Author Topic: Commodities in asset allocation  (Read 6389 times)

Optimus Primal

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Commodities in asset allocation
« on: October 11, 2016, 07:16:47 AM »

Do you have a commodities allocation in your portfolio?  If so, why, how much, and how do you implement it?

Timodeus

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Re: Commodities in asset allocation
« Reply #1 on: October 11, 2016, 07:49:08 AM »
I can only say what I plan to do. My portfolio now does not include any commodities, but I planned on implementing a 5% gold allocation when I retire. My rationale for this twofold, first it adds non-correlation benefits from the largest of my assets (US Stocks) and secondly it provides inflationary protection. There is no guarantee that my rationale would pan out, and many on this forum, general indexers, and value investors despise precious metals and commodities in general because they aren't a good long term investment (I agree with them in that context) and do not contribute to cash flow. I principally view it as an insurance policy, much like canned food and water during an emergency. It probably won't add to return which is why I don't hold it in the accumulation phase, but I think the asset has enough history and value to be part of my post retirement portfolio.

RichMoose

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Re: Commodities in asset allocation
« Reply #2 on: October 12, 2016, 10:53:16 PM »

Do you have a commodities allocation in your portfolio?  If so, why, how much, and how do you implement it?

I don't hold them directly; however, being Canadian and investing in the Canadian stock index I am indirectly exposed in a pretty substantial way. It's pretty fair to say our stock market is almost 50% tied to the price of commodities like oil, natural gas, potash, precious metals, timber, and coal. The 50% number would include mining, financing, transportation, etc. all related to commodities.

I am not one to advocate holding gold ETFs, but I do believe there is merit to holding miners or financiers.

If you are looking for broad exposure, I would suggest holding a Canada ETF, Australia ETF, or Emerging markets ETF. These would all provide good commodity exposure and be more stable than investing in miners or the commodity directly.

Leisured

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Re: Commodities in asset allocation
« Reply #3 on: October 13, 2016, 05:41:52 AM »
I agree with those who support holding the producers of commodities rather than the real thing. I am Australian, and hold BHP, an Australian company which is the world's largest diversified resources company. It had been through a bad patch recently, mainly because of falling prices for oil and iron, but things will get better. Producers of commmodities also pay dividends.

Vagabond76

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Re: Commodities in asset allocation
« Reply #4 on: October 13, 2016, 09:45:25 AM »
I see three ways to invest in commodities:

(1) Buy an ETF that tracks the value of the commodity

(2) Buy companies that extract the commodity from the ground

(3) Hold the physical commodity

The ETF makes no sense to me.  What is the assurance that, GLD for example, actually hold the gold in a vault somewhere?  Plus, ETFs are by definition open ended funds, which is how a share price generally tracks with the NAV.  If lots of people swarm into the ETF, the issuer will issue new shares.  Does the issuer magically obtain more gold in the vault to reflect the new shares?  If people flee the ETF, the issuer will cancel shares.  Where does that gold go?  Plus the LTCG tax rate on GLD is that of collectibles--25%.

The companies are a better option in that they are businesses that an investor can evaluate.  What are the earnings, sales, ratios, beta, yield, etc; and how do those statics compare to competitors?  The problem with owing mining companies is that their share price tends to track an amplified commodity price.  For example, gold rose 20% from Jan 1, 2016 to Jul 1, 2016, and NEM rose 120%.  Conversely, over the preceding six months, gold fell 10% and NEM fell 25%.  You either hit a home run or strike out.

Holding the commodity seems to be the most popular way to own gold and silver.  But owning any commodity cannot really be considered insurance unless you can actually use it.  For a precious metal to be of any value, you need to find someone to trade it for currency or a good or service.  That stack of coins and bars is useless if the monetary system fails and no one will trade their sandwich or it.  Plus, it can be lost or stolen.  Holding barrels of oil in the backyard isn't very practical unless you know how to refine it into a useable product.  Food is useable, but does not keep long.  About the only useful commodity to hold is timber and bullets.  You can burn a piece of wood to keep warm and cook the animal you shot with the bullet.

