Author Topic: Precious Metals  (Read 117342 times)

BicycleB

  • Magnum Stache
  • ******
  • Posts: 4167
  • Location: Colombia
  • Older than the internet, but not wiser... yet
Re: Precious Metals
« Reply #800 on: February 18, 2022, 12:51:56 PM »
People are stupid so they work way too long, but that doesn't mean paranoia is a good strategy.

Time can't be bought back, money is easy to make, you might as well bet on yourself. Investment results favor the optimistic, too.

-W

So is the problem with Tyler's projections that they are too pessimistic, or they suggest the wrong asset allocation?

If they're pessimistic but help me pick the right asset allocation, I can live with that. (I do live with that. I lazily skate along on what appears to be juuuust barely enough to not work.) If my asset allocation's wrong, I could be in trouble.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5299
Re: Precious Metals
« Reply #801 on: February 18, 2022, 01:19:03 PM »
So is the problem with Tyler's projections that they are too pessimistic, or they suggest the wrong asset allocation?

If they're pessimistic but help me pick the right asset allocation, I can live with that. (I do live with that. I lazily skate along on what appears to be juuuust barely enough to not work.) If my asset allocation's wrong, I could be in trouble.

He starts from the assumption that you'll be getting 15th percentile returns, according to the post. The end result of investing with this assumption and trying to limit drawdowns is going to be suppression of overall returns, which for most people is going to mean working much much longer.

By the same token, why not assume 15th percentile life expectancy? It boggles the mind that people are so concerned about their money surviving a 50 year retirement to age 100 that they'll work multiple extra years to get to 2.5% WR or whatever. There is almost no chance you'll get to enjoy that year you spent working, because there's almost no chance you live to 100.

If you're going to be pessimistic, at least be consistent about it.

As to whether the AA recommended is useful, I'd also be cautious there, given that limiting your dataset to 15th percentile return periods is going to shrink the available data to the point that you're overfitting a lot of the time and the portfolios that did well are just happy accidents. This is a legitimate critique even if you're not limiting yourself data-wise, there's just not that much data (maybe 150 years worth, if you're willing to use 19th century railroad boom/bust stock market info which probably isn't similar enough to modern day to be useful).

You can always create great portfolios in hindsight/backtesting. In fact you can create tons of them. That doesn't mean they'll do well going forward.

To me, to be worth considering, an AA must be:
-Extremely simple, with no more than 3 or 4 asset types held.
-Easy to implement even in uncomfortable situations/down markets - if you just cling tighter to your gold when stocks are down, rather than selling it to buy stocks, you're not doing yourself any favors. Goldbugs always think things will get worse.

-W

Radagast

  • Handlebar Stache
  • *****
  • Posts: 2169
  • One Does Not Simply Work Into Mordor
Re: Precious Metals
« Reply #802 on: March 03, 2022, 10:07:14 PM »
https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/

I'm not claiming that gold has high returns, but it can do amazing things when properly added to a portfolio.  Food for thought.

I stopped at "reports the 15th-percentile inflation-adjusted CAGR"... come on, that's crazy town.

-W
Yeah, I agree this is highly misleading. Portfolios with the worst 15th percentile returns should obviously correlate somewhat with those that have a high ulcer index. All of Tyler's metrics are pessimistic, and so plotting them against each other is pointless because they are measuring to a large extent the same thing. To be meaningful it would need to be plotted against mean or median 15 year returns.

I would argue that for the purposes of retirement planning, you absolutely need to be very conservative, so the 15th percentile is an idea level to pitch at. Why else does everyone here err on the side of caution of even the 4% rule when that is already a near worse case scenario?

Or to ask it another way, what is the minimum amount of insurance you want to be have should a worse case scenario unfold?
Answering late. Absolutely 15th percentile is too optimistic for planning. Most 4% rule people assume they are targeting 5th percentile worst, and I like to look at minimum safe withdrawal rate which is worst data point on record.

The problem is comparing 15th worst percentile to another pessimistic measure, such as the ulcer index. The ulcer index measures portfolios according to how long and deep drawdowns are, which obviously has a lot in common with other measures of poor outcomes. So they are not measuring independent variables. Plotting ulcer index against median return would be a lot more useful, for example. I think that a primary objective of the methodology is to make a chart with the Golden Butterfly portfolio on the top left and the Total Stock Market portfolio on the bottom right.

