Diversification a la Markowitz #3: Gold

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seajay
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

Gaston wrote: Mon Mar 20, 2023 6:20 amJust curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
Generally physical gold in-hand is preferable, no counter-party risk. But more generally each individual has different requirements/objectives so combinations of those.

Consider a end of 1971 retiree, who lumped their retirement pot equally between stocks and gold after having taken their first year 4% SWR. Thereafter they drew the inflation adjusted SWR value from whichever was the higher valued at the time (stock or gold), no other rebalancing/action. For the first 16 years after that first year they were spending gold, stocks were left to accumulate. For the remainder of years out to the 30th year they were spending from stocks. They ended 30 years holding a 84/16 stock/gold portfolio that was worth 2.5 times the inflation adjusted start date portfolio value. In that context initially buying/holding gold as physical in-hand coins entailed no further expense other than periodically selling coin(s). For stock, a general accumulation stock index fund is a reasonable choice.

For others, that might rebalance/trade, then a combination of ETF and physical gold is perhaps more appropriate.

For a new portfolio, ETF alone perhaps at the start, then as physical gold is bought so the ETF exposure can be reduced by the same value/amount to keep overall exposure at the desired target value. $200,000 of gold ETF value, buy a coin for $2000, sell $2000 of gold ETF to be left with $198,000 of ETF, $2000 in physical gold.

For storage of physical, some are content to self-insure, as that avoids records held by others that might point to where and how much gold is being stored. A four foot window with a five foot hollow brass large O ring curtain rail for instance can hold $1M of gold coins. Hollowed out tops of doors, table legs, false pipework ...etc. etc. Others with private back gardens bury gold, in case the house is burnt down. Yet others store physical gold abroad, a target destination should it be necessary to leave. Best not to traverse international borders carrying gold, so sell perhaps for bitcoin, repurchase at the desired target location. If you short bitcoin at the time of selling, close out that short when you repurchase gold, that negates any bitcoin volatility whilst enabling the money to be 'electronically' transferred across international borders.
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Re: Diversification a la Markowitz #3: Gold

Post by Logan Roy »

Gaston wrote: Mon Mar 20, 2023 6:20 am
HanSolo wrote: Mon Mar 13, 2023 4:46 pm Depending on criteria chosen, one can "prove" that one should include gold, and one can "prove" that one should not.
Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
iShares Physical Gold ETC or SPDR Gold.. Good enough for Bridgewater and George Soros.

I think tradability is extremely important. I like to rebalance on large, short-term moves, and put it into things like TIPS and stocks. Gold's general volatility and resilience feels like a regular supply of free capital to keep reinvesting – so long as I keep my allocations topped up when they dip below.

Hedge fund guys, like Michael Platt (afaik), like to have quite a bit in gold bars. One could do this with the core allocation, while having a buffer of Gold ETFs to rebalance with. The reason I suspect they like owning gold and real assets may be because of their relationship to the derivatives market. I wonder if they view the whole financial system as a castle built on sand – it's how a trader friend of mine tends to talk. So I think there's definitely an element of wanting to stay wealthy if the whole system comes down.. For me, gold is primarily just another diversifier.
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Re: Diversification a la Markowitz #3: Gold

Post by Fremdon Ferndock »

Logan Roy wrote: Mon Mar 20, 2023 10:29 am
Gaston wrote: Mon Mar 20, 2023 6:20 am
HanSolo wrote: Mon Mar 13, 2023 4:46 pm Depending on criteria chosen, one can "prove" that one should include gold, and one can "prove" that one should not.
Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
iShares Physical Gold ETC or SPDR Gold.. Good enough for Bridgewater and George Soros.

I think tradability is extremely important. I like to rebalance on large, short-term moves, and put it into things like TIPS and stocks. Gold's general volatility and resilience feels like a regular supply of free capital to keep reinvesting – so long as I keep my allocations topped up when they dip below.

Hedge fund guys, like Michael Platt (afaik), like to have quite a bit in gold bars. One could do this with the core allocation, while having a buffer of Gold ETFs to rebalance with. The reason I suspect they like owning gold and real assets may be because of their relationship to the derivatives market. I wonder if they view the whole financial system as a castle built on sand – it's how a trader friend of mine tends to talk. So I think there's definitely an element of wanting to stay wealthy if the whole system comes down.. For me, gold is primarily just another diversifier.
What the heck is iShares Physical Gold ETC? I don't know what an ETC is and it isn't listed at my brokerage. Is it something listed on another exchange?
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

Logan Roy wrote: Mon Mar 20, 2023 10:29 am Hedge fund guys, like Michael Platt (afaik), like to have quite a bit in gold bars. One could do this with the core allocation, while having a buffer of Gold ETFs to rebalance with. The reason I suspect they like owning gold and real assets may be because of their relationship to the derivatives market. I wonder if they view the whole financial system as a castle built on sand – it's how a trader friend of mine tends to talk. So I think there's definitely an element of wanting to stay wealthy if the whole system comes down.
The ancient Talmud advocated thirds each in land, business, in-hand. For British investors over the last 130 years initial thirds each UK home, US dollars invested in US stocks, and gold has three currencies/three assets diversity, and supported a 3.33% PWR (generational wealth). A unfortunate generation could perhaps have seen one of the three having been totally lost, unpleasant but not financially fatal, a 33% loss at times can occur even with the likes of broad stock index funds. Whilst holding two thirds of wealth in-hand (land/home and physical gold), low/no counter-party risks.

Rebalancing, or not, broadly doesn't matter. Without rebalancing you just tend to see the portfolio drift to levels where it has higher weighting in the asset(s) that yielded the highest rewards. You can slow that drift by simply drawing cash flows from the most up liquid asset, or adding cash flows to the laggard. Supplemented with infrequent, perhaps once in a generation rebalancing if/when the drift in weightings becomes too excessive for comfort.
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Re: Diversification a la Markowitz #3: Gold

Post by Logan Roy »

Fremdon Ferndock wrote: Mon Mar 20, 2023 11:01 am
Logan Roy wrote: Mon Mar 20, 2023 10:29 am
Gaston wrote: Mon Mar 20, 2023 6:20 am
HanSolo wrote: Mon Mar 13, 2023 4:46 pm Depending on criteria chosen, one can "prove" that one should include gold, and one can "prove" that one should not.
Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
iShares Physical Gold ETC or SPDR Gold.. Good enough for Bridgewater and George Soros.

I think tradability is extremely important. I like to rebalance on large, short-term moves, and put it into things like TIPS and stocks. Gold's general volatility and resilience feels like a regular supply of free capital to keep reinvesting – so long as I keep my allocations topped up when they dip below.