TL;DR version:  leave the commodities to the companies that have the infrastructure and know-how to use them.

englishteacheralex

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Re: Commodities in asset allocation
« Reply #5 on: October 13, 2016, 09:54:48 AM »
How funny. My husband has been researching asset allocation for the last two months and last night sat down to shift things around in our accounts. Previously we were almost 100% in US index funds, and he decided based on the books we both read and an awful lot of spread-sheeting that our allocation should be

55% US index funds
20% International index funds
20% REIT
5% Commodities

I took one look at his final decision, which was originally 10% commodities, and said...that seems like a lot of money to be gambling with. I don't understand asset allocation as well as he does, but everything I've read and heard about commodities has been pretty discouraging. We went with 5% as a small hedge.

Incidentally, he considers bonds as an asset class for us as covered by his future pension from the federal government, and feels that because of the pension in a job that he has no intention of leaving, there is no need to intentionally invest in bonds.

chasesfish

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Re: Commodities in asset allocation
« Reply #6 on: October 13, 2016, 02:57:26 PM »
I view gold and silver as a hobby, not investing.  I have a few coins, they look pretty and I know what they're worth if I find a willing buyer.

As an investment, nah.  Their short term price is at the whims of how much they find and what billionaire or country decides to buy a lot of it (Like the Hunt Brothers trying to corner the market)

effigy98

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Re: Commodities in asset allocation
« Reply #7 on: October 13, 2016, 06:31:47 PM »
Gold is a stabilizing force in my portfolio. I will continue to hold it. It is the oldest form of currency that cannot be printed. It often zigs when the rest of the market zags. I re-balance to capture the gains (buy low, sell high).

englishteacheralex

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Re: Commodities in asset allocation
« Reply #8 on: October 13, 2016, 06:58:32 PM »
Gold is a stabilizing force in my portfolio. I will continue to hold it. It is the oldest form of currency that cannot be printed. It often zigs when the rest of the market zags. I re-balance to capture the gains (buy low, sell high).

Yeah, this is what my husband explained. We're not buying straight up gold in coins or bullion though. The funds we're buying are actually energy funds. I felt a little uneasy about it nonetheless, but 5% isn't that much and yeah, zigging/zagging I guess. Except...doesn't energy tend to influence the rest of the market?

Vagabond76

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Re: Commodities in asset allocation
« Reply #9 on: October 13, 2016, 08:16:48 PM »
I took one look at his final decision, which was originally 10% commodities, and said...that seems like a lot of money to be gambling with. I don't understand asset allocation as well as he does, but everything I've read and heard about commodities has been pretty discouraging. We went with 5% as a small hedge.

Or you do, but you are willing to cede to his innate male recklessness.

englishteacheralex

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Re: Commodities in asset allocation
« Reply #10 on: October 13, 2016, 08:22:20 PM »
I took one look at his final decision, which was originally 10% commodities, and said...that seems like a lot of money to be gambling with. I don't understand asset allocation as well as he does, but everything I've read and heard about commodities has been pretty discouraging. We went with 5% as a small hedge.

Or you do, but you are willing to cede to his innate male recklessness.

Well, he's read a few more books about it than I have, and has been running numbers on online calculators and furiously making spreadsheets into the night for the past month. At that point, I'm not going to begrudge him a couple thousand dollars to allocate to something he feels is a good idea. Even if it's a total loss, it's not going to affect us that much.

NorCal

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Re: Commodities in asset allocation
« Reply #11 on: October 13, 2016, 10:54:55 PM »
I see three ways to invest in commodities:

(1) Buy an ETF that tracks the value of the commodity

(2) Buy companies that extract the commodity from the ground

(3) Hold the physical commodity


I agree with the three options, but come to different conclusions on the following grounds.  I would also subdivide ETF's into those who hold physical commodities and those who invest in futures.

Buying an ETF that holds the physical commodity (typically your gold or silver ETF's) is far superior to buying the physical commodity in nearly every scenario.  The bid/ask spread is MUCH better.  There is no reason to hold the physical thing unless you fear a true Armageddon, yet think gold would somehow still retain value.

ETF's that invest in futures have no place in a long term portfolio.  The roll yield will eat you alive.  You're effectively paying interest to hold them.

Commodities have value in a portfolio due to their low/negative correlation to equity markets.  That is the sole reason to own them.

I personally allocate ~3% of my portfolio to gold.  Anything between 0-10% is reasonable.  More than that is giving up too much earning potential. 

Optimus Primal

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Re: Commodities in asset allocation
« Reply #12 on: October 14, 2016, 05:14:36 AM »
Gold is a stabilizing force in my portfolio. I will continue to hold it. It is the oldest form of currency that cannot be printed. It often zigs when the rest of the market zags. I re-balance to capture the gains (buy low, sell high).

