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I think it really depends on the cause of the recession. Gold isn't going to protect you from normal inflation in the short term. So long as the dollar can buy everything it can today without hitting hyperinflation levels, Gold's a losing asset, you're better off investing in TIPS. However, gold is the life preserver when the dollar stops acting as a hedge to buy everything. Right now, you wouldn't accept Venezuelan currency as form of payment for anything, unless it was something you could possibly replenish your supply profitably in that same currency. When that mechanism breaks, gold stands out.
Even then, just because you're the guy sitting in a hyperinflation country with gold, it doesn't necessarily mean that you will have a good investment. That's because the entire economic system is now out of whack, production falls through the floor and availability of goods to buy falls significantly. Put another way, if it were allowed, I'm sure you could buy homes in Cheonobyll very cheaply, but what will you possibly do there?
That's what you saw in the 70's and in this past Recession. There was concern that the currency pyramid might break down. In the 70's it was due to leaving Bretton Woods and the after-effects, not the normal inflation. The Central Bank prevented the breakdown in the 80s. They did so again in the last recession. What happened then is what's happened now. Gold prices have fallen to around the replacement cost of gold.
While I disagree with the conclusion, theres a nice collection of historical metal price references in the link. Gold is basically a protection against fiat currency collapse, but the argument presented is its own worst enemy when you realize it's not going to pay you for efficiency gains in productivity or the increased bargaining power of workers today.
Unless, you want to take the argument that decades of peace in the US have actually bubbled up all workers earnings around the world, vastly outstripping gold pricing, and further sealed with debt upon said expected continued earnings which is slowly returning to earlier prices:
Gold is a very slow adjusting asset, my thought would be, simply speaking, that we had a spike later than the first article and later than the second article. We had a sudden spike in demand....for labor. Out of the depression and into war-time and continuing on to manufacture for the world, the United States was a giant Gold Rush. We had the educated workers, the production facilities, the capital, the peace and access to all of the markets that mattered. We've maintained this by moving much (but not all) labor into innovation industries, expanding our marketplace reach, maintaining stability, shifting debt requirements to individuals while at the same time making more of the citizenry capable of handling credit. The process has been followed by most of the developed countries as well. A person from Poorcountryistan with a home and education may be of no importance the economy there, but move to the US or Germany, and that person can get a normal job and carry debt on a home and school education while measuring into growth. So long as the population grows or prosperity spreads, the system works. What happens when it ages and shrinks though?
In this past century, holding gold has been a laughable old habit. A quaint thing that off the boat immigrants might still do out of habit... Even with what we saw in the 70's and in 08, that was just early money moving far before there was real danger. It's insurance against Noah's flood. Best picked up on a sunny cloudless day.
Artillery, nice discussion. I do think we tend to underestimate the importance of gold internationally. The Indian and Chinese economies and demand are way more important. What is your opinion of that factor?
I hate to give an opening for Mathjak since his head is already too big, but I do think there may be a place for gold next time the stock market tanks. I am interested in changes that make sense when economic conditions change. We pretty much can see that when the stock market tanks, it is typically too late to sell off stocks. In fact the opposite is true. When the market drops it is time to buy in. There are some other changes that do leave room for allocation changes. Typically commercial real estate drops later on after the recession has become very evident. It might make sense to sell. Gold also seems to have a slow reaction time. Instead of just reallocating more and more bond money into stocks, it might make sense to put some into gold. I am not convinced but that is something I will keep in the back of my mind for the next crash.
Artillery, nice discussion. I do think we tend to underestimate the importance of gold internationally. The Indian and Chinese economies and demand are way more important. What is your opinion of that factor?
I hate to give an opening for Mathjak since his head is already too big, but I do think there may be a place for gold next time the stock market tanks. I am interested in changes that make sense when economic conditions change. We pretty much can see that when the stock market tanks, it is typically too late to sell off stocks. In fact the opposite is true. When the market drops it is time to buy in. There are some other changes that do leave room for allocation changes. Typically commercial real estate drops later on after the recession has become very evident. It might make sense to sell. Gold also seems to have a slow reaction time. Instead of just reallocating more and more bond money into stocks, it might make sense to put some into gold. I am not convinced but that is something I will keep in the back of my mind for the next crash.
