Categories

Pragmatic Capitalism

Practical Views on Money, Finance & Life

Gold is a Good Portfolio Hedge

« Back to Previous Page
0

Clearly as you show, portfolios are more economically-robust by including gold as the risk/reward ratio clearly improves, even if only marginally — but 33% is way past the tangency portfolio. But, what ultimately matters is whether or not there is a portfolio rebalancing bonus to be had with any potential asset class inclusion. Gold is non-correlated to both stocks and bonds over the long-term. That’s why it works as Modern Portfolio Theory predicts. It is diversification in the true sense, not faux diversification among sub-assets all aligned to the same economic risk drivers.

So, while I agree with what you wrote, I also think you’re being a bit too biased by dogma and not fully understanding of how destructive 1965-1981 to financial asset-only portfolios. Or the typical non-USA experience. OTOH, I believe gold just merely represents the broader real asset class category and is not the be all, end all. Historically, other real assets worked for fear, hedging and SHTF scenarios. You really don’t know what the panicy market will pick next, so prudence dictates diversifying into other sub-classes. Argentina is very instructive here.

BTW, the links for the last two links in reference 4 are pointing to chrome://extension ???

Marked as spam
Posted by MachineGhost
Posted on 03/01/2017 5:59 PM
249 views
Private answer

Oh, I don’t doubt that you could construct a portfolio backtest showing that gold helps to optimize returns. I am not really too concerned about backtested results and I actually think they’re incredibly dangerous.

I prefer to look at portfolio assets from an operational perspective. For instance, I know the exact structure of a bond and what its returns will very likely be over certain periods of time. It’s like studying a car and knowing how it works before I get in and press the pedals. In this sense stocks and bonds are easy to understand so I can make reasonable future predictions about their returns. Gold is a total unknown though. We literally have no idea what’s driving its price. Is it just a weird belief that it’s money? Is it purely economic? We don’t really know. And more importantly, we don’t know how things like beliefs might change. This makes gold nearly impossible to understand from an operational perspective. And that’s why I think it is a potentially very dangerous asset to include in a diversified portfolio.

Marked as spam
Cullen Roche Posted by Cullen Roche
Answered on 03/01/2017 6:16 PM
    Private answer

    That’s reasonable, but it sounds like the zero-risk bias or illusion of control bias to me. I look at asset allocation from an total approach economic risk operational perspective, not the minutia details that aren’t technically necessary to profit. The market doesn’t care what anyone thinks their subjective valuations is for their stocks or bonds; its overwhelmingly emotional-driven already! No one would buy without greed, anyway. So throwing “weird beliefs” gold (or real assets) into the mix is more of an intellectual annoyance than any real hindrance from profiting. I suspect anyone could eventually reason out and hedge the “weird beliefs” for any asset as best as they possibly could.

    Look, if gold mining equities would work in a portfolio as it did in Zimbabwe, I would prefer to use that because it is easier to understand. But unfortunately, it does not. Neither does REIT’s as a replacement for real estate. It’s just not that easy and anything that is, always comes at a cost.

    Anyway, I was curious, so I looked it up and it seems pretty clear from the below chart that gold still works splendidly in a modern portfolio. But it is important to realize that all tangible assets will go up in value during those kind of SHTF political scenarios, not just gold. That includes stocks (take delivery of the certificates!), real estate, other hard assets and nowadays, cryptocurrencies. However, whether or not said asset would beat the increasing rate of inflation due to the depreciating currency and imploding sovereign debt in real terms is what you are actively betting on happening when you stick to a financial-asset only portfolio. You are relying on a near perfect scenario of a free market immediately and rationally responding without distortions, illusions, hindrances, interference or interventions of any kind. You’re also actively betting that the government won’t impose price controls, capital controls, currency controls, exchange controls, rationing and/or shut down financial markets or outright confiscate/ban tangible assets being used as the new money. For those reasons and more, I believe cryptocurrencies have an excellent chance to displace gold in the future.

    Ounce of Gold
    =============
    Zimbabwe Dollar: $45,2103.72
    Argentine Peso: $19,287.69
    Venezuelan Dollar: $12,464.14
    Iceland Krona: $133,074.89

    Marked as spam
    Posted by MachineGhost
    Answered on 03/01/2017 8:17 PM
      Private answer

      Yeah, I know I am not necessarily consensus view here. But if we were going to be true efficient market theorists then gold is a very very small part of aggregate assets. Further, I wonder how much the price has increased based on this mystical belief that it’s more than just a commodity? If so, then there’s a sound argument that gold has become dramatically overvalued relative to other commodities. Over the last 45 years gold has outperformed commodities by 5X. The CRB commodity index has generated a 0% return over this time. So, if you subscribe to my view then gold has a potentially massive downside while its upside relies on what is essentially a greater fool theory….That makes me very uncomfortable.