Hedge fund guys, like Michael Platt (afaik), like to have quite a bit in gold bars. One could do this with the core allocation, while having a buffer of Gold ETFs to rebalance with. The reason I suspect they like owning gold and real assets may be because of their relationship to the derivatives market. I wonder if they view the whole financial system as a castle built on sand – it's how a trader friend of mine tends to talk. So I think there's definitely an element of wanting to stay wealthy if the whole system comes down.. For me, gold is primarily just another diversifier.
What the heck is iShares Physical Gold ETC? I don't know what an ETC is and it isn't listed at my brokerage. Is it something listed on another exchange?
Exchange Traded Commodities.. I'm not sure whether ETCs are popular in the US – they're traded on the London and Australian exchanges. But I think SPDR Gold does the job.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

Fremdon Ferndock wrote: Mon Mar 20, 2023 11:01 am What the heck is iShares Physical Gold ETC? I don't know what an ETC is and it isn't listed at my brokerage. Is it something listed on another exchange?
Exchange Traded Commodity. There are ET (exchange traded) funds, commodities and notes, ETF, ETC, ETN

Similar, but different.

In London there are both the London Stock Exchange and London Metal Exchange markets. Again similar, but different.
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Re: Diversification a la Markowitz #3: Gold

Post by Logan Roy »

seajay wrote: Mon Mar 20, 2023 11:10 am
Logan Roy wrote: Mon Mar 20, 2023 10:29 am Hedge fund guys, like Michael Platt (afaik), like to have quite a bit in gold bars. One could do this with the core allocation, while having a buffer of Gold ETFs to rebalance with. The reason I suspect they like owning gold and real assets may be because of their relationship to the derivatives market. I wonder if they view the whole financial system as a castle built on sand – it's how a trader friend of mine tends to talk. So I think there's definitely an element of wanting to stay wealthy if the whole system comes down.
The ancient Talmud advocated thirds each in land, business, in-hand. For British investors over the last 130 years initial thirds each UK home, US dollars invested in US stocks, and gold has three currencies/three assets diversity, and supported a 3.33% PWR (generational wealth). A unfortunate generation could perhaps have seen one of the three having been totally lost, unpleasant but not financially fatal, a 33% loss at times can occur even with the likes of broad stock index funds. Whilst holding two thirds of wealth in-hand (land/home and physical gold), low/no counter-party risks.

Rebalancing, or not, broadly doesn't matter. Without rebalancing you just tend to see the portfolio drift to levels where it has higher weighting in the asset(s) that yielded the highest rewards. You can slow that drift by simply drawing cash flows from the most up liquid asset, or adding cash flows to the laggard. Supplemented with infrequent, perhaps once in a generation rebalancing if/when the drift in weightings becomes too excessive for comfort.
In essence, rebalancing is one of these things we do primarily to avoid style drift.. However, when you task an algorithm with building the most efficient portfolio possible, through trial, error and emergence, they'll typically find strong ways to benefit from rebalancing – so it almost becomes a 4th or 5th asset class (as it does somewhat in the Harry Browne portfolio).

I've got pessimistic market outlooks in which rebalancing would become the only source of positive return.. A lot of hedge funds, like Brevan Howard, have done well through this period, not through calling market turns or timing, but rather by having volatility strategies (mostly straddles) doing essentially the same thing – just profiting from the fact things will move.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

seajay wrote: Tue Mar 14, 2023 9:04 am
ivgrivchuck wrote: Tue Mar 14, 2023 12:57 am Just stating the obvious, but in January 1982 the U.S. Treasury 10 year yield was 14.4%. Today it's 3.5%-4.0%.

So there has been a strong tailwind for bond returns for the last 40 years. And this tailwind can't repeat since the yields can't go significantly negative. So that also skews the stocks/gold vs. stocks/bonds comparison for that time period. But every time period has its own problems...
Bond returns primarily come from interest payments, where regular interest payments are typically taxed. Discounting a 20% average tax rate and comparing to gold since the ending of money = gold

Image

Broadly comparable, and hence interchangeable.
Pre 1930's and for data from https://papers.ssrn.com/sol3/papers.cfm ... id=3805927

Image
(real)

(Gross) Bond total returns compared to stock total returns. And as gold was money, savers might have deposited their gold into bonds in return for interest (more gold) and for safe keeping.

Note how the Wall Street Crash was actually more a case of a bubble burst reversion (Roaring 20's ... when stocks relatively quickly doubled, doubled again, and again, somewhat similar to Japan's large/fast 1970's/1980's gains seeing a subsequent burst bubble).
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Re: Diversification a la Markowitz #3: Gold

Post by Gaston »

seajay wrote: Mon Mar 20, 2023 3:46 am Which highlights how inflation is a job form of taxation.
Not disagreeing with you, just highlighting that the above is true if you have assets. If you are in debt, inflation can be your friend, depending how the debt is structured.
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

HanSolo wrote: Mon Mar 20, 2023 7:40 am
Gaston wrote: Mon Mar 20, 2023 6:20 am
HanSolo wrote: Mon Mar 13, 2023 4:46 pm Depending on criteria chosen, one can "prove" that one should include gold, and one can "prove" that one should not.
Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
Just as you said, different preferences, so it tends to mean any of the above, or so I've heard.

My preference is the Sprott gold/silver closed-end fund (ticker CEF, formerly known as Central Fund of Canada).

I'm not a "proponent" of gold. My opinion is, people who want it should own it, and people who don't, shouldn't.
CEF has several "sister" funds that invest in physical metals, each of which invests in different metals metal: gold (PHYS), platinum and palladium (SPPP), and silver (PSLV. I have owned CEF in the past due to its potential, if you jump through the proper paperwork hoops, to enable standard capital gains tax treatment on precious metal investments. The paperwork is sort of complex but no worse than a lot of other tax-reduction mechanisms, and applies to all of these trusts.
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Re: Diversification a la Markowitz #3: Gold

Post by McQ »

NoRegret wrote: Mon Mar 20, 2023 2:44 am
McQ wrote: Sun Mar 12, 2023 10:26 pm Anyway, you get the idea: over the very long term, the expected real return on gold is exactly zero (minus storage costs). If that statement is not true, then it cannot be true that gold is a store of (real) value.
Some time ago in another thread I wrote:
NoRegret wrote: Sun Mar 14, 2021 3:13 pm Gold is an enigma. In the last decade it has had high negative correlation to real rates. During other times, such as the 2000's it had inverse correlation to USD. Real rates peaked in 2018 and continued dropping from an ultra easy Fed despite fairly strong growth, culminating in the repo crisis in the fall of 2019. The dollar index is a relative measure against other fiat currencies so does not capture any competitive devaluation dynamics.

Ultimately gold is a monetary reserve asset and has to compete against other major currencies and sovereign bonds. Due to its low weighting in global asset allocation, a small shift in allocation can cause a big change in price since its annual production is low vs. total stock and not very elastic.

