Author Topic: Precious Metals as an Investment?  (Read 13686 times)

hedgefund10

  • Stubble
  • **
  • Posts: 148
  • Age: 30
  • Location: Philadelphia, PA
Precious Metals as an Investment?
« on: March 27, 2016, 09:54:45 AM »
Does anyone buy precious metals as part of their investing strategy?  If so what is your preferred way to invest, physical, ETF, other?

I personally hold 1-2% of my net worth in physical precious metals.

brotatochip

  • 5 O'Clock Shadow
  • *
  • Posts: 99
Re: Precious Metals as an Investment?
« Reply #1 on: March 27, 2016, 10:12:30 AM »
I hold physical silver....you know, just in case shit hits the fan.

James

  • Handlebar Stache
  • *****
  • Posts: 1680
  • Age: 46
  • Location: Rice Lake, WI
Re: Precious Metals as an Investment?
« Reply #2 on: March 27, 2016, 10:20:29 AM »
Buying precious metals is no different than buying any other commodity, the only way it is an investment is if you buy low and sell high. Is that what you do with it? If so do you have a determined sell point? At what point would you sell your physical metal, and what would you use it to purchase? Without that determination I just can't see it being considered an investment, and instead it becomes some sort of security blanket weighing down your overall returns. At 1-2% it's not a huge deal, but one that I can't see justifying as part of an "investing strategy".

I'm not saying security blankets aren't fair to have, and they come in many forms, I just find it best to see things for what they are rather than calling things by names that make us feel better.

dandypandys

  • Bristles
  • ***
  • Posts: 428
  • Age: 43
  • Location: USA
Re: Precious Metals as an Investment?
« Reply #3 on: March 27, 2016, 10:25:11 AM »
I have just been asking about this recently. I have 38k gold and silver, I am looking to sell it actually, I am not enjoying all the zig zagging at all~ I have owned half of it since 2008 stopped buying just before it started reaching its high in 2011. Have held since hoping for a chance to sell.
Bogle says no to commodities in his recent interview.  http://www.bloomberg.com/news/audio/2016-03-11/interview-with-jack-bogle-masters-in-business-audio
I may keep a small percentage of it just in case, as that is why i bought it back in 2008- I was persuaded by an ex, who went on and on and onnnnn about the end coming.

geekette

  • Handlebar Stache
  • *****
  • Posts: 1850
Re: Precious Metals as an Investment?
« Reply #4 on: March 27, 2016, 10:32:38 AM »
I have a shit ton of family silver hiding in the house waiting to be stolen.  Worth less than melt weight as far as I've been able to tell.  Wanna buy it?

Funny thing is, it was so well hidden in my FIL's house, no one could find it until they cleared out everything for the auction after he died.

bobechs

  • Handlebar Stache
  • *****
  • Posts: 1068
Re: Precious Metals as an Investment?
« Reply #5 on: March 27, 2016, 10:36:20 AM »
I hold physical silver....you know, just in case shit hits the fan.


I hold physical shit, about 1-2% of my gross weight --inside, not in my hands--

Kind of anally retentive I know, but I call it my silver lining.

hedgefund10

  • Stubble
  • **
  • Posts: 148
  • Age: 30
  • Location: Philadelphia, PA
Re: Precious Metals as an Investment?
« Reply #6 on: March 27, 2016, 10:54:22 AM »
Buying precious metals is no different than buying any other commodity, the only way it is an investment is if you buy low and sell high. Is that what you do with it? If so do you have a determined sell point? At what point would you sell your physical metal, and what would you use it to purchase? Without that determination I just can't see it being considered an investment, and instead it becomes some sort of security blanket weighing down your overall returns. At 1-2% it's not a huge deal, but one that I can't see justifying as part of an "investing strategy".

I'm not saying security blankets aren't fair to have, and they come in many forms, I just find it best to see things for what they are rather than calling things by names that make us feel better.

I'm not sure why a security blanket can't also be an investment.

James

  • Handlebar Stache
  • *****
  • Posts: 1680
  • Age: 46
  • Location: Rice Lake, WI
Re: Precious Metals as an Investment?
« Reply #7 on: March 27, 2016, 12:10:01 PM »
Buying precious metals is no different than buying any other commodity, the only way it is an investment is if you buy low and sell high. Is that what you do with it? If so do you have a determined sell point? At what point would you sell your physical metal, and what would you use it to purchase? Without that determination I just can't see it being considered an investment, and instead it becomes some sort of security blanket weighing down your overall returns. At 1-2% it's not a huge deal, but one that I can't see justifying as part of an "investing strategy".

I'm not saying security blankets aren't fair to have, and they come in many forms, I just find it best to see things for what they are rather than calling things by names that make us feel better.

I'm not sure why a security blanket can't also be an investment.