      Marked as spam
      Cullen Roche Posted by Cullen Roche
      Answered on 03/02/2017 5:29 PM
        Private answer

        In my opinion, Cullen, you are not looking at this from the correct operational view:
        Gold is a “hedge”, another word for insurance, against major economical collapse. If you think of gold as insurance rather than a hedge investment, it all makes sense. How much money does the average American “waste” on insurance (waste meaning when insurance is never used)? Operationally speaking, it’s nice knowing one has insurance if the unthinkable happens (accidental death, property storm damage, car wreck, economical collapse, etc.)

        Marked as spam
        Posted by troll
        Answered on 03/03/2017 10:57 AM
          Private answer

          @Roche Well, I’m not a believer in the efficient market theory because humans are not Homo Economicus. So what Wall Street has decided to financialize to make a profit and investors have decided to subsequently buy, shouldn’t determine the boundaries of what is an optimal asset allocation for a portfolio. That seems just silly if one really thinks deeply about it. I’d also say the only really convincing argument that can really be made for the Global Financial Portfolio is low costs that ought to beat 99% of all the other institutionally constrained managers. Doesn’t mean it is the best portfolio — just the best for the average person who doesn’t have either the acumen or connections to tap into that outperforming 1%. Right now everyone and their mother all seems to be all crowding into market-cap weighted funds because the “passive investing” meme has gained critical mass and that is causing troubling divergences between concentrated overvaluations of a relative handful of mega-caps (I really like how Apple is excluded). It’s also been happening in low volatility (non-cyclicals in drag), all capitalization sizes in general compared to dot.com bubble (which was just concentrated MegaCap tech overvaluation) and assuming we have enough time left before the next bear market, will surely happen to the all of the Smart Beta “factors”. This may all be “efficient” from a rationally irrational behavorial perspective, but that’s not how markets work in the long-term. The vast majority will have to lose gaping chunks of their paper gains by being on the wrong side of the trade. The time to get into an asset class is when it is out of favor, not when it is currently in the middle of a fad or a bubble, or one will most certainly risk becoming the last bagholder.

          So, I’m glad that the real asset markets are nowhere near what they would be if all Western people had the same perspective about hedging economic risk. Whew! Heck, the gold market is so relatively tiny it really cannot handle any capital flight at all, so just out of real world constraints, flight to safety will have to first go into Treasuries and risk pulling a Japan as long as things stay politically calm. But in the situation when Treasuries become troubled as they did from 1945-1981 (and especially during the last 10 years of that time frame), you’ll see diversification into other assets just out of self-survival. In the 70’s was small caps, developed and real assets.

          Gold isn’t really a cost input in the broad sense that other commodities are, so it has special intrinsic and extrinsic characteristics that other commodities don’t just have and never will. In fact, I’ve looked at numerous commodity studies, and no individual commodity ever performs the special role that gold does during those periods when it shines, so adding commodities doesn’t improve portfolio risk outcomes anymore than gold miners or REIT’s do. So it’s kind of a conflation to talk about commodities and gold in the same sentence, but it is very common. I blame Vanguard.

          Whether or not an asset has “potentially massive downside” is irrelevant to a risk-hedged portfolio, unless one is market timing. But for an asset to truly work in the buy and hold passive sense, it absolutely has to be long-term non-correlated and mean reverting vs the other portfolio assets. So that limits you to stocks, bonds, cash and gold that we have enough historical evidence for. Personally, I have quite serious tracking error by diversifying into other real assets than 100% into gold, but I am comfortable with that as I reduce the risk in the financial assets via other means than relying on the risk-hedge portfolio. I view both stocks and bond as having “massive downside risk” currently. It’s all a question of timing. Do we get a Trump boom economy and rising interest rates that disfavors holding bonds and golds or do we get the Bretton Woods II scenario sooner rather than later that favors the mother of all panics into gold beforehand? I can’t predict what will be what with any high level of confidence and we should not be in that business since its a sucker’s game.