Gold standard went out of favor precisely because the monetary base cannot expand easily to support a growing economy, so it acted as a deflationary force. Under a fiat regime, assuming the monetary base expands to support economy growth (and more), a priori my base case is for gold to have a positive real return assuming stable preference to different kinds of money. Unlike under a gold standard where by definition its real return is 0.
My point was that gold can have a positive real return in a fiat regime where 1) fiat monetary base grows faster than gold which has an annual production of ~1.5%; 2) global economic growth justifies monetary base growth of > 1.5%; 3) there is a stable long term preference for gold to remain a constant percentage of the global monetary base. Note I don't know what's the right amount of base money growth, although I'm pretty sure it's greater than 1.5%.

But all this is academic, gold's price can respond violently to point #3 above. In the same thread I also wrote:
NoRegret wrote: Sun Mar 14, 2021 6:10 pm BHs are conditioned to look at everything through the lens of long term buy-and-hold, which historically worked well only for stocks (even that may have to be qualified for certain countries), and perhaps certain real estate. For everything else, buy-and-hold is at best a so-so strategy. This has to do with the persistence of trend and the magnitude of cycles in relation to the the trend mean.
Your own back tests showed significant date dependence. These days I'm far more interested in the practice (rather than theory) of portfolio construction, I won't distract from this thread here.
I don't find it a distraction, NoRegret. Thanks for the link and I hope you will continue to post as suits.

I have no problem with the idea that whatever the long-term trend (=store of value), over any shorter term gold may over-shoot. As, perhaps it did, in 1979-1980. That's why I was careful to nod to my superiors, those who possess market-timing ability. The more volatile the asset (=gold), the greater the payoff for exercising that market timing ability. Pity I lack it.

But it seems to me that your post contained a more breath-taking assertion: that over the long term, gold could appreciate in value above the rate of inflation. Translation: even as it sits inert in a vault, gold could be creating real value, not just storing value. Almost as if it grew in weight, even as it sat there in quiet isolation.

If I understand you correctly, that would occur because the money base could grow faster than inflation, even as buyers for gold, the market, would insist that the stock of gold maintain a worth equal to a constant fraction of the money base, thus causing its value to grow faster than inflation along with the monetary base.

I see the argument, but I'm not convinced. Could you elaborate on how gold could grow its real value over the long term (call it 50 years plus)? It is easy for me to accept that outcome over any shorter term, call it two or three decades, in the spirit of over-shooting.

But I do not see how gold could grow in real value (=real spending power) over the long term.
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Re: Diversification a la Markowitz #3: Gold

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McQ wrote: Mon Mar 20, 2023 10:25 pm I see the argument, but I'm not convinced. Could you elaborate on how gold could grow its real value over the long term (call it 50 years plus)? It is easy for me to accept that outcome over any shorter term, call it two or three decades, in the spirit of over-shooting.

But I do not see how gold could grow in real value (=real spending power) over the long term.
Maybe human ingenuity can have the effect of decreasing the cost of goods and services in the long run. If they become cheaper relative to gold, then gold increases its purchasing power. If gold is "real money", and didn't increase in purchasing power, then those things didn't really get cheaper.
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Re: Diversification a la Markowitz #3: Gold

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HanSolo wrote: Mon Mar 20, 2023 11:23 pm
McQ wrote: Mon Mar 20, 2023 10:25 pm I see the argument, but I'm not convinced. Could you elaborate on how gold could grow its real value over the long term (call it 50 years plus)? It is easy for me to accept that outcome over any shorter term, call it two or three decades, in the spirit of over-shooting.

But I do not see how gold could grow in real value (=real spending power) over the long term.
Maybe human ingenuity can have the effect of decreasing the cost of goods and services in the long run. If they become cheaper relative to gold, then gold increases its purchasing power. If gold is "real money", and didn't increase in purchasing power, then those things didn't really get cheaper.
One of the sayings I've heard is that 1 oz of gold will buy you a quality men's suit at any time in the past few hundred years.

Apparently tailoring hasn't gotten cheaper over the centuries.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

McQ wrote: Mon Mar 20, 2023 10:25 pm I see the argument, but I'm not convinced. Could you elaborate on how gold could grow its real value over the long term (call it 50 years plus)? It is easy for me to accept that outcome over any shorter term, call it two or three decades, in the spirit of over-shooting.

But I do not see how gold could grow in real value (=real spending power) over the long term.
UK ended direct gold/money convertibility in 1931. Comparing share and gold price increases since then and demand for each waxed and waned

Image

At around 60 years later (1990) gold bought a similar amount of stock shares. Step back a decade prior to that (to 1980) however and gold bought considerably more stock shares. If instead you stepped on a decade to the end of the 1990's and it was the complete opposite.

Within that chart you can select start and end dates for each of stock and gold where the price broadly yielded 0%, 1950 to 2005 for gold for instance, 1931 to 1980 for stocks ...etc.

Volatility is fractal, occurs at both the small (short period) and large (long period) scale.

Individual investors don't achieve the broad average, they are instead confined to what occurs during their 30/whatever retirement years. You can pick individual 30 year periods for each of stock and gold that were good/bad. Whilst the broad average may look OK, some within that may have done dreadful/fantastic. If instead of opting fully for one or the other you 50/50 both, then the tendency was more towards one doing well, the other poorly.

4% SWR reflect historic worst case 30 year periods. In the average and good cases you could have drawn considerably more, perhaps supporting a 8% SWR. If you hold 50/50 and drew 8% SWR from the better case, left the other poorer case as-is, then you still see a overall 4% SWR income being provided.

A factor is that stocks additionally pay dividends, whereas gold and bonds are more inclined to just broadly inflation pace. Blending gold (and/or bonds) with stocks lowers the total return expectancy, in your past posts terminology is a insurance cost, that can pay if stocks endure a bad case outcome, or otherwise have been a drag. Overall average rewards can still be reasonable if you run with insurance, whilst having reduced risk. For some it could be a outcome of "I'd have had so much more at the end of 30 years had I held just stocks alone", for others "thank god I held some gold (bonds) as without that the outcome would have been dreadful". For many, middle road mediocre might be good enough i.e. diversifying their 30 year/whatever risk, not inclined to be a great/fantastic outcome, but neither a bad/worse case outcome, compared to those that opted to concentrate their risk - such as into all-stock.

If you sample all 30 year periods then often there was little difference whether you held all-stock or 50/50 stock/gold. In some cases however all-stock did far far better, typically arising out of start dates following large stock price declines (bad times). Individual investors are however less likely to opt for all-stock going into retirement after prior bad times/declines. It's a very small number that might achieve those great/exceptional case outcomes. However mathematically those great case outcomes distort the average, give the appearance of a better broad average than if instead a median measure were used.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

Gaston wrote: Mon Mar 20, 2023 8:13 pm
seajay wrote: Mon Mar 20, 2023 3:46 am Which highlights how inflation is a job form of taxation.
Not disagreeing with you, just highlighting that the above is true if you have assets. If you are in debt, inflation can be your friend, depending how the debt is structured.
Just continuing the just-saying sideline :) ....