What is your allocation percentage and why?

Le Barbu

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Re: Commodities in asset allocation
« Reply #13 on: November 01, 2016, 12:06:08 PM »

Do you have a commodities allocation in your portfolio?  If so, why, how much, and how do you implement it?

I don't hold them directly; however, being Canadian and investing in the Canadian stock index I am indirectly exposed in a pretty substantial way. It's pretty fair to say our stock market is almost 50% tied to the price of commodities like oil, natural gas, potash, precious metals, timber, and coal. The 50% number would include mining, financing, transportation, etc. all related to commodities.

I am not one to advocate holding gold ETFs, but I do believe there is merit to holding miners or financiers.

If you are looking for broad exposure, I would suggest holding a Canada ETF, Australia ETF, or Emerging markets ETF. These would all provide good commodity exposure and be more stable than investing in miners or the commodity directly.

I already asked myself if I should include commodities in my portfolio. As a Canadian, my home bias is in the 30% range. When using A.A. tools, 30% commodities gives about the same results. This is why I prefer to own ZCN at 0.05% MER than any other expensive commodities ETF. 

robartsd

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Re: Commodities in asset allocation
« Reply #14 on: November 01, 2016, 12:47:11 PM »
The ETF makes no sense to me.  What is the assurance that, GLD for example, actually hold the gold in a vault somewhere?  Plus, ETFs are by definition open ended funds, which is how a share price generally tracks with the NAV.  If lots of people swarm into the ETF, the issuer will issue new shares.  Does the issuer magically obtain more gold in the vault to reflect the new shares?  If people flee the ETF, the issuer will cancel shares.  Where does that gold go?
Read the prospectus from one of those funds. Usually only authorized participants (AP) can deal with the fund directly and the fund only deals with them in specific sized lots of shares (often 50k or 100k). To create new shares, the AP must deliver a basket of goods to the fund to offset the shares created (they also pay a fee to cover the fund's transaction costs). APs can also redeem shares (in creation lot sizes) and receive a basket of goods (again paying a fee to cover the fund's transaction costs). To pay for fund expenses, the fund sells some of the goods on the open market, so the basket of goods corresponding to each creation lot decreases slightly over time.

Classical_Liberal

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Re: Commodities in asset allocation
« Reply #15 on: November 01, 2016, 02:52:01 PM »
I'm now holding about 7% Gold.  Some through physical coins, more through ETF.

My thought processes: I originally held a few gold coins for SHTF circumstances, but was becoming more concerned that as rates rise from ZIRP noncoorlation between treasuries and US equities would diminish.   The upside for both US treasuries and equities doesn't seem great in the short to mid term (i'm still buying international index in my 401k), so I figured now was the time to buy gold.  Prior to buying, I did a significant amount of research on risk parity type investing. I dislike the idea of leverage so decided the best way to gaurd against certain risks was to hold a small percentage of gold.  Research also showed that where data is available (post 1972), a small percentage of gold in a passive portfolio has increased SWR's without terribly hurting CAGR.

After stocks rebounded from the dip at the beginning of this year I began putting most of my new investment $ into gold to reach my goal allocation of 10%.  At first I purchased a few more coins, but the transaction & shipping costs of lump sum averaging were too high and unrealistic for future rebalances.  Now I buy IAU.  The trust for IAU operates exactly as robertsd stated in the previous post, so exchange for the actual metal is not realistic.  However, the expense ratio is reasonable (similar to an investor share index fund from Vangaurd) and the large number of traded shares make the investment very liquid.

Personal conclusion: It was nice to see an initial bump in gold prices when I first started investing, but not expected nor required for my continued allocation goal.  It's been of psychological gain to see an asset moving in different directions, I'm more confident in my portfolio.  Although the investment may lose value and over the long haul has much less upside than other classes, I'm confident that an asset that has retained some value since the beginning of human history isn't the worst place to park capital.  The fact that it still plays a role in central banking reserves systems doesn't hurt either. I guess I'm a gold bug.

AlmstRtrd

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Re: Commodities in asset allocation
« Reply #16 on: November 01, 2016, 03:46:09 PM »
I guess I'm a gold bug.

Nah. Gold is just another form of cash. If the USD goes into the crapper, gold should do well. You are just diversifying.