MinorMiner

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: Precious Metals
« Reply #803 on: March 04, 2022, 01:43:57 PM »
I personally won't invest in precious metals. I spent my youth working on extracting them. I've plowed over way too many forests to want to have any part in that. It really sucks seeing birds looking for their nests in the middle of winter after having buried them to open a new dump site. Please consider what ramifications your investments have on the future of the world.

clarkfan1979

  • Magnum Stache
  • ******
  • Posts: 2809
  • Age: 43
  • Location: Pueblo West, CO
Re: Precious Metals
« Reply #804 on: March 04, 2022, 01:57:12 PM »
People are stupid so they work way too long, but that doesn't mean paranoia is a good strategy.

Time can't be bought back, money is easy to make, you might as well bet on yourself. Investment results favor the optimistic, too.

-W

I agree with "Investment results favor the optimistic, too" However, one needs to be realistically optimistic. Although difficult to define, optimism and performance is curvilinear. Once a person becomes "too optimistic" their performance starts to decrease.

I'm an optimistic dude. I have leverage and mortgages on rentals. It's been working out.

My brother started buying Iraqi Dinar about 4 years ago telling me that it's going to 100x. Now he is buying silver at $25/ounce and telling me that it will trade for $600/ounce in a few months. He owns a 5th wheel trailer but doesn't have enough money to buy a truck to pull it. He mostly stays with family (waiting for his ship to come in) and is technically homeless.


JAYSLOL

  • Handlebar Stache
  • *****
  • Posts: 1682
Re: Precious Metals
« Reply #805 on: March 04, 2022, 03:00:57 PM »
People are stupid so they work way too long, but that doesn't mean paranoia is a good strategy.

Time can't be bought back, money is easy to make, you might as well bet on yourself. Investment results favor the optimistic, too.

-W

I agree with "Investment results favor the optimistic, too" However, one needs to be realistically optimistic. Although difficult to define, optimism and performance is curvilinear. Once a person becomes "too optimistic" their performance starts to decrease.

I'm an optimistic dude. I have leverage and mortgages on rentals. It's been working out.

My brother started buying Iraqi Dinar about 4 years ago telling me that it's going to 100x. Now he is buying silver at $25/ounce and telling me that it will trade for $600/ounce in a few months. He owns a 5th wheel trailer but doesn't have enough money to buy a truck to pull it. He mostly stays with family (waiting for his ship to come in) and is technically homeless.

I know this story, not the homeless part but a friend of mine operates the same way.  Only a matter of time before he gets into crypto if heís not already. 

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #806 on: March 04, 2022, 03:16:45 PM »
https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/

I'm not claiming that gold has high returns, but it can do amazing things when properly added to a portfolio.  Food for thought.

I stopped at "reports the 15th-percentile inflation-adjusted CAGR"... come on, that's crazy town.

-W
Yeah, I agree this is highly misleading. Portfolios with the worst 15th percentile returns should obviously correlate somewhat with those that have a high ulcer index. All of Tyler's metrics are pessimistic, and so plotting them against each other is pointless because they are measuring to a large extent the same thing. To be meaningful it would need to be plotted against mean or median 15 year returns.

I would argue that for the purposes of retirement planning, you absolutely need to be very conservative, so the 15th percentile is an idea level to pitch at. Why else does everyone here err on the side of caution of even the 4% rule when that is already a near worse case scenario?

Or to ask it another way, what is the minimum amount of insurance you want to be have should a worse case scenario unfold?
Answering late. Absolutely 15th percentile is too optimistic for planning. Most 4% rule people assume they are targeting 5th percentile worst, and I like to look at minimum safe withdrawal rate which is worst data point on record.

The problem is comparing 15th worst percentile to another pessimistic measure, such as the ulcer index. The ulcer index measures portfolios according to how long and deep drawdowns are, which obviously has a lot in common with other measures of poor outcomes. So they are not measuring independent variables. Plotting ulcer index against median return would be a lot more useful, for example. I think that a primary objective of the methodology is to make a chart with the Golden Butterfly portfolio on the top left and the Total Stock Market portfolio on the bottom right.