Please read what I said. I didn't say a security blanket can't be an investment.

Buying a commodity as part of an investment strategy relies on a future plan to sell the commodity in order to make a profit. It is very similar to home ownership. Owning a home can be an investment, but the ownership itself does not constitute "investment". What makes it an investment vs simply owning an asset is the planning/intent of the purchase.

So if buying silver as an investment please specify how you plan for it to turn a profit. Then I will consider it an investment, regardless to whether I believe it is wise or not. But simply having 1-2% of your net worth in a commodity does not make that an "investment".

Finally, I am not making judgement based on whether it is an investment or not. My own house is not an investment, I likely would make more money in my area renting rather than owning and investing the money instead of owning the asset of a house. But I choose to own a house based on other reasons. My house is not an investment, but it was the right decision for us. Owning silver can be what you choose to do regardless of the investment question. I only wish to clarify the intent of ownership.
« Last Edit: March 27, 2016, 12:14:26 PM by James »

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5490
  • Location: Fayetteville, NC
Re: Precious Metals as an Investment?
« Reply #8 on: March 27, 2016, 12:15:46 PM »
What price per ounce did you buy it at, and what price are you intending to sell it at?   Or are you planning to hold and only sell when needed, in the hope that prices will outstrip inflation and the stock market?

Remember, if we hit mad max times, gold and silver will be valueless.  Food, guns, ammo, medicine, defensible shelter will be valuable.  So will skills that enable you to make things that the people in power value - assuming you live long enough to find someone who cares about your skills.

hedgefund10

  • Stubble
  • **
  • Posts: 148
  • Age: 30
  • Location: Philadelphia, PA
Re: Precious Metals as an Investment?
« Reply #9 on: March 27, 2016, 01:02:28 PM »
Buying precious metals is no different than buying any other commodity, the only way it is an investment is if you buy low and sell high. Is that what you do with it? If so do you have a determined sell point? At what point would you sell your physical metal, and what would you use it to purchase? Without that determination I just can't see it being considered an investment, and instead it becomes some sort of security blanket weighing down your overall returns. At 1-2% it's not a huge deal, but one that I can't see justifying as part of an "investing strategy".

I'm not saying security blankets aren't fair to have, and they come in many forms, I just find it best to see things for what they are rather than calling things by names that make us feel better.

I'm not sure why a security blanket can't also be an investment.

Please read what I said. I didn't say a security blanket can't be an investment.

Buying a commodity as part of an investment strategy relies on a future plan to sell the commodity in order to make a profit. It is very similar to home ownership. Owning a home can be an investment, but the ownership itself does not constitute "investment". What makes it an investment vs simply owning an asset is the planning/intent of the purchase.

So if buying silver as an investment please specify how you plan for it to turn a profit. Then I will consider it an investment, regardless to whether I believe it is wise or not. But simply having 1-2% of your net worth in a commodity does not make that an "investment".

Finally, I am not making judgement based on whether it is an investment or not. My own house is not an investment, I likely would make more money in my area renting rather than owning and investing the money instead of owning the asset of a house. But I choose to own a house based on other reasons. My house is not an investment, but it was the right decision for us. Owning silver can be what you choose to do regardless of the investment question. I only wish to clarify the intent of ownership.

Everything I own is "available for sale". Everything has its price.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1861
  • Location: Seattle, WA
Re: Precious Metals as an Investment?
« Reply #10 on: March 27, 2016, 01:12:20 PM »
Precious metals are terrible investments.   They might be okay as a trade, however.

hedgefund10

  • Stubble
  • **
  • Posts: 148
  • Age: 30
  • Location: Philadelphia, PA
Re: Precious Metals as an Investment?
« Reply #11 on: March 27, 2016, 01:13:40 PM »
What price per ounce did you buy it at, and what price are you intending to sell it at?   Or are you planning to hold and only sell when needed, in the hope that prices will outstrip inflation and the stock market?

Remember, if we hit mad max times, gold and silver will be valueless.  Food, guns, ammo, medicine, defensible shelter will be valuable.  So will skills that enable you to make things that the people in power value - assuming you live long enough to find someone who cares about your skills.

I agree about mad max times. Guns and Ammo and Food. However, I'm more concerned about negative interest rates and a cash ban.

bobechs

  • Handlebar Stache
  • *****
  • Posts: 1068
Re: Precious Metals as an Investment?
« Reply #12 on: March 27, 2016, 02:40:33 PM »
Remember, if we hit mad max times, gold and silver will be valueless.  Food, guns, ammo, medicine, defensible shelter will be valuable.  So will skills that enable you to make things that the people in power value - assuming you live long enough to find someone who cares about your skills.

I agree about mad max times. Guns and Ammo and Food. However, I'm more concerned about negative interest rates and a cash ban.
[/quote]

Well, this thread certainly veered cray-cray with no untoward delay.