When I've looked at employing 2x leverage, such as 50/50 2x stock/gold instead of 100% 1x stock, I noted that even with just yearly rebalancing the two tended to compare reasonably PV. With higher leverage you need to rebalance more often, a third 3x, two thirds bonds for instance aligns better if you rebalance every six months. For Zvi Bodie's 10/90, 10% in 10x leveraged Traded Options, 90% in safe, then you need to rebalance monthly.

Based on that, I've used simple 2 x stock - (T-Bill + 2%) measures as a historic synthetic 2x yearly gain ... type measure. Actual 2x leveraged ETF's use daily rebalancing, so their cost of borrowing in order to double up stock exposure tracks ongoing cost-of-debt changes closely. If instead you borrowed once/year at the rate at the time in order to double up stock exposure then that 'debt structure' would indeed relatively win in cases of high/rising inflation, where inflation eroded the cost of the debt in real term (negative real yields).

Half in 2x stock, half in gold with daily debt reviews as per regular 2x leveraged ETF's has the additional benefit of half of the value being in-hand, no counter party risk (assuming physical gold). A DIY'er of that might borrow at the start of each year at a 1 year fixed term rate in order to double up the stock exposure and be better placed to capture/maintain the benefits if real yields at the time were negative and subsequently moved more positive. Or lose out if real yields were positive - but subsequently moved more negative. Fundamentally - washes. Individually however and you might try and 'time' the potentials. That timing might be as simple as just not bothering with leveraged ETF's if interest rates are too high, say 5% or more. Historic measures of employing half in 2x stock, half in gold, if the prior year ends interest rate was 5% or less, or otherwise holding 100% 1x stock, did historically yield a broad overall better outcome than just constant 100% 1x stock.

Another nice feature when using LETF's is that you can rotate some of holdings between 1x, 2x or 3x, to release/reinsert some cash whilst keeping overall exposure the same. If for instance you have $10,000 in 2x = $20,000 of stock exposure, but need $2000 cash, then selling $6000 of 2x to buy $4000 of 3x ... still maintains $20,000 of stock exposure whilst also having $2000 cash in-hand ($4000 in 2x = $8K, $4000 in 3x = $12K, combined $20K of stock exposure).

If 50/50 2x stock/gold yearly rebalanced generally compares to 100% stock, then if a investor were content with 50/50 1x stock/gold in order to 'insure' (hedge) risk, then that could be held as 25/50 2x stock/gold, yearly rebalanced, to similar overall effect PV and where (again assuming physical in-hand gold), counter party risk (stock ETF/broker) is reduced to just 25%.

LETF's are useful IMO, but too many look to such for scaling up risk/exposure, rather than seeing them as tools to potentially reduce/diversify risk.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

watchnerd wrote: Mon Mar 20, 2023 11:26 pmOne of the sayings I've heard is that 1 oz of gold will buy you a quality men's suit at any time in the past few hundred years. Apparently tailoring hasn't gotten cheaper over the centuries.
But salt has :)

Many Roman soldiers paid in salt for their suit, that was prized/valued at the time. Whilst a Roman suit costing one ounce of gold might equally see a ounce of gold buy a good suit in modern times, in terms of salt suit prices have soared. Anything, stocks, gold, salt, iron, whatever will tend to see prices pace inflation if the supply/demand remains the same. Or otherwise see prices rise to exceptionally high, or decline to very low levels. Gold is inclined to broadly offset inflation all the while whilst central banks tend to value it as part of their reserves and/or savers value it (such as a hedge against fiat currency where states can print/spend (induce inflation) by however much they might opine they can get away with, without causing a large flight, and that periodically they get wrong).

Just to add that Roman soldiers were often paid their wages in salt, hence the general expression of 'not worth their salt' ... in reflection of not being considered worth their wages.
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Re: Diversification a la Markowitz #3: Gold

Post by AlmstRtrd »

Gaston wrote: Mon Mar 20, 2023 6:20 am Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
I'm not really a "proponent" but I think many who own gold tend to hold the physical metal as part of their taxable account and use ETFs in tax-deferred & Roth accounts. I personally like it as a diversifier but also like stocks, I-Bonds, TIPS and nominal Treasuries.
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Re: Diversification a la Markowitz #3: Gold

Post by dcabler »

AlmstRtrd wrote: Tue Mar 21, 2023 5:25 am
Gaston wrote: Mon Mar 20, 2023 6:20 am Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
I'm not really a "proponent" but I think many who own gold tend to hold the physical metal as part of their taxable account and use ETFs in tax-deferred & Roth accounts. I personally like it as a diversifier but also like stocks, I-Bonds, TIPS and nominal Treasuries.
Also not a proponent. Philosophies aside, what I've found, though, is that its diversification benefits really depend on what else is in your portfolio. For my particular case, historically speaking, the diversification benefits were more than offset by a longer term reduction in returns that I'm not willing to live regardless of the % held in gold for anything but 0%, effectively. This is only from an investment standpoint, ignoring "Mad Max" types of scenarios...
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Re: Diversification a la Markowitz #3: Gold

Post by Valuethinker »

dcabler wrote: Tue Mar 21, 2023 5:32 am
AlmstRtrd wrote: Tue Mar 21, 2023 5:25 am
Gaston wrote: Mon Mar 20, 2023 6:20 am Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
I'm not really a "proponent" but I think many who own gold tend to hold the physical metal as part of their taxable account and use ETFs in tax-deferred & Roth accounts. I personally like it as a diversifier but also like stocks, I-Bonds, TIPS and nominal Treasuries.
Also not a proponent. Philosophies aside, what I've found, though, is that its diversification benefits really depend on what else is in your portfolio. For my particular case, historically speaking, the diversification benefits were more than offset by a longer term reduction in returns that I'm not willing to live regardless of the % held in gold for anything but 0%, effectively. This is only from an investment standpoint, ignoring "Mad Max" types of scenarios...
Those of us who have seen "Mad Max II" aka The Road Warrior, will know that it is petrol (gasoline) that is most important ;-). You've got to own that oil refinery that you can defend :? :? **

That and crossbows. Hand cannons.

Personal Assets Trust in the UK, a famously conservative fund (Matthew Lyons of Troy Asset Management runs it - good guy), holds something like 7% weighting on gold. OTOH in the UK we have a peculiarly incompetent set of political-economic arrangements (the 44 day Truss administration, evicted after a financial crisis which they caused) and the impact has been a pretty steady devaluation of GBP £ sterling over the last 120 years or so.

Looks like CEF/ Central Fund of Canada is the easiest way for an American to effectuate a similar strategy.