Sure, you can use whatever measure of risk you like. For the article Tyler for reasons decided 15th percentile was a reasonable metric.  There might even be an ungodly amount of wisdom in it given how elevated asset prices are currently and that future expected returns are probably down around that sort of level as a resut. 

But I'm sure that if you switch to consider the ulcer index, sharpe ratio, Sortino (my personal favourite), or even ex ante measurements like VaR, it wouldn't substantially change the message of the article - and indeed most of the whole portfoliocharts site - is getting at... which is that a well diversified portfolio becomes stronger than the sum of its individual components.  The combination of Gold, SCV and Bonds beautifully demonstrates this.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #807 on: March 05, 2022, 05:10:44 AM »
Radical Personal Finance is more miss than hit these days imo, but this is a superb episode about the history of gold in the US:
https://www.podchaser.com/podcasts/radical-personal-finance-7484/episodes/50-years-ago-it-was-illegal-fo-130164933

Why was gold confiscated? Simply to remove the ability of citizens to protect themselves from wealth confiscation via the inflation "tax", transferring wealth to the Federal state in order to pay for Goverment largesse.

clarkfan1979

  • Magnum Stache
  • ******
  • Posts: 2809
  • Age: 43
  • Location: Pueblo West, CO
Re: Precious Metals
« Reply #808 on: March 05, 2022, 05:57:28 AM »
People are stupid so they work way too long, but that doesn't mean paranoia is a good strategy.

Time can't be bought back, money is easy to make, you might as well bet on yourself. Investment results favor the optimistic, too.

-W

I agree with "Investment results favor the optimistic, too" However, one needs to be realistically optimistic. Although difficult to define, optimism and performance is curvilinear. Once a person becomes "too optimistic" their performance starts to decrease.

I'm an optimistic dude. I have leverage and mortgages on rentals. It's been working out.

My brother started buying Iraqi Dinar about 4 years ago telling me that it's going to 100x. Now he is buying silver at $25/ounce and telling me that it will trade for $600/ounce in a few months. He owns a 5th wheel trailer but doesn't have enough money to buy a truck to pull it. He mostly stays with family (waiting for his ship to come in) and is technically homeless.

I know this story, not the homeless part but a friend of mine operates the same way.  Only a matter of time before he gets into crypto if heís not already.

My brother is in the "crypto" market. However, it's a fringe market in which you can't actually exchange your crypto for US currency. You can only trade goods for the crypto with other members. This market caters to the conspiracy theorists who believe that the US dollar will implode overnight, so it's risky to hold US currency.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5299
Re: Precious Metals
« Reply #809 on: March 06, 2022, 08:02:06 AM »
Perhaps my statement was poorly worded. By "optimistic" I mean willing to invest even when the short term prospects look bad, ie "Walt in 20 years will be happy I put this money into stocks/bonds/RE, even if Walt in 2 years won't."

There are numerous "best investors are dead/forgot they had a 401k for 30 years and let dividends reinvest the whole time" articles out there.

When your investing mindset is entirely focused on avoiding losses (which your brain values at twice the weight of gains) you end up losing, in the long run.

I did not mean to say that people who wildly invest in crazy speculative stuff will do well overall.

-W

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 8659
  • Location: Fayetteville, NC
Re: Precious Metals
« Reply #810 on: March 06, 2022, 10:10:31 AM »
Radical Personal Finance is more miss than hit these days imo, but this is a superb episode about the history of gold in the US:
https://www.podchaser.com/podcasts/radical-personal-finance-7484/episodes/50-years-ago-it-was-illegal-fo-130164933

Why was gold confiscated? Simply to remove the ability of citizens to protect themselves from wealth confiscation via the inflation "tax", transferring wealth to the Federal state in order to pay for Goverment largesse.

I suggest you pick up a history book and learn about the Great Depression.   The nation was collapsing and quite a few things were tried in order to salvage democracy and capitalism out of the shambles of our financial system at the time.   Some worked, some didn't.  This particular experiment happened in 1933.   It was repealed in the mid 70s.

Good try on making up stuff to fit your world view, though.