Not to say that is at all surprising, given the topic.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #13 on: March 27, 2016, 03:09:18 PM »
I personally own quite a bit of IAU as part of my Permanent Portfolio.  I like gold for how it's one of the few assets negatively correlated to the stock market.  As one piece of a regularly rebalanced diversified portfolio, owning a bit of gold can greatly smooth out the ride while still providing nice returns. 

hedgefund10

  • Stubble
  • **
  • Posts: 148
  • Age: 30
  • Location: Philadelphia, PA
Re: Precious Metals as an Investment?
« Reply #14 on: March 27, 2016, 03:48:09 PM »
I have just been asking about this recently. I have 38k gold and silver, I am looking to sell it actually, I am not enjoying all the zig zagging at all~ I have owned half of it since 2008 stopped buying just before it started reaching its high in 2011. Have held since hoping for a chance to sell.
Bogle says no to commodities in his recent interview.  http://www.bloomberg.com/news/audio/2016-03-11/interview-with-jack-bogle-masters-in-business-audio
I may keep a small percentage of it just in case, as that is why i bought it back in 2008- I was persuaded by an ex, who went on and on and onnnnn about the end coming.

Damn, 38K. My exes struggled to get a dime out of me. Perhaps that is why they are exes hahahaha.

wienerdog

  • Bristles
  • ***
  • Posts: 462
Re: Precious Metals as an Investment?
« Reply #15 on: March 27, 2016, 05:50:06 PM »
I personally own quite a bit of IAU as part of my Permanent Portfolio. 

Do you keep IAU in a tax advantaged account?  Is it taxed at a precious metal rate?

AlmstRtrd

  • Stubble
  • **
  • Posts: 183
Re: Precious Metals as an Investment?
« Reply #16 on: March 27, 2016, 05:55:59 PM »
I personally own quite a bit of IAU as part of my Permanent Portfolio.  I like gold for how it's one of the few assets negatively correlated to the stock market.  As one piece of a regularly rebalanced diversified portfolio, owning a bit of gold can greatly smooth out the ride while still providing nice returns.

Ditto for me. IAU and physical gold as part of a balanced Permanent Portfolio. I know gold isn't very popular on here and I think part of that is because gold investors oftentimes have a religious fervor about holding it OR they are end-of-the-world types. If used as a tool (like stocks, bonds and cash) it can really moderate portfolio returns. The overall portfolio lows are higher and the highs are lower with a big slice of gold. So when the stock market is rocking as it was from 1982 to 1999, you can feel like an idiot for holding gold. The swings up and down can take a long time... but there are boatloads of folks on here who are planning to live off of their investments for decades. Just as stocks are likely to see a few good runs over a long time span, I believe gold will as well.

The other thing is that if you are going to invest in gold as part of your core portfolio, it doesn't make sense to only hold 1-2%. You want enough of it so that it can pick up and carry your portfolio when it is hot. If it's just a little side speculation, then that is different.


Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #17 on: March 27, 2016, 06:05:22 PM »
Do you keep IAU in a tax advantaged account?  Is it taxed at a precious metal rate?

I have it in both taxable and tax-advantaged.  It's taxed like a collectible -- gains are taxed as ordinary income with a maximum cap of 28%.  I've held it for years without selling, which means there's no taxes.  At my current income levels I'll probably pay about 15% when I ever sell, assuming I don't mitigate that with tax loss harvesting.  The taxes aren't so bad if you're smart about it. 

wienerdog

  • Bristles
  • ***
  • Posts: 462
Re: Precious Metals as an Investment?
« Reply #18 on: March 27, 2016, 06:14:28 PM »
It's taxed like a collectible -- gains are taxed as ordinary income with a maximum cap of 28%. 

Thanks for the clarification.  For some reason I thought it had a special category (I guess it is called collectible) and was always 28%. 

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #19 on: March 27, 2016, 06:23:18 PM »
It's taxed like a collectible -- gains are taxed as ordinary income with a maximum cap of 28%. 

Thanks for the clarification.  For some reason I thought it had a special category (I guess it is called collectible) and was always 28%.

Yeah, that's a common misconception.  It does have special collectibles treatment, but it's not as bad as you think.  People often quote the 28% like it's a set rate rather than the cap.

http://www.journalofaccountancy.com/issues/2015/jan/investing-in-gold-tax-considerations.html
« Last Edit: March 27, 2016, 07:26:14 PM by Tyler »

mrpercentage

  • Handlebar Stache
  • *****
  • Posts: 1236
  • Location: PHX, AZ
Re: Precious Metals as an Investment?
« Reply #20 on: March 27, 2016, 06:32:39 PM »
No but I think its smart. I wouldn't mind holding the GLD but it hasn't been screaming at me to buy.