          @Troll I don’t know that gold is always a singular hedge against “major economic collapse”. There is no historical pattern as other assets have also served that role… people will use whatever they can and whatever is available to save themselves… bronze coins, silver coins, gold coins, diamonds, rare stamps, canned food, cars, scrap metal, etc. But, in thise modern era of demonetization, gold highly functions as a universal government/systemic risk hedge and the effect is really magnified when it’s priced in the world’s reserve currency.

          Marked as spam
          Posted by MachineGhost
          Answered on 03/03/2017 5:18 PM
            Private answer

            P.S. I also also point out I try to use tactical allocation to deal with the crazy risk in all the asset classes, but that is because I think the passive real returns of both stocks or a risk-hedge portfolio are a gigantic waste of time for our short lifespans. If you don’t think its worth the extra fuss, ponder this again when the pensions funds start going belly en masse up because they still think they can get 8% nominal. Someone is going to pay the price for this systemic irresponsibility and I am determined that it’s not going to be me.

            Marked as spam
            Posted by MachineGhost
            Answered on 03/03/2017 5:25 PM
              Private answer

              Machine Ghost, I’m a profound realist as well as an economical ignoramus. I think it took you 6 paragraphs to say what I did in 6 lines. As far as history is concerned, gold has been a viable commodity for over 5000 years. I think my original statement stands (as does your extended statement).

              Marked as spam
              Posted by troll
              Answered on 03/05/2017 11:33 AM
                Private answer

                Gold Is Dead Folks. Digital Currency IS the future. WHY, Because The BIBLE Tells us so. Revelation 13:17 “And no one could buy or sell anything without that mark, which was either the name of the beast or the number representing his name.”

                Cullen should understand this based on his Jesuat upbringing IF it was based on Biblical teachings. Folks, it’s all there in Black N White. The Christian Bible foretold of a CASHLESS Society And That Includes the Relic GOLD..

                Marked as spam
                Posted by Cowpoke
                Answered on 03/05/2017 10:58 PM
                  Private answer

                  Isn’t that the same book that said a bat is a bird? (Lev 11:13,19; Deu 14:11-18)

                  Marked as spam
                  Posted by troll
                  Answered on 03/06/2017 9:51 AM
                    Private answer

                    Seriously Troll? OK, I’ll play… What “Phylum” group do bats belong in? LOL
                    Now Revelation 13:17 says:
                    Verse (Click for Chapter)
                    New International Version
                    so that they could not buy or sell unless they had the mark, which is the name of the beast or the number of its name.

                    New Living Translation
                    And no one could buy or sell anything without that mark, which was either the name of the beast or the number representing his name.

                    English Standard Version
                    so that no one can buy or sell unless he has the mark, that is, the name of the beast or the number of its name.

                    Berean Study Bible
                    so that no one could buy or sell unless he had the mark–the name of the beast or the number of its name.

                    Berean Literal Bible
                    and that no one should be able to buy or to sell, if not the one having the mark–the name of the beast, or the number of its name.

                    New American Standard Bible
                    and he provides that no one will be able to buy or to sell, except the one who has the mark, either the name of the beast or the number of his name.

                    King James Bible
                    And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.

                    Holman Christian Standard Bible
                    so that no one can buy or sell unless he has the mark: the beast’s name or the number of his name.

                    International Standard Version
                    so that no one may buy or sell unless he has the mark, which is the beast’s name or the number of its name.

                    NET Bible
                    Thus no one was allowed to buy or sell things unless he bore the mark of the beast–that is, his name or his number.

                    New Heart English Bible
                    and that no one could be able to buy or to sell, unless he has that mark, the name of the beast or the number of his name.

                    Aramaic Bible in Plain English
                    That no one may buy or sell again except one who has the mark of the name of The Beast or the number of its name.

                    GOD’S WORD® Translation
                    It does this so that no one may buy or sell unless he has the brand, which is the beast’s name or the number of its name.

                    New American Standard 1977
                    and he provides that no one should be able to buy or to sell, except the one who has the mark, either the name of the beast or the number of his name.

                    Jubilee Bible 2000
                    and that no one might buy or sell, unless he has the mark or the name of the beast or the number of its name.

                    King James 2000 Bible
                    And that no man might buy or sell, except he that had the mark, or the name of the beast, or the number of his name.

                    American King James Version
                    And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.

                    American Standard Version
                    and that no man should be able to buy or to sell, save he that hath the mark, even the name of the beast or the number of his name.