DaTrill

  • Bristles
  • ***
  • Posts: 297
Re: Precious Metals
« Reply #811 on: March 06, 2022, 02:00:42 PM »
Silver is only down 80% over the past 40 years and up 20% since the end of WWI.  Commodities are subject to major bull/bear runs and one must be able to buy/sell at the right time to make any money.  If one has some experience and knowledge of supply chain issues with commodities, one can crush it, otherwise it's dead money.  The additional issue with commodities today is China can make it illegal to hold/hoard any commodity at any time and crush the price.  Russia can also dump any of their commodities (almost anything) just for spite and crush the financial markets if provoked.         

https://www.forex.in.rs/silver-price-history/#:~:text=Silver%20price%20history%20table%20from%201915%20till%202021,%20%205.2%20%20115%20more%20rows%20

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #812 on: March 07, 2022, 04:03:30 AM »
Radical Personal Finance is more miss than hit these days imo, but this is a superb episode about the history of gold in the US:
https://www.podchaser.com/podcasts/radical-personal-finance-7484/episodes/50-years-ago-it-was-illegal-fo-130164933

Why was gold confiscated? Simply to remove the ability of citizens to protect themselves from wealth confiscation via the inflation "tax", transferring wealth to the Federal state in order to pay for Goverment largesse.

I suggest you pick up a history book and learn about the Great Depression.   The nation was collapsing and quite a few things were tried in order to salvage democracy and capitalism out of the shambles of our financial system at the time.   Some worked, some didn't.  This particular experiment happened in 1933.   It was repealed in the mid 70s.

Good try on making up stuff to fit your world view, though.

And yet gold was confiscated at the price of $20/oz and then immediately repriced to $35/oz. That's wealth confiscation by any other description. Nice try, though.
« Last Edit: March 07, 2022, 05:08:43 AM by vand »

BicycleB

  • Magnum Stache
  • ******
  • Posts: 4167
  • Location: Colombia
  • Older than the internet, but not wiser... yet
Re: Precious Metals
« Reply #813 on: March 07, 2022, 12:15:13 PM »

And yet gold was confiscated at the price of $20/oz and then immediately repriced to $35/oz. That's wealth confiscation by any other description.

That does sound like a wealth confiscation by inflation - roughly 43% of inflation (15/35), before accounting for changes of the dollar price of goods. Fwiw, given the deflationary environment of the day, I suspect that the inflation boost from this move was probably a good thing at the time for the overall economy.

Whatever the amount, it does seem sort of tax-like, in that it was done by govt action. Though also not tax-like, in that it produced no revenue for the govt, but was instead an act designed to manage the currency in hopes of influencing the economy.
« Last Edit: March 07, 2022, 12:21:16 PM by BicycleB »

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #814 on: March 08, 2022, 08:24:56 AM »
Bosh.
And just like that, the yellow stuff is at or touching new highs depending on what currency you are measuring it.

JAYSLOL

  • Handlebar Stache
  • *****
  • Posts: 1682
Re: Precious Metals
« Reply #815 on: March 08, 2022, 08:27:45 AM »
Bosh.
And just like that, the yellow stuff is at or touching new highs depending on what currency you are measuring it.

Itís been flat forever if you measure the yellow stuff in gold.  :)

v8rx7guy

  • Magnum Stache
  • ******
  • Posts: 2653
  • Age: 37
  • Location: Bellingham, WA
Re: Precious Metals
« Reply #816 on: March 08, 2022, 08:31:22 AM »
I wonder at what price I would unload a few OZs... maybe $2,500 would be too much to ignore?

RWD

  • Walrus Stache
  • *******
  • Posts: 5427
  • Location: Mississippi
Re: Precious Metals
« Reply #817 on: March 08, 2022, 08:45:04 AM »
I wonder at what price I would unload a few OZs... maybe $2,500 would be too much to ignore?
I've been wondering that about my 1 oz of palladium too, haha.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #818 on: March 08, 2022, 08:46:04 AM »
I wonder at what price I would unload a few OZs... maybe $2,500 would be too much to ignore?

As with all buy and sell decisions, your asset allocation and rebalancing rules should be the primary driver

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4207
Re: Precious Metals
« Reply #819 on: March 08, 2022, 01:19:58 PM »
Bosh.
And just like that, the yellow stuff is at or touching new highs depending on what currency you are measuring it.