William Bernstein's epic piece on Efficient Frontier re gold said it best. This is an asset for the most patient of investors.

** We laugh. But when the Islamic State was in full force in northern Iraq and Syria, one of its major sources of revenue was running small oil refineries served by fields they controlled. The Coalition's destruction of those refineries, cutting off the supply of money, was an important part of the strategy.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

-0.43 correlation between 15 year 8% SWR outcome for stock and gold

Image

For much of 15 year start years a 50% stock allocation and 8% SWR (so 4% relative to total portfolio value) ended those 15 years with a decent amount of the start date (real) value still remaining. In some cases ended with more than the start date value available. In other cases would have drawn down into negative territory, i.e. ran out of money before fulfilling that objective - but when so, often gold did OK as a alternative.

You wouldn't be inclined to start with half in stock, half in gold and draw 8% 15 year SWR solely from one alone until exhausted, more generally you just pick whichever is doing the better at the time, i.e. is the most-up when making each SWR withdrawal. Drawing the SWR from the most-up will also tend to be a partial rebalance back towards 50/50 (yield similar overall outcome to if you had rebalanced each year back to 50/50 weightings).

Historically gold was the years best performing asset in around a third of years, stocks being best in around two-thirds of years. On that measure a reasonable choice of target asset allocation is 67/33 stock/gold. However the differences since 1972 between 67/33 and 50/50 were relatively small PV, and the counts are not a consistent two-thirds/one-third of years, can for instance at other times be 50/50 or 40/60 ...etc. The efficient-frontier is variable/volatile in a unpredictable manner.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

In pre 1930 times when gold and silver coins were money, worth their weight, savers might have been inclined to be content with lending/depositing surplus money into bonds, as per that earlier chart I posted, where total returns compared to stocks

Image

What bonds? Well maybe a 1 and 20 year treasury barbell perhaps.

What about when that ended however, 1931 UK, 1933 US, when bonds (deposited gold) transitioned from being positive real due to inflation broadly averaging 0%, to where inflation became predominant (a form of taxation)? Well a barbell of 50/50 stock/gold combines in a somewhat similar manner to how 1 and 20 year treasury combine to a central 10 year bullet, two polar opposites. Combining somewhat to a central global unhedged bond type bullet PV

Swings in collective global inflation rates tend to be much smoother/smaller than individual countries inflation rates. Indeed for a British investor even just holding hard US dollars and gold 50/50 under their mattress negated much of British inflation, smoothed it down to being less than 1% (-0.6% log linear regression IIRC). Compared to gold alone and all currencies tend to see relative declines sooner or later, the temptation/need to 'create more gold' (print/spend currency) becomes too alluring/needed, even if just for domestic political reasons.
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Re: Diversification a la Markowitz #3: Gold

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Logan Roy wrote: Mon Mar 20, 2023 10:29 am
Gaston wrote: Mon Mar 20, 2023 6:20 am
HanSolo wrote: Mon Mar 13, 2023 4:46 pm Depending on criteria chosen, one can "prove" that one should include gold, and one can "prove" that one should not.
Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
iShares Physical Gold ETC or SPDR Gold.. Good enough for Bridgewater and George Soros.

If you're going to hold (as opposed to trade), I prefer the mini-shares version of SPDR Gold, GLDM, for it's lower ER compared to GLD.

.10 vs .40
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

watchnerd wrote: Tue Mar 21, 2023 9:30 amIf you're going to hold (as opposed to trade), I prefer the mini-shares version of SPDR Gold, GLDM, for it's lower ER compared to GLD.
In my British tax exempt account, you aren't allowed to hold foreign currencies and conversion for small/modest amounts has a 1.5% FX cost, 3% round-trip. Similar to gold coin spreads through dealers. In gold clubs you'll often find both buyers and sellers content to cut out the middle man and buy/sell at spot. Some self-insure, store/hide wherever for no additional cost, rather than having it on record at some insurance company that you have $x value of gold that under the terms has to be stored in a safe - that can be opened with a pencil (held close to a loved ones eye). But funds are easier to sell fixed/larger amounts quickly via a few mouse clicks.
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Re: Diversification a la Markowitz #3: Gold

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Gold as fire insurance? No, at best it sounds more like earthquake insurance (10% deductible on the total policy). I do buy earthquake insurance, and I did buy flood insurance in the 500-year flood plain, not just the 100-year flood plain that FEMA recommends. I don't hold gold except for the ring I'm wearing.

Gold as a store of value? Yes, but in those doomsday scenarios you need to have physical gold, a way to protect it, a way to transport it to a better/safer location, and someone willing to accept it as payment. I'm more likely to accept food than gold in that sort of situation.

Gold arguably provided a better return when currencies were linked to it precisely because that linkage led to deflationary events that improved gold returns. The post gold-standard inflation environment is notably different than the prior one.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

seajay wrote: Tue Mar 21, 2023 10:42 am
watchnerd wrote: Tue Mar 21, 2023 9:30 amIf you're going to hold (as opposed to trade), I prefer the mini-shares version of SPDR Gold, GLDM, for it's lower ER compared to GLD.
In my British tax exempt account, you aren't allowed to hold foreign currencies and conversion for small/modest amounts has a 1.5% FX cost, 3% round-trip. Similar to gold coin spreads through dealers. In gold clubs you'll often find both buyers and sellers content to cut out the middle man and buy/sell at spot. Some self-insure, store/hide wherever for no additional cost, rather than having it on record at some insurance company that you have $x value of gold that under the terms has to be stored in a safe - that can be opened with a pencil (held close to a loved ones eye). But funds are easier to sell fixed/larger amounts quickly via a few mouse clicks.
Gold counts as foreign currency?
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

watchnerd wrote: Tue Mar 21, 2023 9:30 am
Logan Roy wrote: Mon Mar 20, 2023 10:29 am
Gaston wrote: Mon Mar 20, 2023 6:20 am
HanSolo wrote: Mon Mar 13, 2023 4:46 pm Depending on criteria chosen, one can "prove" that one should include gold, and one can "prove" that one should not.
Just curious: Do proponents of gold tend to favor gold stocks/ETFs, owning the physical metal in a bank safety deposit box or other 3rd party location, or owning the physical metal at home?

I know there will different preferences but, as a general rule, what does “including gold” tend to mean?
iShares Physical Gold ETC or SPDR Gold.. Good enough for Bridgewater and George Soros.

If you're going to hold (as opposed to trade), I prefer the mini-shares version of SPDR Gold, GLDM, for it's lower ER compared to GLD.

