Author Topic: Good article on AA for Gold  (Read 5911 times)

fiveoclockshadow

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Good article on AA for Gold
« on: July 27, 2013, 02:05:25 PM »
What is a sane asset allocation for gold in your portfolio?

http://www.nytimes.com/2013/07/28/business/budging-just-a-little-on-investing-in-gold.html

TL;DR around 2% or so, though zero is perfectly good as well

footenote

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Re: Good article on AA for Gold
« Reply #1 on: July 27, 2013, 02:53:14 PM »
I found the "what a solider gets paid" analysis fascinating. Thanks for posting this!

(And, on gold in my portfolio: ummmmm... no.)

AdrianM

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Re: Good article on AA for Gold
« Reply #2 on: July 28, 2013, 04:18:21 AM »
The author is a Keynesian, so why would he support sound money?

Honest Abe

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Re: Good article on AA for Gold
« Reply #3 on: July 28, 2013, 06:02:19 AM »
Two cents of advice for anyone considering building a position: Gold is a good hedge against inflation and physical gold is a good hedge against the unknown. However if you're going to build a gold position, dollar cost average into it, don't get freaked out by zerohedge.com and drop $25k in one shot. The popularity of ETFs has made the price of gold quite volatile and the current price may not reflect the true value.
« Last Edit: July 28, 2013, 06:04:45 AM by Honest Abe »

Sparafusile

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Re: Good article on AA for Gold
« Reply #4 on: July 28, 2013, 08:02:17 AM »
To expand on Honest Abe's advice, if you're going to buy gold (or silver or platinum) make sure you take physical possession. There are "funds" out there that let you speculate in precious metals without actually having to own any of the stuff. These can be grossly over leveraged and dangerous if a hiccup occurs in the market.

fiveoclockshadow

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Re: Good article on AA for Gold
« Reply #5 on: July 28, 2013, 09:59:31 AM »
TIPS are a much better hedge against inflation.

Diversification is a good hedge against the unknown. Gold has low correlation to many asset classes so it can play a role but currency diversification is low correlation as well and has lower costs.

Excellent advice to DCA into any volatile asset class - REITs another example where lump sum purchasing is scary.

Very good points on the differences between gold and the various stand-ins for gold. If you are the Armageddon type of gold investor it would of course be silly to expect an ETF to do you any good when you are trying to purchase rats and fire hardened spears at the local market.
« Last Edit: July 28, 2013, 10:01:46 AM by fiveoclockshadow »

Honest Abe

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Re: Good article on AA for Gold
« Reply #6 on: July 28, 2013, 10:29:26 AM »
it would of course be silly to expect an ETF to do you any good when you are trying to purchase rats and fire hardened spears at the local market.

made me lol

tomsang

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Re: Good article on AA for Gold
« Reply #7 on: July 28, 2013, 12:13:48 PM »

Gold has almost no correlation to inflation. From the research and post on is gold anti-mustachian, the hedge against inflation has not held up. Gold is more of a hedge if the world comes to an end.


http://www.mrmoneymustache.com/forum/investor-alley/is-gold-anti-mustachian/


The PP holds gold at all times, whether it's popular or not. It serves a specific purpose for those who want inflation protection in their portfolios.

Gold has almost no correlation to inflation.   

http://goldratefortoday.org/gold-inflation-relationship-correlation/
"First, the Wall Street Journal commissioned a study from the research firm Ibbotson Associates. According to their research, between 1978 and 2010 gold and the inflation rate have a correlation value of 0.08. This is nearly no correlation (on a scale ranging from -1 to 1, where 1 is perfect correlation, and -1 perfect negative correlation, and zero is the absence of a relationship).

Second, also Citibank comes in 2009 to the conclusion that “there is no obvious relationship between the gold price and inflation”.  Sometimes the development of gold follows inflation, at other times there is an inverse trend or just on obvious pattern at all.

Therefore, it can be concluded that there is no, or only a weak, relationship between the gold rate and inflation levels."

Honest Abe

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Re: Good article on AA for Gold
« Reply #8 on: July 28, 2013, 01:42:04 PM »

Gold has almost no correlation to inflation. From the research and post on is gold anti-mustachian, the hedge against inflation has not held up. Gold is more of a hedge if the world comes to an end.


Well I agree that when you compare gold to the USD it's very difficult to find a consistent correlation. However, the USD is a floating currency with it's own volatility and variables at play that are external to it's relationship to gold. However when using gold to (theoretically speaking because it would be illegal) purchase goods and services you find a much more consistent relationship.