If the point of owning gold is to rebalance when gold gets high and stocks get low, and one currently does not own any gold, should they now:
     a) sell stocks low and buy gold high to get the right allocation, or
     b) hold stocks and short gold, because that's the opposite of what the market is doing?

v8rx7guy

  • Magnum Stache
  • ******
  • Posts: 2653
  • Age: 37
  • Location: Bellingham, WA
Re: Precious Metals
« Reply #820 on: March 08, 2022, 03:11:57 PM »
I wonder at what price I would unload a few OZs... maybe $2,500 would be too much to ignore?

As with all buy and sell decisions, your asset allocation and rebalancing rules should be the primary driver

Yeah. I don't really consider my gold to be part of my IPS, it was something I acquired long before I paid attention to finances/investments.  I feel like my DCA is around $1400/oz , so it would be fun to sell for a profit.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #821 on: March 09, 2022, 03:08:14 AM »
If people are wondering where is the investment opportunity here, then imo it's in the gold miners.. prices in the sector relative to the metal are much closer to all time lows than the all time highs.

https://s3.tradingview.com/snapshots/c/c0uHYXfV.png

It doesn't take much imagination to see gold going to $2500 over the next couple of years and the miners doubling in relation to the metal, which would still not make them expensive compared to their historical range.

In the past I've pointed out that you need to be very careful with gold miners - they are not a close proxy for gold. There are many points from where long term performance of the miners and gold have diverged - to the point where gold would have preserved or grown your wealth, while the miners would have seen you holding losses.

That said, these things are cyclical, and at times miners will play catch up and greatly outperform the metal. I think we may be starting one of those periods - I have a core holding in gold, but I'm increasing my allocation to the mining stocks accordingly.

Relative to gold, the miners are the same price they were in 2000 when gold was at the end of its 18 year bear market. I like the risk/reward of that play.

 
« Last Edit: March 09, 2022, 03:25:10 AM by vand »

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #822 on: March 09, 2022, 03:22:57 AM »
BTW, there was clearly a short squeeze on Palladium as it more than doubled off its mid December lows.. and everyone missed it...

JAYSLOL

  • Handlebar Stache
  • *****
  • Posts: 1682
Re: Precious Metals
« Reply #823 on: March 09, 2022, 07:45:38 AM »
Even if gold goes to $2500, I doubt that makes a group of mining companies a home run to buy.  I donít run a mining company, but a landscaping company, and I can tell you that itís going to be a rough year, fuel costs are up 30%, labour cost are up 20-25% (if we can find people at all), parts, supplies, vehicles and equipment are all up in cost and are taking a long time to be delivered.  I imagine that if we raised our prices for a $2000 job to $2500, that wouldnít even get us back to the margins we were making a year or two ago. 

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4207
Re: Precious Metals
« Reply #824 on: March 09, 2022, 03:07:51 PM »
If people are wondering where is the investment opportunity here, then imo it's in the gold miners.. prices in the sector relative to the metal are much closer to all time lows than the all time highs.

https://s3.tradingview.com/snapshots/c/c0uHYXfV.png

It doesn't take much imagination to see gold going to $2500 over the next couple of years and the miners doubling in relation to the metal, which would still not make them expensive compared to their historical range.

In the past I've pointed out that you need to be very careful with gold miners - they are not a close proxy for gold. There are many points from where long term performance of the miners and gold have diverged - to the point where gold would have preserved or grown your wealth, while the miners would have seen you holding losses.

That said, these things are cyclical, and at times miners will play catch up and greatly outperform the metal. I think we may be starting one of those periods - I have a core holding in gold, but I'm increasing my allocation to the mining stocks accordingly.

Relative to gold, the miners are the same price they were in 2000 when gold was at the end of its 18 year bear market. I like the risk/reward of that play.

 

Very interesting @vand . Are you looking at GDX or GOAU or stock picking?

I wonder, what's the thesis from here? Is Russia going to start trading gold for oil/gas or buying gold to bolster their reserve assets? Seems just as likely they have to spend their gold to keep the currency afloat and soldiers paid.
« Last Edit: March 09, 2022, 03:22:31 PM by ChpBstrd »

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #825 on: March 10, 2022, 01:10:32 AM »
If people are wondering where is the investment opportunity here, then imo it's in the gold miners.. prices in the sector relative to the metal are much closer to all time lows than the all time highs.

https://s3.tradingview.com/snapshots/c/c0uHYXfV.png

It doesn't take much imagination to see gold going to $2500 over the next couple of years and the miners doubling in relation to the metal, which would still not make them expensive compared to their historical range.