I had a good amount of physical silver and even some 18 and 24 karat gold. I sold it all in 2009 when I was jobless. I kept one coin from 1888. Everything else was sold at a fraction because the sharks know when you need the money. I even sold a full carat diamond that was purchased in 93 by a step dad for $5000 and later given to me by my mom after the divorce. I got $1500 for it. I went to more than one place. I got a lot of "the cut isn't as popular anymore" or "well we need a profit margin and have to set it and wait for a purchaser". It was a VS1 G full carat. I did a lot of research. The point is you can get screwed in transactions and barter in physical. The stock market is strait forward.
I think I get more typos with memories like these. Sorry

I would pick GLD. I do miss my 18 carat puzzle ring from Bahrain. I think it was 3/4 oz troy-- I might not ever get another one again. I think I got $800 for it. Oh well.
« Last Edit: March 27, 2016, 07:52:38 PM by mrpercentage »

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: Precious Metals as an Investment?
« Reply #21 on: March 27, 2016, 07:38:03 PM »
Looking back throughout history commodities have volatility similar to stocks... a LOT, and they have returns similar to inflation.

The returns similar to inflation shouldn't be a surprise. Why would commodities grow faster than inflation over long periods of time?

The volatility similar to stocks also shouldn't be a surprise. Oil prices and Exxon stock are going to move in similar fashions. There is some correlation there. However, oil doesn't pay a dividend. Exxon does.

So I don't see the point in investing in commodities. The risk return trade off isn't there. I also don't see a huge benefit to adding commodities as a hedge to an already diversified portfolio. You get exposure to most commodities through ownership in stocks, but those stocks also pay dividends.

Some back testing will show that gold/silver can be a good inflation or stock hedge, but most of that back testing only goes back to the late 70s. We have older data on gold and I haven't seen anything to suggest it was a good hedge against anything prior to that.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #22 on: March 27, 2016, 07:51:38 PM »
Some back testing will show that gold/silver can be a good inflation or stock hedge, but most of that back testing only goes back to the late 70s. We have older data on gold and I haven't seen anything to suggest it was a good hedge against anything prior to that.

Prior to 1971, gold was a fixed $35 per ounce per the Bretton Woods agreement, as all dollars were legislatively backed by a fixed amount of gold.  You're right -- gold was not much of a diversifier back then because it was functionally equivalent to cash and could legally not change value.  But in the fiat currency era that followed the repeal of Bretton Woods, it's a completely different story. 

mrpercentage

  • Handlebar Stache
  • *****
  • Posts: 1236
  • Location: PHX, AZ
Re: Precious Metals as an Investment?
« Reply #23 on: March 27, 2016, 07:54:03 PM »
Some back testing will show that gold/silver can be a good inflation or stock hedge, but most of that back testing only goes back to the late 70s. We have older data on gold and I haven't seen anything to suggest it was a good hedge against anything prior to that.

Prior to 1971, gold was a fixed $35 per ounce per the Bretton Woods agreement, as all dollars were legislatively backed by a fixed amount of gold.  You're right -- gold was not much of a diversifier back then because it was functionally equivalent to cash and could legally not change value.  But in the fiat currency era that followed the repeal of Bretton Woods, it's a completely different story.
+1
I was going to say the gold standard

brotatochip

  • 5 O'Clock Shadow
  • *
  • Posts: 99
Re: Precious Metals as an Investment?
« Reply #24 on: March 28, 2016, 03:47:19 AM »
I hold physical silver....you know, just in case shit hits the fan.


I hold physical shit, about 1-2% of my gross weight --inside, not in my hands--

Kind of anally retentive I know, but I call it my silver lining.

How insightful!  Your comments really don't contribute anything to this thread.

georgicus

  • 5 O'Clock Shadow
  • *
  • Posts: 22
  • Location: Portland, OR
Re: Precious Metals as an Investment?
« Reply #25 on: March 28, 2016, 04:16:48 AM »
I, for one, thought it was witty!

Nonetheless ... Every so often I get to looking for some commodity ETF or fund for diversification.  What holds me back is that is every time I look deeply, the fund/ETF has some funky attribute, like high management fee, tracking error, or a really opaque strategy.

I ran across IAU for the first time last week.  IAU seems ideal because it's negatively correlated with both stocks and bonds.  But holding gold itself and calling it an investment is something that I find hard to wrap my head around.  (OTOH, at least it is easy to understand mechanically.)

Any recommendations for other commodity ETFs?

AlmstRtrd

  • Stubble
  • **
  • Posts: 183
Re: Precious Metals as an Investment?
« Reply #26 on: March 28, 2016, 06:28:12 AM »
Just wanted to add that yes, gold is a commodity, but it shouldn't be lumped in with oil, pork bellies or even silver (which is now generally considered to be more of an industrial metal, as opposed to a precious metal).