.10 vs .40
Yes, but in either case you have the "collectibles" capital gains treatment I believe.
That's what you can avoid with the Sprott physical metal trusts, assuming you follow all the arcane rules.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

technovelist wrote: Tue Mar 21, 2023 12:23 pm
Yes, but in either case you have the "collectibles" capital gains treatment I believe.
That's what you can avoid with the Sprott physical metal trusts, assuming you follow all the arcane rules.
That's why I hold gold ETFs in tax advantaged accounts.
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

watchnerd wrote: Tue Mar 21, 2023 12:45 pm
technovelist wrote: Tue Mar 21, 2023 12:23 pm
Yes, but in either case you have the "collectibles" capital gains treatment I believe.
That's what you can avoid with the Sprott physical metal trusts, assuming you follow all the arcane rules.
That's why I hold gold ETFs in tax advantaged accounts.
Then it doesn't matter what form it's in: ETF, trust, or physical (e.g., Gold Star Trust, which has physical gold IRAs), as the taxation is the same.
But if you want some in taxable accounts, the Sprott trusts can have significant tax advantages.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Diversification a la Markowitz #3: Gold

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technovelist wrote: Tue Mar 21, 2023 1:15 pm
watchnerd wrote: Tue Mar 21, 2023 12:45 pm
technovelist wrote: Tue Mar 21, 2023 12:23 pm
Yes, but in either case you have the "collectibles" capital gains treatment I believe.
That's what you can avoid with the Sprott physical metal trusts, assuming you follow all the arcane rules.
That's why I hold gold ETFs in tax advantaged accounts.
Then it doesn't matter what form it's in: ETF, trust, or physical (e.g., Gold Star Trust, which has physical gold IRAs), as the taxation is the same.
But if you want some in taxable accounts, the Sprott trusts can have significant tax advantages.
*shrug*

I've never had tax software flag a gold ETF sale as a 'collectible', even in taxable accounts.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

GAAP wrote: Tue Mar 21, 2023 11:25 am Gold as fire insurance? No, at best it sounds more like earthquake insurance (10% deductible on the total policy). I do buy earthquake insurance, and I did buy flood insurance in the 500-year flood plain, not just the 100-year flood plain that FEMA recommends. I don't hold gold except for the ring I'm wearing.

Gold as a store of value? Yes, but in those doomsday scenarios you need to have physical gold, a way to protect it, a way to transport it to a better/safer location, and someone willing to accept it as payment. I'm more likely to accept food than gold in that sort of situation.

Gold arguably provided a better return when currencies were linked to it precisely because that linkage led to deflationary events that improved gold returns. The post gold-standard inflation environment is notably different than the prior one.
Gold as a alternative to T-Bills/Bonds?
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

GAAP wrote: Tue Mar 21, 2023 11:25 am Gold as fire insurance? No, at best it sounds more like earthquake insurance (10% deductible on the total policy). I do buy earthquake insurance, and I did buy flood insurance in the 500-year flood plain, not just the 100-year flood plain that FEMA recommends. I don't hold gold except for the ring I'm wearing.

Gold as a store of value? Yes, but in those doomsday scenarios you need to have physical gold, a way to protect it, a way to transport it to a better/safer location, and someone willing to accept it as payment. I'm more likely to accept food than gold in that sort of situation.

Gold arguably provided a better return when currencies were linked to it precisely because that linkage led to deflationary events that improved gold returns. The post gold-standard inflation environment is notably different than the prior one.
I don't think you need a Mad Max scenario for gold to be a store of value.
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

seajay wrote: Tue Mar 21, 2023 2:22 pm
GAAP wrote: Tue Mar 21, 2023 11:25 am Gold as fire insurance? No, at best it sounds more like earthquake insurance (10% deductible on the total policy). I do buy earthquake insurance, and I did buy flood insurance in the 500-year flood plain, not just the 100-year flood plain that FEMA recommends. I don't hold gold except for the ring I'm wearing.

Gold as a store of value? Yes, but in those doomsday scenarios you need to have physical gold, a way to protect it, a way to transport it to a better/safer location, and someone willing to accept it as payment. I'm more likely to accept food than gold in that sort of situation.

Gold arguably provided a better return when currencies were linked to it precisely because that linkage led to deflationary events that improved gold returns. The post gold-standard inflation environment is notably different than the prior one.
Gold as a alternative to T-Bills/Bonds?
Provides no income. Diversification benefits basically only occur at equity allocations far below anything I would normally consider. So, still solidly :wink: not for me.
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

watchnerd wrote: Tue Mar 21, 2023 1:36 pm
technovelist wrote: Tue Mar 21, 2023 1:15 pm
watchnerd wrote: Tue Mar 21, 2023 12:45 pm
technovelist wrote: Tue Mar 21, 2023 12:23 pm
Yes, but in either case you have the "collectibles" capital gains treatment I believe.
That's what you can avoid with the Sprott physical metal trusts, assuming you follow all the arcane rules.
That's why I hold gold ETFs in tax advantaged accounts.
Then it doesn't matter what form it's in: ETF, trust, or physical (e.g., Gold Star Trust, which has physical gold IRAs), as the taxation is the same.
But if you want some in taxable accounts, the Sprott trusts can have significant tax advantages.
*shrug*

I've never had tax software flag a gold ETF sale as a 'collectible', even in taxable accounts.
It's been a long time since I owned such an ETF so I could be out of date on how they are reported.
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

watchnerd wrote: Tue Mar 21, 2023 2:50 pm
GAAP wrote: Tue Mar 21, 2023 11:25 am Gold as fire insurance? No, at best it sounds more like earthquake insurance (10% deductible on the total policy). I do buy earthquake insurance, and I did buy flood insurance in the 500-year flood plain, not just the 100-year flood plain that FEMA recommends. I don't hold gold except for the ring I'm wearing.

Gold as a store of value? Yes, but in those doomsday scenarios you need to have physical gold, a way to protect it, a way to transport it to a better/safer location, and someone willing to accept it as payment. I'm more likely to accept food than gold in that sort of situation.

Gold arguably provided a better return when currencies were linked to it precisely because that linkage led to deflationary events that improved gold returns. The post gold-standard inflation environment is notably different than the prior one.
I don't think you need a Mad Max scenario for gold to be a store of value.
True, unless the 1970's or 2000 to present were Mad Max scenarios.
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

watchnerd wrote: Tue Mar 21, 2023 2:50 pm
GAAP wrote: Tue Mar 21, 2023 11:25 am Gold as fire insurance? No, at best it sounds more like earthquake insurance (10% deductible on the total policy). I do buy earthquake insurance, and I did buy flood insurance in the 500-year flood plain, not just the 100-year flood plain that FEMA recommends. I don't hold gold except for the ring I'm wearing.

Gold as a store of value? Yes, but in those doomsday scenarios you need to have physical gold, a way to protect it, a way to transport it to a better/safer location, and someone willing to accept it as payment. I'm more likely to accept food than gold in that sort of situation.

