get off the stoop or die.”

You stumble off the stoop. Guess you do not own 50 ounces of gold after all. It appears that after civilization collapsed, unscrupulous individuals, with the aid of armed force, have seized your gold on deposit and made it their own.

Probably should have kept those 50 ounces under the floorboard, and not just the receipt.

Cashing in a put against civilization is really quite difficult.

#2: Gold in an ETF

Sam Smith figured it would be best to own gold in the form of an ETF. Let someone else deal with the hassles of physical storage. Own an instrument with complete liquidity that tracks the price of gold. Buy and sell at will within your brokerage account in fractions of an ounce, harvesting the rebalance premium as prices fluctuate.

Now assume the same cyber hack, same chaos. “Thank the Lord I don’t have to travel downtown,” says Sam. It was disconcerting to have no Internet access, but that was only for a few days. On Thursday Sam tries for the 20th time to log on to his brokerage account. Success!

He pulls up the account balance screen. “Whoa! My $40,000 of SPY is trading at $400,000! After civilization collapsed? What the …”

At that point Sam noticed an icon he hadn't seen before on the upper right corner of the account screen: “new/old $$”

He clicks on ‘old’. Now what had been $40,000 of SPY is requoted at $3,963. “Okay, that’s more what I expected from the collapse of civilization.”

Rubbing his hands: “Let’s see what my AUM is worth.”

As he scrolled down, a box with red print popped up: “Pursuant to Executive Order No. 369-23, on 04-20-2023 all the gold held on deposit by AUM was purchased for 5,000 new dollars per ounce. After clearing, the cash for your AUM shares will appear in your settlement fund.”

Sam screamed. “My $10,000 of gold is worth $100 in old dollars and losing value by the day! Arghh!!”

Sam tried to log onto Facebook to complain but couldn’t reach the site. Bogleheads was down too. Reddit didn’t come up at all.

Sam probably should have kept the gold in hand. Armed force, this time under the aegis of the State, has again seized his gold left on deposit.

If you were President of the United States in this time of crisis, would you proceed any differently?

It truly is difficult to clear a put against civilization…

#3: Option clearing for gold held in hand

Peter was way smarter than James or Sam. He kept gold coins—American eagles—in a strong box on his property. He’d never placed that much trust in civilization. And he was an America First kind of guy: “No point in owning Krugerrands—no way anyone would trust the gold content if push came to shove, it’s got to be American gold, minted right here in the US of A.”

Peter lived outside of town on a hobby farm. He sold most of his produce, as a better deal than using it to feed his family; but he derived comfort from knowing that they would never suffer scurvy, even if things all went south.

And then it all did go south. Peter stayed on the farm for weeks; no way it made sense to risk going into town. Finally, it came time to stock up on supplies.

Peter took one gold coin, his smallest American Eagle, 1/10 ounce, out of the box. “This should be enough.”

As he drove up it was disconcerting to see the sandbags outside the supermarket, and the boarded-up windows on all the stores he passed. At least, parking was easier. Peter joined the line snaking outside the door of All-Grocery. The line moved relatively quickly. Seemed the few people turned away were on the disreputable side, no one he knew. Peter waved at the doorman, a relative. Cousin Bob waved back but didn’t smile or invite him forward.

When he got to the head of the line Bob waved him inside. “You’ve got 20 minutes. Cash only.”

Peter looked at him: “Gold coin okay?” For the first time, Bob livened up. “Absolutely!” He snapped his fingers. A boy appeared with a freshly sanitized cart. “Use this one, Cuz.”

Peter looked around once he was inside the store. Slim pickings on the fresh produce counter, not much in the way of fresh meats. Frozen cases looked pretty well stocked, and the canned and packaged goods aisles looked normal.

Peter started loading his cart. When it was stacked to the top he headed to the cashier. He observed most people in front of him paid with $100 bills, but they didn’t look the same as the bills he remembered. More colorful. Lots of gold typeface and shiny threads.

As Peter started to load his groceries on the belt he flashed the American Eagle coin. “Okay if I pay with this?” The cashier nodded so rapidly his glasses went askew. “But I’ll have to call a manager, the exchange rate changes hourly and only he can authorize how much change I give you.”

Peter shrugged and kept loading the belt. When the manager appeared, he seemed surprisingly apologetic, verging on the obsequious. “Sir, before we accept your gold coin I have to disclose to you that any change we make will be in paper bills, even though you are paying in gold.”

“Okay …” said Peter, bemused.

The cashier, who had finished ringing up, looked sharply at the manager: “I don’t have enough $100 bills in the tray to make his change, sir.” The manager went off to get more. Peter stared after him, rubbing his chin.

With the groceries bagged up, and the manager having dropped off a fresh supply of bills, the cashier started counting out change. It was … uncomfortable how everyone in the line stared.

“There you go, sir, $32,300 in change, three-hundred-twenty-three $100 bills against the $250,000 value of your gold coin at 2pm, less your purchases.”

Peter was stunned. But he had enough presence of mind to scoop the three bundled stacks of $100 bills into his pocket, while holding the loose 23 bills in hand.