In the past I've pointed out that you need to be very careful with gold miners - they are not a close proxy for gold. There are many points from where long term performance of the miners and gold have diverged - to the point where gold would have preserved or grown your wealth, while the miners would have seen you holding losses.

That said, these things are cyclical, and at times miners will play catch up and greatly outperform the metal. I think we may be starting one of those periods - I have a core holding in gold, but I'm increasing my allocation to the mining stocks accordingly.

Relative to gold, the miners are the same price they were in 2000 when gold was at the end of its 18 year bear market. I like the risk/reward of that play.

 

Very interesting @vand . Are you looking at GDX or GOAU or stock picking?

I wonder, what's the thesis from here? Is Russia going to start trading gold for oil/gas or buying gold to bolster their reserve assets? Seems just as likely they have to spend their gold to keep the currency afloat and soldiers paid.

GDX isn't available to me, but I have a couple of active funds that I'm in. Frankly, with sector plays like this it's going to be overall sector beta that delivers the majority of the performance rather than the stock picking ability of the manager.  They're all basically in the same companies, just the proportions are a little different between one fund and another.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #826 on: March 10, 2022, 02:51:41 AM »
Even if gold goes to $2500, I doubt that makes a group of mining companies a home run to buy.  I donít run a mining company, but a landscaping company, and I can tell you that itís going to be a rough year, fuel costs are up 30%, labour cost are up 20-25% (if we can find people at all), parts, supplies, vehicles and equipment are all up in cost and are taking a long time to be delivered.  I imagine that if we raised our prices for a $2000 job to $2500, that wouldnít even get us back to the margins we were making a year or two ago.

So what you're saying is that the price of gold needs to go even higher to for miners to be profitable to offset the real inflation that we are seeing.. yeah, wouldn't be a problem for me.. that's why I hold gold too

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4207
Re: Precious Metals
« Reply #827 on: March 10, 2022, 08:12:00 AM »
Even if gold goes to $2500, I doubt that makes a group of mining companies a home run to buy.  I donít run a mining company, but a landscaping company, and I can tell you that itís going to be a rough year, fuel costs are up 30%, labour cost are up 20-25% (if we can find people at all), parts, supplies, vehicles and equipment are all up in cost and are taking a long time to be delivered.  I imagine that if we raised our prices for a $2000 job to $2500, that wouldnít even get us back to the margins we were making a year or two ago.

So what you're saying is that the price of gold needs to go even higher to for miners to be profitable to offset the real inflation that we are seeing.. yeah, wouldn't be a problem for me.. that's why I hold gold too

The theory of gold as an inflation hedge has always rested on the following string of assumptions:

a) demand for gold is constant or growing,
b) tiny amounts of gold cost exorbitant amounts of dollar spending to extract,
b) as inflation goes up, the cost to extract gold will go up,
c) to maintain operations, miners will have to charge more money for the gold they extract as their costs increase.

One could poke holes in each of these assumptions. For example:

a) Demand for jewelry, electronics, and national reserves has elasticity based on price.
b) Technology may be reducing the cost of mining.
c) Much of the world's gold is mined or will be mined in places where costs are detached from the US inflation rate.
d) Another option is for miners to simply lose money. Companies can lose money for many years, staying afloat with loans, asset sales, and equity issues. Mining has high fixed costs, so it doesn't always make sense to cut production when prices are down.

Of course all businesses face a long list of challenges, and money is typically made anyway. The point is that coming up with a compelling narrative is risky because a compelling counter-narrative is just as easy to produce.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #828 on: March 10, 2022, 09:33:28 AM »
Gold is many things, but it's often a poor direct inflation hedge.  Commodities are better for directly hedging inflation than gold, but gold is a better permanent diversifier for an investment portfolio, which can also include doing some of the heavy lifting to keep the portfolio afloat during periods where financial assets struggle.

However, you don't see any theoretically efficient portfolios that contain commodities because the price drag reduces the long term performance too much for the amount of risk reduction they provide.