Yes, it would be nice to have data that goes back further than 1972, 1975, or whatever someone wants to consider as a fair start date, but at this point we have to work with the data that we have. In addition to financial systems suffering from inflation, they also tend to collapse with rather alarming frequency. One might prefer the term "macro shock" rather than "collapse" because something always emerges to take the place of the old system. For example, I know we are not Iceland, but I think their financial crisis of 2008-2011 is instructive. A portfolio that held gold still got whacked relative to the USD but it at least held it's overall value in terms of the Icelandic Kronur. That's just one example. A Brazilian or Argentinian investor would be well served to be holding some gold right now.

Gold is definitely a defensive investment in that one wouldn't expect it to do great when the economy is humming along. But economies go through cycles and diversifiers really help at certain times in those cycles. My take is that gold is a worthwhile diversifier to hold. Others won't agree and that's obviously fine.

One last point is that an investor's age does matter when talking about this stuff. I'm 57 and not particularly mustachian so riding out a 20-year stock market lull would be tough for me. Having a portfolio that doesn't potentially have a bad sequence of returns risk is important to me. If I were retired at 30 and able to live very frugally like a lot of folks on here, I might feel differently.

Sorry this post got so long! I'll crawl back into my cave now.

bobechs

  • Handlebar Stache
  • *****
  • Posts: 1068
Re: Precious Metals as an Investment?
« Reply #27 on: March 28, 2016, 07:56:32 AM »
I hold physical silver....you know, just in case shit hits the fan.


I hold physical shit, about 1-2% of my gross weight --inside, not in my hands--

Kind of anally retentive I know, but I call it my silver lining.

How insightful!  Your comments really don't contribute anything to this thread.

Just wait until I feed it into the fan...

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1760
Re: Precious Metals as an Investment?
« Reply #28 on: March 28, 2016, 12:29:11 PM »
I've considered adding gold to my portfolio after looking at back tested returns.  Most of gold's return comes from a few years in the early 1970s.  If you start at 1975- in your testing, you get very different results than if you include the few years before that. 

Gold reacts differently than stocks or bonds to some kinds of crisis.  If you are retired and pulling money out of your portfolio, you can sell gold during a crisis.  Gold helps for that case if it prevents you from selling stocks and bonds at a market bottom, and can be used to rebalance.  But gold is a drag on your portfolio for most situations. 

Note if you hold physical gold, you've made it much more difficult to sell.  Selling "IAU" takes a few clicks on your broker's website.  It's easy to rebalance, or pull money out of IAU when you need it.  Compare that to physical gold, where you have to transact with a business that either takes a noticeable cut or makes you wait for a check in the mail.  I wouldn't consider physical gold to be as much a part of your portfolio as a gold ETF, since there's so many steps involved in getting your money out.

effigy98

  • Bristles
  • ***
  • Posts: 354
Re: Precious Metals as an Investment?
« Reply #29 on: March 28, 2016, 02:55:47 PM »
I like the permanent portfolio with a tilt towards dividend stocks/REIT. A mix of IAU for easy re-balance and physical. Backtesting shows it keeps up with most other portfolios, however the strongest draw for me is I go into panic mode during crashes and do irrational things with my stock position, the permanent portfolio does not have these wild swings (gold is a part of that) and I can keep getting similar returns probably than total stock market. Even if it's a percent or two lower, it would still be worth it as I have shot myself in the foot both in the dotcom crash and the mortgage crash. What really sold me is Tyler's website showing how it performs better during draw down vs total stock market. When the tech market layoffs happen and I go into early retirement (not by choice) the economy is probably crashing at the same time I will have reduced volatility so I do not have the urge to jump out a window.

Gold is controversial though, people look at you weird if they ask what you invest in and you say "gold". It gets a bad rap from doomsday people.

Also, I have never had trouble selling physical gold, there are many businesses that will buy it like local coin shops, jewelry makers, online metal dealers, etc.

AlmstRtrd

  • Stubble
  • **
  • Posts: 183
Re: Precious Metals as an Investment?
« Reply #30 on: March 28, 2016, 04:14:29 PM »
I've considered adding gold to my portfolio after looking at back tested returns.  Most of gold's return comes from a few years in the early 1970s.  If you start at 1975- in your testing, you get very different results than if you include the few years before that. 

The 2000s were awfully good for gold as well. If you take the 1/1/2000 to 3/28/16 time period and compare a 60/40 (S&P/10-year treasuries) to a 50/30/20 (S&P/10-year treasuries/gold), the 2nd portfolio returns about an extra percentage point each year. This assumes annual rebalances. That time period obviously had two bad stock bears and one gold bear. Both stocks and gold also enjoyed a long period of strong gains during that time.