2Birds1Stone

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Re: Commodities in asset allocation
« Reply #17 on: November 01, 2016, 04:34:57 PM »
I do, I currently have ~12-13% of my investments in physical Ag/Au, tucked away in a SDB.

I don't plan on purchasing in the near term but I do plan on keeping it as 5-10% of my investments for the long term.

I made a huge mistake by purchasing a whole crap ton at the end of 2013 and am underwater on it currently. This was before I discovered bogleheads/MMM/Jcollins etc.

At one point PM's made up 30% of my AA. Since then I have been learning and purchasing stocks/bonds to even things out. I refuse to sell the PM's they can serve as a reminder and learning experience =)

k9

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Re: Commodities in asset allocation
« Reply #18 on: November 01, 2016, 05:26:36 PM »

Do you have a commodities allocation in your portfolio?  If so, why, how much, and how do you implement it?
Gold, about 20% of my AA, in bullions kept in a safe, because it both improves the risk/return ratio, and protects from potential extreme events (confiscation of assets or a plain massive fraud/failure is a much more possible event here in Europe than in some other places across Atlantic Ocean). But reason #1 is the main reason for my choice.

Vagabond76

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Re: Commodities in asset allocation
« Reply #19 on: November 02, 2016, 03:53:45 AM »
The ETF makes no sense to me.  What is the assurance that, GLD for example, actually hold the gold in a vault somewhere?  Plus, ETFs are by definition open ended funds, which is how a share price generally tracks with the NAV.  If lots of people swarm into the ETF, the issuer will issue new shares.  Does the issuer magically obtain more gold in the vault to reflect the new shares?  If people flee the ETF, the issuer will cancel shares.  Where does that gold go?
Read the prospectus from one of those funds. Usually only authorized participants (AP) can deal with the fund directly and the fund only deals with them in specific sized lots of shares (often 50k or 100k). To create new shares, the AP must deliver a basket of goods to the fund to offset the shares created (they also pay a fee to cover the fund's transaction costs). APs can also redeem shares (in creation lot sizes) and receive a basket of goods (again paying a fee to cover the fund's transaction costs). To pay for fund expenses, the fund sells some of the goods on the open market, so the basket of goods corresponding to each creation lot decreases slightly over time.

I read GLD's, and it requires less and less gold each time an AP creates a "basket" of 100,000 shares.

"The initial amount of gold required for deposit with the Trust to create Shares for the period from the formation of the Trust to the first day of trading of the Shares on the NYSE was 10,000 ounces per Basket. The number of ounces of gold required to create a Basket or to be delivered upon the redemption of a Basket gradually decreases over time, due to the accrual of the Trust’s expenses and the sale of the Trust’s gold to pay the Trust’s expenses"

This was probably not a big deal when the fund started 12 years ago or when the price of physical gold was rising, but what about now after over a decade of expenses and five years of declines?

mgarf

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Re: Commodities in asset allocation
« Reply #20 on: November 02, 2016, 09:56:37 AM »
Gold doesn't make a whole lot of sense to me. It's a shiny piece of metal... Why not buy silver, or platinum, or computer companies? I don't think it should outweigh any asset more than any other.

If you're looking at 30-year timespans (which most people should be doing), historically (via portfolio charts) gold only really gives a boost worst case scenario... and you loose out all other scenarios. Plus I don't think in the real world you would get this worst-case scenario benefit anyways. The higher MERs for gold ETFs would far outweigh this small benefit.

Gold

No Gold

Vagabond76

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Re: Commodities in asset allocation
« Reply #21 on: November 02, 2016, 10:38:08 AM »
Buffet isn't my favorite guy when it comes to tax policy, but his views on gold are hard (at least for me) to dispute.  This is from his 2011 annual letter to shareholders:

The second major category of investments involves assets that will never produce anything, but that are
purchased in the buyer’s hope that someone else – who also knows that the assets will be forever
unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of
such buyers in the 17th century.
This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they
believe the buying pool will expand still further. Owners are not inspired by what the asset itself can
produce – it will remain lifeless forever – but rather by the belief that others will desire it even more
avidly in the future.
The major asset in this category is gold, currently a huge favorite of investors who fear almost all other
assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however,
has two significant shortcomings, being neither of much use nor procreative. True, gold has some
industrial and decorative utility, but the demand for these purposes is both limited and incapable of
soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still
own one ounce at its end.
What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the
past decade that belief has proved correct. Beyond that, the rising price has on its own generated
additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.
As “bandwagon” investors join any party, they create their own truth – for a while.
Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses
that can be created by combining an initially sensible thesis with well-publicized rising prices. In these
bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market,
and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles
blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise
man does in the beginning, the fool does in the end.”
18
Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it
would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At
$1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400
million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most
profitable company, one earning more than $40 billion annually). After these purchases, we would
have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying
binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual
production of gold command about $160 billion. Buyers – whether jewelry and industrial users,
frightened individuals, or speculators – must continually absorb this additional supply to merely
maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn,
wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the
currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its
owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The
170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can
fondle the cube, but it will not respond.
Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m
confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at
a rate far inferior to that achieved by pile B."