                    Douay-Rheims Bible
                    And that no man might buy or sell, but he that hath the character, or the name of the beast, or the number of his name.

                    Darby Bible Translation
                    and that no one should be able to buy or sell save he that had the mark, the name of the beast, or the number of its name.

                    English Revised Version
                    and that no man should be able to buy or to sell, save he that hath the mark, even the name of the beast or the number of his name.

                    Webster’s Bible Translation
                    And that no man might buy or sell, save him that had the mark, or the name of the beast, or the number of his name.

                    Weymouth New Testament
                    in order that no one should be allowed to buy or sell unless he had the mark–either the name of the Wild Beast or the number which his name represents.

                    World English Bible
                    and that no one would be able to buy or to sell, unless he has that mark, the name of the beast or the number of his name.

                    Young’s Literal Translation
                    and that no one may be able to buy, or to sell, except he who is having the mark, or the name of the beast, or the number of his name.

                    Before the ask Cullen section was created Cullen was enthralled with the Idea of a cashless society. Ether the Jesuits failed to educate him properly in this aspect of scripture or he was absent that day.

                    Regardless, you can deny Biblical prophecy that is so closely related to today’s events that seek to control our monetary system digitally.
                    Which would in fact give the ULTIMATE control to the one’s that control it..

                    Marked as spam
                    Posted by Cowpoke
                    Answered on 03/06/2017 10:35 PM
                      Private answer

                      Can’t

                      Marked as spam
                      Posted by Cowpoke
                      Answered on 03/06/2017 10:42 PM
                        Private answer

                        Sorry, Cowpoke. I didn’t mean to question your faith, only the veracity or your source(s).

                        Marked as spam
                        Posted by troll
                        Answered on 03/07/2017 9:41 AM
                          Private answer

                          Cowpoke, u r so funny. Attached is the literal “mark of the beast” so fondly referenced in your game of telephone.

                          This is because when Nero’s name in Greek is converted to Hebrew/Aramic using Jewish gematria, 50 + 200 + 6 + 50 + 100 + 60 + 200 = 666. Nothing to see here, folks.

                          Now that a Bitcoin is valued more than an ounce of real solid tangible gold (!!!) and the Winklevoss Bitcoin Trust ETF is due to be approved by the SEC this or next week after years of delay, I smell a pair trade.

                          Attachments:
                            Marked as spam
                            Posted by MachineGhost
                            Answered on 03/07/2017 8:06 PM
                              Private answer

                              Mr troll, I was just adding that source because it was a very big back in the 70’s brought to masses by Hal Lindsey’s Late Great Planet Earth book. I read that book and his 1980’s countdown to Armageddon. Not sure how old you are But during the 60’s -80’s the World powers were the US/Nato and the Soviet/Eastern block and Hal hit it out of the park when he said the Soviet Union would collapse and then I watched it collapse with the Berlin Wall right before my eyes years after reading that. That leaves a rather large imprint on folks like myself.
                              Afterwards and via this discussion, I see there were others predicting as well: https://en.wikipedia.org/wiki/Predictions_of_the_dissolution_of_the_Soviet_Union But it’s all for sake of the complexity of how we savers allocate our savings based on personal life events surrounding us.

                              Which is probably why the market is so unpredictable, because it carry’s with it is a culmination of past, present and future..

                              Marked as spam
                              Posted by Cowpoke
                              Answered on 03/07/2017 9:24 PM
                                Private answer

                                MG, I just see your post after I was typing up a response to troll. That’s interesting, I will look it over and reply later. I have a bunch of political comments on other sites I have to pound away at for now LOL.. ?

                                Marked as spam
                                Posted by Cowpoke
                                Answered on 03/07/2017 9:27 PM
                                  Private answer

                                  Cowpoke,
                                  Did Hal Lindsey make any other astounding predictions in his now classic, literary catalogues?

                                  Marked as spam
                                  Posted by troll
                                  Answered on 03/08/2017 11:49 PM
                                    Private answer

                                    Cowpoke,
                                    As long as you are re-reading Brother Hal’s book so you can respond to my question with great wisdom [actually, my question concerning this charlatan’s book was sarcastic rhetoric] please inform us as to how the Soviet Union collapsed before the Battle of Gog and Magog.

                                    Marked as spam
                                    Posted by troll
                                    Answered on 03/09/2017 9:47 PM
                                      « Back to Previous Page