If you are comparing yourself to a slew of stock-heavy investors, a year like 2013 is going to be a tough time to be holding gold. Over long periods gold does smooth out returns though. But I get that some people just have no interest in holding it. IMHO it's only worth holding if one makes it a decent slice of a portfolio AND if it doesn't drive you nuts during a long period of underperformance.

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: Precious Metals as an Investment?
« Reply #31 on: March 28, 2016, 05:11:59 PM »
Some back testing will show that gold/silver can be a good inflation or stock hedge, but most of that back testing only goes back to the late 70s. We have older data on gold and I haven't seen anything to suggest it was a good hedge against anything prior to that.

Prior to 1971, gold was a fixed $35 per ounce per the Bretton Woods agreement, as all dollars were legislatively backed by a fixed amount of gold.  You're right -- gold was not much of a diversifier back then because it was functionally equivalent to cash and could legally not change value.  But in the fiat currency era that followed the repeal of Bretton Woods, it's a completely different story.

Does that change anything?  Look at the big picture. Think of currencies backed by gold like derivatives on gold because that is essentially how gold backed currencies functioned for hundreds of years. If currencies are priced according to gold then you can still find the value of gold at any given time. What can your currency buy at any given time?

We actually have more historical data on gold values than about any other asset class thanks to the fact that british pounds were backed by gold and they tracked the values along with inflation going back hundreds of years.

There were horrible periods of inflation and deflation when we were on the gold standard. There were individual years with 20%+ inflation or deflation. If you measure the entire recorded history of gold values going back to the 1600s gold has underperformed inflation over that time frame since gold backed currencies lost purchasing power, and measuring annual changes in inflation/deflation there was still a lot of volatility.

So no, I don't see a point to adding it to a portfolio. If you want an inflation hedge you are better off with stocks. If you want a hedge against stock market volatility you are better off using bonds. I don't think the fact that gold behaved differently in the late 70s and 2006-2011 means we should assume those brief years are the new norm. Actually, speaking of the late 70s, adjusted for inflation gold never recovered from its crash in 1980. Even without adjusting for inflation it was a 26 year bear market. How do we know the crash in 2013 isn't the start of another 25-30 year bear market?  It isn't like gold is actually supported by profits or dividends. It actually costs money to hold, and is only backed by its value in manufacturing and jewelry. Nope, not something I want to invest in.

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

markbike528CBX

  • Handlebar Stache
  • *****
  • Posts: 1095
  • Location: the Everbrown part of the Evergreen State (WA)
Re: Precious Metals as an Investment?
« Reply #32 on: March 28, 2016, 07:03:13 PM »
~ 2% physical gold/silver. 
 I'm using it instead of cash/CD as the long term emergency stash, because it has a chance of not being nibbled by inflation, where cash would certainly be hit by inflation.

I don't expect to use the long term emergency stash, instead drawing from current income for most needs,so it is exposed to long term inflation.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #33 on: March 28, 2016, 08:43:04 PM »
@Indexer:  Don't get me wrong -- I believe putting all of your money in gold is a terrible idea.  It's just that portfolio theory with multiple uncorrelated assets is a bit more complex and counter-intuitive than most people realize.  You have to look at the big picture and not just the returns of each individual asset, and gold can play an important role in certain portfolios.  Nobody should invest in something they're not comfortable with, but that doesn't mean other people can't find good reasons to invest in those same assets.  Speaking for myself, gold has been a valuable addition to my portfolio. 

Indexer

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: Precious Metals as an Investment?
« Reply #34 on: March 28, 2016, 08:56:31 PM »
Tyler, I'm 100% for a well diversified portfolio with uncorrelated assets!  The more diversification at the lowest cost the better!

I just don't think gold(or other commodities) does a better job at hedging than the traditional stocks and bonds. I know some people like it, but I think the financial industry and many financial advisors add commodities to make something look more complicated while not really adding any value.

Example:  Personal Capital has an efficient frontier chart. They recommended a portfolio to me that included alternative investments like REITs and commodities. However when I compared their proposed portfolio to my existing portfolio on their efficient frontier chart... my portfolio was actually sitting in a more efficient portfolio. My portfolio in question:  60% VTSAX, 40% VTIAX.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #35 on: March 28, 2016, 09:19:08 PM »
We share the same skepticism of recommendations by the financial industry.  ;)  Good for you for checking your own numbers.  Different people like different portfolios, and we all need to find what works for us. 

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: Precious Metals as an Investment?
« Reply #36 on: March 28, 2016, 09:56:49 PM »
Tyler, I'm 100% for a well diversified portfolio with uncorrelated assets!  The more diversification at the lowest cost the better!

I just don't think gold(or other commodities) does a better job at hedging than the traditional stocks and bonds. I know some people like it, but I think the financial industry and many financial advisors add commodities to make something look more complicated while not really adding any value.