Either way, it does keep up for the most part and doesn't depreciate or require maintenance like other real assets. The downside being that it's a non-productive asset and the premiums for physical can be a bit high.

tomsang

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Re: Good article on AA for Gold
« Reply #9 on: July 28, 2013, 02:21:47 PM »
Either way, it does keep up for the most part and doesn't depreciate or require maintenance like other real assets. The downside being that it's a non-productive asset and the premiums for physical can be a bit high.

I have a few ounces of gold and several hundred silver dollars in physical form. I find them to be a pain as they take up room, you worry about loss, and they just sit there. I collected coins 30 years ago and have been slowly selling off them. Sold 15 ounces of gold at $1,722 only to watch it go up over the next month. If I was going to have more than 1% of my networth in metals, then the cost to secure, insure and protect the asset would be cost prohibitive. At this point I am taking on risk by storing them at home vs. paying for secure storage and insuring for loss. With transaction costs on the buy and sell side, gold/silver in physical form is not a very efficient investment. Again, maybe it is good if the world comes to end but really food stores, farming skills, hunting skills, and gun and ammo are better investments for the black swan events.

I think you are discounting the cost of owning gold if you were adequately securing your investment. I think many just self insure and don't fully understand that they are taking on risk. If it is less than 1% of your Stache then the risk is reasonable. If you are doing a PP with 25%, then I think you are very exposed to have it in physical form without insurance.

YMMV

Honest Abe

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Re: Good article on AA for Gold
« Reply #10 on: July 28, 2013, 02:42:51 PM »
I always thought 25% was too much... my AA is closer to yours, Tom.

PolarBeer

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Re: Good article on AA for Gold
« Reply #11 on: July 29, 2013, 06:32:05 AM »
Not sure why you should bother to AA for such a low % and then have to keep track of one more asset to rebalance. Add to that fact that the usefulness of gold is disputed to put it mildly.

Nope. Not worth it for me, and I'd never recommend it to anyone either.

fiveoclockshadow

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Re: Good article on AA for Gold
« Reply #12 on: July 29, 2013, 07:07:29 AM »
Yes I have no interest in adding a 2% asset class to my portfolio personally. But I thought the analysis of the capital weighted allocation of gold in the world market being around 2% was interesting since there are people who weight their asset classes by total capital percentage. And there are people who slice and dice asset classes down to a few percent though I'm not one of them.

Kriegsspiel

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Re: Good article on AA for Gold
« Reply #13 on: July 29, 2013, 05:43:29 PM »
If people were really holding market cap, they'd hold what, 75-80% bonds, and 20-25% stocks though, right?

fiveoclockshadow

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Re: Good article on AA for Gold
« Reply #14 on: July 29, 2013, 07:10:30 PM »
If people were really holding market cap, they'd hold what, 75-80% bonds, and 20-25% stocks though, right?

And of those stocks nearly 50% would be international.  Yes, I've never quite understood the motivation for allocating based on market cap but there is a chunk of people who do so after neglecting the stock/bond balance.  Personally I've seen good reason to bias towards holding securities in ones own currency (assuming said currency is reasonably stable).  Within certain funds/indexes following market cap makes sense to reduce transaction and tax costs but I'm not exactly sure why some people assume their asset allocations on the larger scale should match market cap.

Kriegsspiel

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Re: Good article on AA for Gold
« Reply #15 on: July 29, 2013, 07:14:48 PM »
I was trying to say the same thing then; holding certain %s in an asset based solely on the worldwide market cap is nonsense.

fiveoclockshadow

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Re: Good article on AA for Gold
« Reply #16 on: July 30, 2013, 04:27:22 AM »
Yep!  I was agreeing with your observation that it doesn't seem to make much sense (at least to me).  I've also failed to understand the sometimes made claim that if you believe in the EMH you should allocate based on market cap - I don't see the relationship at all as there is no reason to assume the average of the entire market risk premium should be your desired risk premium. I think your observation on bond allocation is a succinct way of saying that.

Mr Mark

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Re: Good article on AA for Gold
« Reply #17 on: July 30, 2013, 08:56:24 PM »
2% of 'stash seems ok with me, if you're a gambler on gold.

My percentage is <0.1%

sherr

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Re: Good article on AA for Gold
« Reply #18 on: August 02, 2013, 08:10:12 AM »
However when using gold to (theoretically speaking because it would be illegal) purchase goods and services you find a much more consistent relationship.

What? No it's not. It's perfectly legal to barter using gold or any other value store. Just because law required that debtors are required to accept legal tender as repayment does not mean they are required to take *only* legal tender as repayment. Furthermore that law only extends to paying debts, not to purchasing goods / services, which is why toll booths can choose to not accept change and whatnot.