If you have to choose between them then gold is the better option... it provides diversification as part of a portfolio, but its monetary properties means it benefits from increasing purchasing power over long time periods, whereas commodities can provide slightly better short term diversification, but at the cost of losing purchasing power over long time periods as technology improves and we are able to extract raw materials and process them more efficiently.


NB- I know Dalio's All-weather portfolio contains some commodities, but that is a risk-parity solution, not an theoretically efficient portfolio.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #829 on: April 15, 2022, 03:47:24 AM »
If people are wondering where is the investment opportunity here, then imo it's in the gold miners.. prices in the sector relative to the metal are much closer to all time lows than the all time highs.

https://s3.tradingview.com/snapshots/c/c0uHYXfV.png

It doesn't take much imagination to see gold going to $2500 over the next couple of years and the miners doubling in relation to the metal, which would still not make them expensive compared to their historical range.

In the past I've pointed out that you need to be very careful with gold miners - they are not a close proxy for gold. There are many points from where long term performance of the miners and gold have diverged - to the point where gold would have preserved or grown your wealth, while the miners would have seen you holding losses.

That said, these things are cyclical, and at times miners will play catch up and greatly outperform the metal. I think we may be starting one of those periods - I have a core holding in gold, but I'm increasing my allocation to the mining stocks accordingly.

Relative to gold, the miners are the same price they were in 2000 when gold was at the end of its 18 year bear market. I like the risk/reward of that play.

 

The miners are starting to show relative strength... indeed they have helped keep my portfolio afloat YTD.

But bigger picture is that we are still in a long term basing pattern, and will be until we take out the 2016 high of HUI/Gold  around 0.22. 

Longer term however I see no reason why the ratio can't get back to 0.4-0.6 range, which would be a nice x2.5-4 move from where we currently are. Gold double & miners trebling in relative strength = x6 increase. That is a realistic target for this sector imo.

Imanuels

  • 5 O'Clock Shadow
  • *
  • Posts: 56
  • Location: Germany
Re: Precious Metals
« Reply #830 on: April 17, 2022, 02:57:38 AM »
I sold my gold after it went vertical recently with thesis that (i) market overreacted and (ii) similar to bonds it will suffer from the rising rates. It indeed dropped short after, however I'm now considering buying back with a following hypothesis. Why would anyone exchange something they have in limited amount (commodities) and it takes them effort (money, time, energy, environment) to extract, process, transport for something we can create out of thin air in an unlimited amount (EUR, USD)? Thus, there could come a point where gold is used. For example, after WW II the devastated countries needed gold or U.S. dollars (the only currency considered to be "as good as gold") to pay for imports and make debt payments. I must admit that other than that, I don't have any evidence to support this hypothesis.
Any thoughts, is it likely?
Another reason is that gold is inversely correlated to stocks, and thus would be a nice buffer in case of further market decline.

vand

  • Handlebar Stache
  • *****
  • Posts: 1904
  • Location: UK
Re: Precious Metals
« Reply #831 on: April 17, 2022, 02:07:55 PM »
I sold my gold after it went vertical recently with thesis that (i) market overreacted and (ii) similar to bonds it will suffer from the rising rates. It indeed dropped short after, however I'm now considering buying back with a following hypothesis. Why would anyone exchange something they have in limited amount (commodities) and it takes them effort (money, time, energy, environment) to extract, process, transport for something we can create out of thin air in an unlimited amount (EUR, USD)? Thus, there could come a point where gold is used. For example, after WW II the devastated countries needed gold or U.S. dollars (the only currency considered to be "as good as gold") to pay for imports and make debt payments. I must admit that other than that, I don't have any evidence to support this hypothesis.
Any thoughts, is it likely?
Another reason is that gold is inversely correlated to stocks, and thus would be a nice buffer in case of further market decline.

Jumping in and out of a position is not really my jam.
By all means either top up or top slice if you feel we are near a short term bottom or top, but if you keep a core holding and respect some hard allocation boundaries then you never have to give yourself these agonising choices of when you get in or when you get out.

Imanuels

  • 5 O'Clock Shadow
  • *
  • Posts: 56
  • Location: Germany
Re: Precious Metals
« Reply #832 on: April 18, 2022, 10:29:25 AM »
I agree about jumping in and out and generally I have no idea about short term bottom or top. I change my mind when the facts change which has recently led to concerns about commodities producing countries accepting certain currencies in the future. I guess I'll humbly admit that I've no idea and stay on the sidelines.