Example:  Personal Capital has an efficient frontier chart. They recommended a portfolio to me that included alternative investments like REITs and commodities. However when I compared their proposed portfolio to my existing portfolio on their efficient frontier chart... my portfolio was actually sitting in a more efficient portfolio. My portfolio in question:  60% VTSAX, 40% VTIAX.

This is basically what I think however I think commodities or gold can play a role in creating that diversified portfolio. At the same time I have no intention to add any gold or commodities unless I get a lot of money or a big portfolio. I view these assets as a hedge and I'm not prepared at this point to pay the cost of that hedge.

If I get a relatively large portfolio I would be prepared to add say 10% of total assets to gold or I'd personally prefer a commodity index.

v8rx7guy

  • Handlebar Stache
  • *****
  • Posts: 1328
  • Location: Bellingham, WA
Re: Precious Metals as an Investment?
« Reply #37 on: March 28, 2016, 11:24:11 PM »
5% in physical gold coins.

MustacheAndaHalf

  • Handlebar Stache
  • *****
  • Posts: 1760
Re: Precious Metals as an Investment?
« Reply #38 on: March 29, 2016, 10:12:56 AM »
AlmstRtrd - When I plug 2000-2016 and 100% gold into Portfolio Visualizer, I get 7.49% CAGR.  Compared to stocks, that's an okay return - but with far higher volatility.  It really looks good because of the stock crashes during those years - crashes we couldn't spot in advance.  Looking to the future, we can't determine if those years will repeat.  Note in your example, gold took 16 years for $100 in gold to become $339 (tripling in ~15 yrs).

Compare that to the early years I hinted at: in 1973-1974 gold earned just over 70% / year (!).  So you could triple your money in 2 years instead of 15 years... which should make you wonder what happened during those years.  You could research and decide if those years can ever repeat, but I'd recommend most people simply avoid using 1973-1974 when they back test gold's performance.
« Last Edit: March 29, 2016, 10:14:45 AM by MustacheAndaHalf »

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1861
  • Location: Seattle, WA
Re: Precious Metals as an Investment?
« Reply #39 on: March 29, 2016, 02:17:05 PM »
So no, I don't see a point to adding it to a portfolio. If you want an inflation hedge you are better off with stocks. If you want a hedge against stock market volatility you are better off using bonds. I don't think the fact that gold behaved differently in the late 70s and 2006-2011 means we should assume those brief years are the new norm. Actually, speaking of the late 70s, adjusted for inflation gold never recovered from its crash in 1980. Even without adjusting for inflation it was a 26 year bear market. How do we know the crash in 2013 isn't the start of another 25-30 year bear market?  It isn't like gold is actually supported by profits or dividends. It actually costs money to hold, and is only backed by its value in manufacturing and jewelry. Nope, not something I want to invest in.

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

^ This.  The inflation adjust gains for gold over the last 500 years are very close to, if not actually,  zero.   Based on that result, I conclude you should expect zero gains from gold over any reasonable period of time. 

Gold kinda seems like tying an anchor to your port.   At least other stuff appreciates. 

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4838
  • Age: 34
  • Location: Seattle, WA
Re: Precious Metals as an Investment?
« Reply #40 on: March 29, 2016, 03:41:43 PM »
So no, I don't see a point to adding it to a portfolio. If you want an inflation hedge you are better off with stocks. If you want a hedge against stock market volatility you are better off using bonds. I don't think the fact that gold behaved differently in the late 70s and 2006-2011 means we should assume those brief years are the new norm. Actually, speaking of the late 70s, adjusted for inflation gold never recovered from its crash in 1980. Even without adjusting for inflation it was a 26 year bear market. How do we know the crash in 2013 isn't the start of another 25-30 year bear market?  It isn't like gold is actually supported by profits or dividends. It actually costs money to hold, and is only backed by its value in manufacturing and jewelry. Nope, not something I want to invest in.

http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

^ This.  The inflation adjust gains for gold over the last 500 years are very close to, if not actually,  zero.   Based on that result, I conclude you should expect zero gains from gold over any reasonable period of time. 

Gold kinda seems like tying an anchor to your port.   At least other stuff appreciates. 

I tend to agree with this. I invest in things because I have some reason to expect that they will increase in value over the desired time period. I expect stocks to increase in value because the economy tends to expand, and owning shares of most large businesses is a pretty surefire way to benefit from economic expansion over the long term. I expect bonds to increase in value because they pay real interest that is backed up by creditworthy institutions.