Gold arguably provided a better return when currencies were linked to it precisely because that linkage led to deflationary events that improved gold returns. The post gold-standard inflation environment is notably different than the prior one.
I don't think you need a Mad Max scenario for gold to be a store of value.
I agree -- but many of the arguments for owning physical gold are pretty close to that. The sort of situation where that occurs locally (Wiemar Republic, Brazilian Hyperinflation, etc.) tend to mean that your best option is to go somewhere else -- thus the requirement to transport that value store.

The first requirement I would have for a store of value is that it reliably stores that value, which tends to mean it is not volatile. Gold doesn't qualify.

The second requirement I would have is that it is a reliable real store of value, not nominal. Gold doesn't qualify here either.
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Re: Diversification a la Markowitz #3: Gold

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GAAP wrote: Tue Mar 21, 2023 3:09 pm
I agree -- but many of the arguments for owning physical gold are pretty close to that. The sort of situation where that occurs locally (Wiemar Republic, Brazilian Hyperinflation, etc.) tend to mean that your best option is to go somewhere else -- thus the requirement to transport that value store.

The first requirement I would have for a store of value is that it reliably stores that value, which tends to mean it is not volatile. Gold doesn't qualify.

The second requirement I would have is that it is a reliable real store of value, not nominal. Gold doesn't qualify here either.
I don't think there is a transport issue if you're a 21st Turkish citizen who is buying gold ETFs.
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Re: Diversification a la Markowitz #3: Gold

Post by Fremdon Ferndock »

I'm seriously thinking about gold but not as a "diversifier" or anything like that. I think gold is a great asset that is date-dependent. I'm thinking the date is arriving soon and I'd like to put some gold under my pillow in case I'm right.
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

watchnerd wrote: Tue Mar 21, 2023 3:11 pm
GAAP wrote: Tue Mar 21, 2023 3:09 pm
I agree -- but many of the arguments for owning physical gold are pretty close to that. The sort of situation where that occurs locally (Wiemar Republic, Brazilian Hyperinflation, etc.) tend to mean that your best option is to go somewhere else -- thus the requirement to transport that value store.

The first requirement I would have for a store of value is that it reliably stores that value, which tends to mean it is not volatile. Gold doesn't qualify.

The second requirement I would have is that it is a reliable real store of value, not nominal. Gold doesn't qualify here either.
I don't think there is a transport issue if you're a 21st Turkish citizen who is buying gold ETFs.
Perhaps not -- but the same argument could be made for any ETF, assuming you have a way to trade it for something else. I doubt you could use an ETF to directly pay for food on your way out of the country.

I used PV's fund screener to look for gold funds. None of them came close to reliably storing value since they were nearly always in a drawdown state.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

GAAP wrote: Tue Mar 21, 2023 3:29 pm
watchnerd wrote: Tue Mar 21, 2023 3:11 pm
GAAP wrote: Tue Mar 21, 2023 3:09 pm
I agree -- but many of the arguments for owning physical gold are pretty close to that. The sort of situation where that occurs locally (Wiemar Republic, Brazilian Hyperinflation, etc.) tend to mean that your best option is to go somewhere else -- thus the requirement to transport that value store.

The first requirement I would have for a store of value is that it reliably stores that value, which tends to mean it is not volatile. Gold doesn't qualify.

The second requirement I would have is that it is a reliable real store of value, not nominal. Gold doesn't qualify here either.
I don't think there is a transport issue if you're a 21st Turkish citizen who is buying gold ETFs.
Perhaps not -- but the same argument could be made for any ETF, assuming you have a way to trade it for something else. I doubt you could use an ETF to directly pay for food on your way out of the country.

I used PV's fund screener to look for gold funds. None of them came close to reliably storing value since they were nearly always in a drawdown state.
?

A present-day Turkish person mitigating lira inflation wouldn't have to pay for food on the way out of the country using gold, ETFs, or anything other than Turkish lira.

And then use currency of wherever they're going (euros, dollars, dinars, etc)....if they're fleeing at all.

These "WWII Jews fleeing and bribing guards with gold" type scenarios aren't really what is happening today with many people living in highly inflationary (but not quite hyper-inflationary) currency regimes.

They're often not even trying to leave the country -- they're just trying to protect their wealth from inflation, capital controls, etc -- and
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

watchnerd wrote: Tue Mar 21, 2023 4:32 pmA present-day Turkish person mitigating lira inflation wouldn't have to pay for food on the way out of the country using gold, ETFs, or anything other than Turkish lira.

And then use currency of wherever they're going (euros, dollars, dinars, etc)....if they're fleeing at all.

These "WWII Jews fleeing and bribing guards with gold" type scenarios aren't really what is happening today with many people living in highly inflationary (but not quite hyper-inflationary) currency regimes.

They're often not even trying to leave the country -- they're just trying to protect their wealth from inflation, capital controls, etc -- and
and ... counter party risks?

viewtopic.php?p=7172658#p7172658
Image

If 50/50 2x stock/gold broadly compares to 100% 1x stock, then the option to have half of the portfolio value physically in-hand, for some might be considered the better option.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

seajay wrote: Tue Mar 21, 2023 4:46 pm
watchnerd wrote: Tue Mar 21, 2023 4:32 pmA present-day Turkish person mitigating lira inflation wouldn't have to pay for food on the way out of the country using gold, ETFs, or anything other than Turkish lira.

And then use currency of wherever they're going (euros, dollars, dinars, etc)....if they're fleeing at all.

These "WWII Jews fleeing and bribing guards with gold" type scenarios aren't really what is happening today with many people living in highly inflationary (but not quite hyper-inflationary) currency regimes.

They're often not even trying to leave the country -- they're just trying to protect their wealth from inflation, capital controls, etc -- and
and ... counter party risks?

viewtopic.php?p=7172658#p7172658
Image

If 50/50 2x stock/gold broadly compares to 100% 1x stock, then the option to have half of the portfolio value physically in-hand, for some might be considered the better option.
But you usually wouldn't have half your physical gold port actually in hand.

You'd have it held in your name in a bank vault in Geneva, Abu Dhabi, etc.
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Re: Diversification a la Markowitz #3: Gold

Post by Gaston »

GAAP wrote: Tue Mar 21, 2023 3:09 pm The first requirement I would have for a store of value is that it reliably stores that value, which tends to mean it is not volatile. Gold doesn't qualify.

The second requirement I would have is that it is a reliable real store of value, not nominal. Gold doesn't qualify here either.
What, in your opinion, meets the above criteria?
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Re: Diversification a la Markowitz #3: Gold

Post by GAAP »

Gaston wrote: Tue Mar 21, 2023 5:58 pm
GAAP wrote: Tue Mar 21, 2023 3:09 pm The first requirement I would have for a store of value is that it reliably stores that value, which tends to mean it is not volatile. Gold doesn't qualify.