Accrual

  • 5 O'Clock Shadow
  • *
  • Posts: 77
  • Age: 31
  • Location: Staying The Course
Re: Precious Metals
« Reply #833 on: May 03, 2022, 05:19:57 PM »
If people are wondering where is the investment opportunity here, then imo it's in the gold miners.. prices in the sector relative to the metal are much closer to all time lows than the all time highs.

https://s3.tradingview.com/snapshots/c/c0uHYXfV.png

It doesn't take much imagination to see gold going to $2500 over the next couple of years and the miners doubling in relation to the metal, which would still not make them expensive compared to their historical range.

In the past I've pointed out that you need to be very careful with gold miners - they are not a close proxy for gold. There are many points from where long term performance of the miners and gold have diverged - to the point where gold would have preserved or grown your wealth, while the miners would have seen you holding losses.

That said, these things are cyclical, and at times miners will play catch up and greatly outperform the metal. I think we may be starting one of those periods - I have a core holding in gold, but I'm increasing my allocation to the mining stocks accordingly.

Relative to gold, the miners are the same price they were in 2000 when gold was at the end of its 18 year bear market. I like the risk/reward of that play.

 

Thanks for the post. 2 reasons why I am interested in gold: currency devaluation and tech, namely semis who use a lot of gold in the mfg process.

With respect to #1: are you not concerned about the ability of governments to take control of these miners if the currency devaluation is swift and steep?

js82

  • Pencil Stache
  • ****
  • Posts: 520
Re: Precious Metals
« Reply #834 on: May 03, 2022, 07:51:32 PM »
Even if gold goes to $2500, I doubt that makes a group of mining companies a home run to buy.  I donít run a mining company, but a landscaping company, and I can tell you that itís going to be a rough year, fuel costs are up 30%, labour cost are up 20-25% (if we can find people at all), parts, supplies, vehicles and equipment are all up in cost and are taking a long time to be delivered.  I imagine that if we raised our prices for a $2000 job to $2500, that wouldnít even get us back to the margins we were making a year or two ago.

So what you're saying is that the price of gold needs to go even higher to for miners to be profitable to offset the real inflation that we are seeing.. yeah, wouldn't be a problem for me.. that's why I hold gold too

The theory of gold as an inflation hedge has always rested on the following string of assumptions:

a) demand for gold is constant or growing,
b) tiny amounts of gold cost exorbitant amounts of dollar spending to extract,
b) as inflation goes up, the cost to extract gold will go up,
c) to maintain operations, miners will have to charge more money for the gold they extract as their costs increase.

One could poke holes in each of these assumptions. For example:

a) Demand for jewelry, electronics, and national reserves has elasticity based on price.
b) Technology may be reducing the cost of mining.
c) Much of the world's gold is mined or will be mined in places where costs are detached from the US inflation rate.
d) Another option is for miners to simply lose money. Companies can lose money for many years, staying afloat with loans, asset sales, and equity issues. Mining has high fixed costs, so it doesn't always make sense to cut production when prices are down.

Of course all businesses face a long list of challenges, and money is typically made anyway. The point is that coming up with a compelling narrative is risky because a compelling counter-narrative is just as easy to produce.

I think this points to the fundamental issue - and where some of the conficting opinions in this thread may lie.

Both of the following can be true:

1.) Gold is a suboptimal choice as a "buy and hold" asset, if you're just buying it, sitting on it, and otherwise leaving it alone for the next three decades.  Ditto if you're just buying it as nebulous "inflation protection" without integrating it into your overall portfolio.
2.) Gold can improve risk-adjusted returns in a stocks/bonds/precious metals portfolio *IF* you're diligently rebalancing to maintain your target asset allocation, as it's a somewhat-decoupled, cyclical asset that benefits from tending to move in patterns different from your other assets, making the rebalancing a sort of "buy low, sell high" on autopilot.

Basically, if you're not going to be diligent about rebalancing, it's hard to make a compelling case for gold/precious metals vs. traditional equity.  However, if you're rigorous about rebalancing, adding another partially non-correlated asset to your portfolio can objectively improve risk-adjusted returns.
« Last Edit: May 03, 2022, 07:53:11 PM by js82 »