Classical_Liberal

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Re: Commodities in asset allocation
« Reply #22 on: November 02, 2016, 02:45:05 PM »

If you're looking at 30-year timespans (which most people should be doing), historically (via portfolio charts) gold only really gives a boost worst case scenario... and you loose out all other scenarios. Plus I don't think in the real world you would get this worst-case scenario benefit anyways. The higher MERs for gold ETFs would far outweigh this small benefit.

Gold

No Gold

The worst case scenarios is the only time a 4%WR actually needs any help, all other cases you end with ridiculous amounts of wealth.  If gold trades a possible 4% failure senerio for a possible 4% "I died super-dooper rich", that's a trade Ill make any day.

Buffet isn't my favorite guy when it comes to tax policy, but his views on gold are hard (at least for me) to dispute.  This is from his 2011 annual letter to shareholders:


"Productivity" is subjective, IMHO.  Apple is only productive because a bunch of suckers waste personal & global resources to buy new Iphones every year.  When you buys shares of a "productive" company, you are only betting that they continue to make things people want in profitable fashion.  Buying gold is betting people will continue to want gold... People have wanted gold for much longer than they have wanted Iphones.

bryan

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Re: Commodities in asset allocation
« Reply #23 on: November 02, 2016, 04:07:40 PM »
Commodities are quite obviously (supposedly) priced into a given stock. More-so, if it is a very liquid stock. Ignorance of commodity markets is probably fine if you are just aware enough that you should be plowing all your invest-able capital into VT, or something on that order of complexity.

Of course commodities change in price which ripples up-and-down the markets. This is very well known. Some portfolios hold commodities because the portfolio originator found that it benefits the portfolios performance metrics (back-testing, simulations, all that) or there was a nice story to it. Not sure what people are confused about?

I guess there is a lot of nit-picking about gold (precious metals), every boglehead's, mustache-face's favorite whipping boy? There may be some truth to that since gold is hardly a commodity, it is actually more useful as money. But then again, if you squint, money is the primary commodity (or form of capital) for capitalism (weird!).

I had a response over at ERE that was speaking of gold aversion: http://forum.earlyretirementextreme.com/viewtopic.php?f=3&t=7798&p=118543#p118543

Personally I think Gold/Silver/Bitcoin type assets (money) are useful..

For a precious metal to be of any value, you need to find someone to trade it for currency or a good or service.  That stack of coins and bars is useless if the monetary system fails and no one will trade their sandwich or it.

Quite the contrary. In any case of systemic failure (or some migratory fleeing a troubled state) I can think of, gold has proven rather valuable, especially relative to the local stocks, real estate, fiat currency, debts, contracts. Granted, if you are talking about some prepper wet-dream, I would agree that one could have more practical investments like coffee/whiskey/sugar/spices/salt/soap/chickens/eggs/cooking fats/pistol ammo/etc..
« Last Edit: November 02, 2016, 04:18:36 PM by bryan »

k9

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Re: Commodities in asset allocation
« Reply #24 on: November 03, 2016, 05:13:44 AM »
Gold doesn't make a whole lot of sense to me. It's a shiny piece of metal... Why not buy silver, or platinum, or computer companies? I don't think it should outweigh any asset more than any other.