The second requirement I would have is that it is a reliable real store of value, not nominal. Gold doesn't qualify here either.
What, in your opinion, meets the above criteria?
For low volatility, cash. Adding some inflation protection, TIPS (ideally duration-matched) in the USA.

Gold is far more volatile than either cash or short-term TIPS, and so less reliably stores value in the short-term. I wouldn't normally have use for long-term value storage, although I do have use cases that require future specific amounts at specific points in time -- for that, TIPS make more sense to me.
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Re: Diversification a la Markowitz #3: Gold

Post by McQ »

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.
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Re: Diversification a la Markowitz #3: Gold

Post by watchnerd »

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.

Amusing as it was to skim (sorry, I confess it was TLDR), this bit of fan fiction about a put on civilization ending doesn't represent the data of gold purchases.

For example, large central bank reserves, of which the United States has the most:

https://www.statista.com/statistics/267 ... -reserves/

Or the amount added by central banks:

Image

Image

Or gold consumption at the consumer level, where India and China lead by volume, but Germany and Switzerland lead per capita:

Image
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Re: Diversification a la Markowitz #3: Gold

Post by technovelist »

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

...
It is very, very difficult to self-clear a put option against civilization. Even with gold in hand.
That's not the purpose of gold in planning for the breakdown of civil order.
You don't try to spend it during the interregnum because of exactly those scenarios you depict.
For that you have junk silver dimes and quarters, or maybe .22 LR ammo.
Gold is for capital purchases after a new societal organization has arisen and has adopted a new monetary system, which history says will be based on gold.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Diversification a la Markowitz #3: Gold

Post by Fremdon Ferndock »

technovelist wrote: Thu Mar 23, 2023 12:44 am
McQ wrote: Wed Mar 22, 2023 10:05 pm Gold: a deep out-of-the-money put?

...
It is very, very difficult to self-clear a put option against civilization. Even with gold in hand.
That's not the purpose of gold in planning for the breakdown of civil order.
You don't try to spend it during the interregnum because of exactly those scenarios you depict.
For that you have junk silver dimes and quarters, or maybe .22 LR ammo.
Gold is for capital purchases after a new societal organization has arisen and has adopted a new monetary system, which history says will be based on gold.
Really?
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Re: Diversification a la Markowitz #3: Gold

Post by NoRegret »

McQ wrote: Mon Mar 20, 2023 10:25 pm But it seems to me that your post contained a more breath-taking assertion: that over the long term, gold could appreciate in value above the rate of inflation. Translation: even as it sits inert in a vault, gold could be creating real value, not just storing value. Almost as if it grew in weight, even as it sat there in quiet isolation.

If I understand you correctly, that would occur because the money base could grow faster than inflation, even as buyers for gold, the market, would insist that the stock of gold maintain a worth equal to a constant fraction of the money base, thus causing its value to grow faster than inflation along with the monetary base.

I see the argument, but I'm not convinced. Could you elaborate on how gold could grow its real value over the long term (call it 50 years plus)? It is easy for me to accept that outcome over any shorter term, call it two or three decades, in the spirit of over-shooting.

But I do not see how gold could grow in real value (=real spending power) over the long term.
Not an assertion, more like a supposition. The idea is that monetary gold acts like an anchor that reigns in un-fettered money creation. Just as police power that enforces property rights is arguably more valuable to higher-networth people; the value of monetary gold can grow if it provides that anchoring service to a real economy that's growing faster than gold's annual production rate*.

*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.

I can also make the (entirely circular) argument that gold's real return is the compensation for holding a non-revenue-generating asset (by definition no longer currency in a fiat regime).

Anyway, like I said, the point is purely academic. The forces that make gold more or less fashionable among asset allocators will create price gyrations far greater than can be reasonably expected from the arguments above.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

The US dollar has lost more than 99% of its 1930's gold purchase power, that's a pretty traumatic crash.

Shiller's data for 1946 indicates a S&P500 price of $18.02 and a dividend of $0.71, so near-as $18 bought you a 4% dividend income flow.

In 1986 the S&P500 price was $208.19 and for that you received a dividend of $8.28, so also bought a 4% dividend income flow.

Both of those dates were selected for that 4% dividend income stream alignment, to level-the-field so-to-speak.

S&P500 price gain (dollar decline) over those years, a 11.5 factor. Price increase (dollar decline) over the same period for gold = 11.3 factor ($34.7 1946 gold price, $393 1986 gold price). So you could have held gold, and seen its stock dividend yield purchase power having remained the same 40 odd years later. Or invested in stocks and reaped the benefit of the dividends.

Gold is similar to T-Bills, bonds and suchlike, non productive assets, in contrast to stocks that are productive assets. Similar arguments might be made for why not to hold gold, or T-Bills, or Bonds, and to just hold stocks instead for their production benefits. You might even broaden that argument to compare just buying a farm and leaving it idle, perhaps later selling the land for much the same price as you originally paid, after inflation, or working the land to produce dividends.

One thing is for certain, all fiat currencies fade towards zero, its just a case of how quickly. Gold has a history of hedging such collapses, all be them slow, or quick. How much gold to hold is a similar debate as to how much T-Bills or bonds to hold. Stock prices are volatile and blending that risk with other assets attenuates that volatility, but typically at a cost i.e. in holding a combination of productive and 0% real expectancy assets rather than solely productive assets alone. However there are other cases, for example a third each in 3x stock, T-Bills, Gold has the same/similar reward expectancy as 100% stock, whilst having more diverse counter-party risk factors.

Image
(clickable image to take you to PV)

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.
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Re: Diversification a la Markowitz #3: Gold

Post by seajay »

Many stocks borrow, such as issuing corporate bonds. In effect when you buy stock shares you are also buying into a element of short (sold) bonds. Borrowing to invest tends to just scale volatility, more broadly rewards tend to still be much the same as not having borrowed. If you consider stocks to be 1.5x leveraged due to having borrowed, then its not unreasonable to de-leverage that exposure, opt for 67/33 stock/bonds (which could equally be held via the likes of thirds each in 2x stock/gold/T-Bills) The broader tendency for that might to to see the 100% stock zig-zag around the 67/33 stock/bond, similar overall rewards, but with more volatility.

If you buy stock, that in turn sell some bonds, and you also buy those bonds, then that might be considered as being somewhat wasteful use of capital. Being long and short bonds in around equal measure is a zero sum nominal stance. However that can still 'work' overall for investors, similar rewards, with less volatility (greater comfort) ... and the likes of 67/33 stock/bonds is quite a popular type of choice/asset-allocation. Some measure the likes of Sharpe Ratio, in effect the gain divided by the volatility, where the higher that value being considered by some as being 'safer', but that might also be considered as being 'comfort' (less volatile). Subject to how you see gold, for some holding gold adds elements of comfort, might for instance cover a Black-Swan type event and serve as a hedge when regular stocks and bonds alone faltered.
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