“Help you out sire?” The bagger had everything loaded and was ready to wheel out the cart.

“Sure.”

With the truck loaded, Peter peeled off a bill and handed it to the bagger—who took it sullenly and strode away without a word.

“Huh--a $100 tip and that is the look I get?”

Peter shook his head and got into the truck cab. Driving off, he reflected: “gold—best investment I ever made.”

As he drove off, Peter didn’t notice the blacked-out SUV leaving the parking lot behind him. When he turned off the main road, and made the hog leg turn onto the side road, he didn’t notice that the SUV turned off the main road too. Peter was too busy whistling to the tune of “Happy Days Are Here Again,” while trying to remember just how many American Eagle coins he had put in the strong box over the years. He’d have to count them after the groceries were put away.

Four miles beyond where the pavement stopped, Peter pulled up in front of his house. He grabbed the frozen goods first and headed inside to relieve himself before unloading the rest.

When he came out of the bathroom Peter froze. Two men in ski masks carrying AR-15s were in the living room. Peter’s Glock was on the hall table just behind him, where he always put it whenever he returned from a trip out.

[You’ve watched enough pulp fiction to visualize what happens next.]

The last thing Peter heard before bleeding out was: “Take down the curtain rods and shake ‘em. Check for loose floorboards. Remove all the pictures, clear every closet and thump on the drywall. Let’s hope we don’t have to burn the place down to find where he stored his gold.”

It is very, very difficult to self-clear a put option against civilization. Even with gold in hand.
I really enjoyed reading through these vignettes, thanks for writing and sharing them. As someone who is fairly neutral (and not very knowledgeable) about the topic, I think it highlights a perspective that many gold-bulls perhaps don't give enough thought to.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

dml130 wrote: Sat Apr 01, 2023 10:26 am
McQ wrote: Wed Mar 22, 2023 10:05 pm .
snip
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I really enjoyed reading through these vignettes, thanks for writing and sharing them. As someone who is fairly neutral (and not very knowledgeable) about the topic, I think it highlights a perspective that many gold-bulls perhaps don't give enough thought to.
One could make up stories about stocks and/or bonds. Or opt to exclude periods when gold did well as "one-off" whilst still including periods such as when stocks did very well following deep declines (1934, 1974 type start years). Fundamentally historically and 50/50 gold yielded more consistent 30 year Max withdrawal rates than did stocks. With stocks you might have hit a 4% 30 year SWR, or a 10% SWR, but where those upper cases had start dates that clustered following deep downs. Average 7% SWR ... better than stock/gold 50/50 that was more inclined to 5% SWR more consistently. But where often for many investors it worked out similar to whether they held either choice (perhaps in the belief that they might achieve the 'average' without appreciating that average is a skewed measure).

Hey there's Mr T who sells treasury bonds, he sets the interest rates, can print/spend money to direct inflation, sets the taxation rate, and can change the rules. He doesn't need to borrow as he can instead print/spend, that devalues all other notes in circulation. Obligates pension funds having to buy them, as that's a nice pool of money that might be depleted via appropriate levels of taxation/inflation/interest rate setting. ...etc.

Gold historically was a larger value currency unit. British Pound started back in the 750's as a Saxon Pound weight of silver, but gold was preferred for larger transactions such as international trade, less weight of higher value. Yes a $2000 bank note in your wallet alongside $20's and $10's would be of limited use in everyday transactions for most, but convenient in other cases of larger transactions. $1M in $10 bills weighs around 220 pounds, whilst in gold it weights around 33 pounds.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

SCV/Gold 67/33 vs TSM 30 year MaxWR%

Image
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

But small cap value is a unreliable historical fluke - isn't it?

Perhaps not ... British FT250 is a stock index of the next 250 largest stocks after the largest 100 (that comprise the FT100 index). FTAS = FT All Share = FT100 + FT250 + others (all stocks).

Image

Just maybe, SCV isn't a premium, but rather has the inclination to avoid a large cap drag factor, such as having high weightings in individual stocks and where there maybe multiple large weighted stocks from the same sector - that collectively at times falter.

FT250 in US scale is small cap comparable. Sees stocks feed in/out of both its top and bottom, captures stocks that haven't totally failed falling back into it from the FT100 (potential 'value' plays). Sees poor stocks fall out of the bottom, that are replaced with uprising alternatives. Even includes a bunch of Investment Trusts - stocks that primary business is .. stocks/investing and that diversify widely. Around half of earnings are from 'foreign' (international).

Whilst the US was a right-tail good case market since the 1930's, in contrast the UK has been more middle road average. Yet 5% SWR was still reasonable.

67/33 is on the conception that if 66 stock value halved to 33 whilst 33 gold value doubled to 66 then rebalancing back to 67/33 has you back to target weightings but where the number of stock shares held had been doubled-up. Martingale style. Unlikely to actually occur, but conceptually covered.

US MC for 67/33 SCV/Gold 5% 30 year SWR

US PV for 67/33 SCV/gold compared to TSM
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