I think the main misconception about gold is to consider it only by itself. Sure, it's a shiny metal and won't ever produce anything by itself. "Buy-and-hold forever" does not really make sense with gold. But if you treat it like a business owner would, it starts making sense. Gold is something that, sometimes, most people dispise and are ready to sell at a (relatively) low price and that, at other times, most people would pay twice the price you originally paid. Your goal, as a business owner, is to sell 2 bucks what you bought for one, exactly what wal-mart does when selling diapers (they don't own diapers because they're a good investment, they own them because they know that, at some time, they'll make a profit). And the cool thing is that, more often than not, people want to buy gold at any price exactly at the very moment when stocks are on a bargain, ie at the very moment you would love to have a lot of fresh cash on hand. And you don't even have to think about it: just implement rebalancing rules, and you're done.

robartsd

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Re: Commodities in asset allocation
« Reply #25 on: November 03, 2016, 10:49:07 AM »
I read GLD's, and it requires less and less gold each time an AP creates a "basket" of 100,000 shares.

"The initial amount of gold required for deposit with the Trust to create Shares for the period from the formation of the Trust to the first day of trading of the Shares on the NYSE was 10,000 ounces per Basket. The number of ounces of gold required to create a Basket or to be delivered upon the redemption of a Basket gradually decreases over time, due to the accrual of the Trust’s expenses and the sale of the Trust’s gold to pay the Trust’s expenses"

This was probably not a big deal when the fund started 12 years ago or when the price of physical gold was rising, but what about now after over a decade of expenses and five years of declines?
It requires less gold to create a basket because the fund owns less gold per share. An AP must deliver whatever quantity of gold currently corresponds a basket of shares based on the funds current holdings. The reason this declines over time is that the fund's expenses are paid from the gold it holds. The issuing and redemption of shares can have no impact on the amount of gold each share represents.

Perhaps an example would help: Say a gold fund starts with a basket of 10,000 shares each holding one ounce of gold, then one ounce of gold is sold to pay for fund expenses. Now the fund holds 9,999 ounces of gold or 0.9999 ounces per share. An AP decides to create another basket of shares and delivers 9,999 ounces of gold to the fund. If the fund again sells an ounce of gold to pay expenses, it would hold 19,997 ounces of gold, so each of the 20,000 shares would own .99985 ounces of gold and 9,998.5 ounces would be required to create a basket.

Car Jack

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Re: Commodities in asset allocation
« Reply #26 on: November 03, 2016, 11:15:02 AM »
What could possibly go wrong?  I mean gold brings dividends....oh wait, it doesn't create dividends.  Well, look at the gains over the last 10 years......oh wait....it's worth less today than it was 10 years ago....  Well, it's shiny and I can pretend I'm Scrooge McDuck or maybe a pirate.  The most compelling reasons to hold gold is that you want to hide assets from FAFSA during your kids college days or you're a criminal and need to launder money.  Gold is great for these things.  Any pawn shop will have gold and silver coins.

Obviously, I have zero gold in my portfolio.

Tyler

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Re: Commodities in asset allocation
« Reply #27 on: November 03, 2016, 12:31:22 PM »
My latest article has a working example that demonstrates why I think gold is an effective component of a well-diversified portfolio (and you can run the same analysis for yourself to look at broader commodity funds as well).  Long story short -- it's particularly good at reducing portfolio drawdowns without necessarily sacrificing returns. 

Tyler

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Re: Commodities in asset allocation
« Reply #28 on: November 03, 2016, 02:10:18 PM »
Bretton Woods drastically changed the fundamental behavior of gold prior to 1971, so the time after that is really all we have to go on. 

With that in mind, one thing to note is that the data I linked to is completely start date independent.  Every point is the worst case for every individual portfolio, and that even accounts for start dates when gold lost 80% of its value and floundered for more than 30 years. Also keep in mind that some of the worst drawdowns for many all-stock portfolios were not just in the 70's but also in the 2000's, well past the initial gold peak.  Gold helped a lot in that timeframe as well.

IMHO, the inverse relationship between gold and US stocks is pretty well established but that's not to say it will stay that way forever.  That's why I also advocate including other assets like bonds and/or international stocks as well.  You diversify not because you expect every asset to continue to do well, but because you expect something to eventually break down and want to be prepared. Basically, gold or other commodities don't have to always be the perfect foil for stocks as long as you have enough diversification so that something else is there to help pick up the slack.  I like them not as a magic bullet, but as one piece to the puzzle. 

« Last Edit: November 03, 2016, 02:44:28 PM by Tyler »

Vagabond76

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Re: Commodities in asset allocation
« Reply #29 on: November 03, 2016, 02:32:01 PM »
Gold wasn't legal  to own in the US in large quantities until the 1970s. Only coins and jewelry was legal to own. Before the end of Breton Woods in 1971, gold could be exchanged for a fixed amount of dollars ($38).