What's the scenario for gold increasing in value? The most commonly cited scenario is that the economy stops growing, everyone defaults on their loans, and shiny metal is now seen as more attractive than stocks or bonds. Okay...so betting on gold would be directly in opposition to my existing bets for stocks and bonds. Why would I want to do that? For diversification I want something that's uncorrelated with my other investments, not anticorrelated.

mrpercentage

  • Handlebar Stache
  • *****
  • Posts: 1236
  • Location: PHX, AZ
Re: Precious Metals as an Investment?
« Reply #41 on: March 29, 2016, 05:01:39 PM »
I just wanted to add:

I got the most out of gold. Pretty close the weight of gold.

I got ripped off on the diamond. Many do to my understanding. 25-30% of value

I got poor deal on the silver-- maybe 75% value.

I got ripped off on any special coin-- maybe 50% value.

I actually made money on my guns.

You really have to barter and I consider myself adept through plenty of Mexico trips and sales training from years ago.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1141
Re: Precious Metals as an Investment?
« Reply #42 on: March 29, 2016, 05:28:07 PM »
I tend to agree with this. I invest in things because I have some reason to expect that they will increase in value over the desired time period. I expect stocks to increase in value because the economy tends to expand, and owning shares of most large businesses is a pretty surefire way to benefit from economic expansion over the long term. I expect bonds to increase in value because they pay real interest that is backed up by creditworthy institutions.

What's the scenario for gold increasing in value? The most commonly cited scenario is that the economy stops growing, everyone defaults on their loans, and shiny metal is now seen as more attractive than stocks or bonds. Okay...so betting on gold would be directly in opposition to my existing bets for stocks and bonds. Why would I want to do that? For diversification I want something that's uncorrelated with my other investments, not anticorrelated.

I see this as a good example of fundamental differences between investing strategies.  I agree that investing in gold is a poor decision for a growth or value investing strategy, where you buy each asset with the expectation that it will generate a return on its own over time.  Gold works better in a strategy based in modern portfolio theory, where profits gained from rebalancing mid-term fluctuations between assets are just as important as long-term growth.  Both methods are perfectly fine and have proven histories to back them up.  Like farming vs. hunting for putting food on the table, they're just two different approaches to accomplish the same goal.   
« Last Edit: March 29, 2016, 05:36:11 PM by Tyler »

AlmstRtrd

  • Stubble
  • **
  • Posts: 183
Re: Precious Metals as an Investment?
« Reply #43 on: March 31, 2016, 05:04:47 PM »
I've considered adding gold to my portfolio after looking at back tested returns.  Most of gold's return comes from a few years in the early 1970s.  If you start at 1975- in your testing, you get very different results than if you include the few years before that. 

The 2000s were awfully good for gold as well. If you take the 1/1/2000 to 3/28/16 time period and compare a 60/40 (S&P/10-year treasuries) to a 50/30/20 (S&P/10-year treasuries/gold), the 2nd portfolio returns about an extra percentage point each year. This assumes annual rebalances. That time period obviously had two bad stock bears and one gold bear. Both stocks and gold also enjoyed a long period of strong gains during that time.

If you are comparing yourself to a slew of stock-heavy investors, a year like 2013 is going to be a tough time to be holding gold. Over long periods gold does smooth out returns though. But I get that some people just have no interest in holding it. IMHO it's only worth holding if one makes it a decent slice of a portfolio AND if it doesn't drive you nuts during a long period of underperformance.

AlmstRtrd - When I plug 2000-2016 and 100% gold into Portfolio Visualizer, I get 7.49% CAGR.  Compared to stocks, that's an okay return - but with far higher volatility.  It really looks good because of the stock crashes during those years - crashes we couldn't spot in advance.  Looking to the future, we can't determine if those years will repeat.  Note in your example, gold took 16 years for $100 in gold to become $339 (tripling in ~15 yrs).

Compare that to the early years I hinted at: in 1973-1974 gold earned just over 70% / year (!).  So you could triple your money in 2 years instead of 15 years... which should make you wonder what happened during those years.  You could research and decide if those years can ever repeat, but I'd recommend most people simply avoid using 1973-1974 when they back test gold's performance.

Just wanted to pull these two posts together and make sure we're talking about the same thing. I am taking my numbers from here:

http://www.peaktotrough.com/hbpp.cgi

So 100% in gold from 1/1/2000 to present would have a CAGR of 9.30%. But I was comparing a pretty typical 60/40 portfolio to one that had a 20% gold stake with both stocks and bonds then reduced by 10% each. Smoother ride with lower highs and higher lows which is definitely not for everyone.

I don't think our positions are even very far apart. I agree that 1973 and 1974 are unlikely to repeat themselves.

I think with real diversification - meaning holding a variety of assets that will do well in different economic environments - one is almost guaranteed to have at least one stinker at any given time. That's just a different mindset than a stocky heavy portfolio that basically only has a few bonds added in for ballast.

People may also prefer different asset allocations for different points in their lives. Most of my earnings potential is behind me (I think!). Sequence of returns becomes ever more important at this end of the tunnel.