Thanks, hopefully my mistyping of the labor bubble After the first article and Before the second article wasn't too confusing. (Had after and after)
I'm going to speak on the stock market first. MJ's argument is that uncertainty can lead to people looking for safety, and while many run to T-Bills, gold seems to be that weird contrarian asset class that will shift up when things are all going wrong. So he's gone back with backtesting and found that while your total return may be lower from the allocation (start x date end y date) having a lot of gold (I consider 25% a lot) reduces the volatility in your portfolio. If I'm an 85 year old retiree, I really don't want to see my portfolio swing 30% in a year.
That said, gold's degree of success in a bear market will be dependent upon what caused the recession, and more importantly, what's a country's plan to fix the problem. So say the US factories lose competitiveness and a lot people lose their jobs because factories are starting to close. What's the central bank's next step? They're going to lower interest rates. A lower interest rate is going to make the dollar less attractive relative to other currencies. While interest rates are lower and the government attempts to supply side a recovery, you will be able to get more dollars for your gold. When said recovery is in place and interest rates start going up, you will get fewer dollars for your gold, but probably still more than when it started as some inflation has now been locked in. (assuming dollar creation is > gold production which it almost always is)
So, in the normal cycle, you end in roughly the same place. You have x gold's worth of purchasing power.
Now if we switch the cause of the recession to China and Russia declaring economic war on the US and they start dumping their trillions of dollars of bonds onto the market. Bond prices are going to fall through the floor....which is going to jack up the interest rate. Who can buy those bonds? If we buy them and don't create money, money will be so tight on the economy side that it will crowd out all investment. Innovation will stop. Then the economy is hit with a weak currency and no chance at growth. But, in reality, we'd be forced to create more dollars to buy back the bonds. This would cause inflation. The dollar would plunge in value both from the active selling and the all important dent in dollar demand. The dollar would no longer be able to buy goods from China and Russia. The dollar has lost convertibility into goods. That's the value of currencies. The dollar takes a hit. Gold "looks" like an amazing investment at that point in dollar terms. You can get a lot more dollars for your gold, but you can get less for your dollars. However, you could also buy RMB or Rubles etc. Gold remains convertible.
I'm going to go beyond India and China. The reality is that, removed from the constructs of the early Bretton Woods, Asia in particular remains highly attached to gold. Considering that's where half the world's population lives, that's pretty important. The central banks there have been buying, but what's more important is that people understand that gold is money. They accept it, not as an investment but a necessary given. There's a marketplace for....Bitcoin, but you're not buying anything with it at most stores. In the US, people like to think of Gold and Silver as money, but most places don't think silver is money any more than they do copper. In the event of an economic war, your gold can still buy you something where your silver or your dollars (or Bitcoin) cannot.
Beyond Asia, most countries in the world have a living member in the extended family that has experienced the affects of currency crisis. They know they need a backup. German families keep gold personally despite living in the country with the world's largest trade surplus and a Federal surplus. A 2013 poll said family expenditures in India were 8.13% devoted to gold. Forgetting the central bank, the population of India is estimated to own approximately 24,000 metric tons of gold in families. The US couldn't dream of having an overall savings rate at 8.13%, much less that much going to gold. Vietnam directly has Dong (for everyday purchases), Dollars (for imported items) and Gold (for land). It's right in the system of understanding the different levels of convertibility.
America is utterly devoid of this instinct. The Federal Reserve has been running the show for the past 100 years and we've avoided Panics. We did have a Depression, but the problem was there were no dollars, not that the dollar wasn't convertible. Really, because the Federal Banking system has been so good, people don't save. We've had social security for living memory. For a long time there were pensions. (not that all got them). We've had easy access to credit. We have to be plied with matches and tax deferrals to even consider saving. We even throw out small slurs for people that are too tight or cheap with their money....what are they saving it for, they can't take it with them.
Our central bank is great, but our population doesn't save. What little we do save needs to be in high growth equities because we're going to consume everything else. When it comes (hopefully not in my lifetime) it will hit here hard because nobody will be prepared. There isn't a fiat currency that's made it yet. Even the grandaddy of fiat currencies, the British Sterling, was originally defined as 12 ounces of silver. At spot rates, that's $178.08, but $1.50 will get you a pound.
My oldest $20 gold coin turns 100 this year. At spot rate, that's $1,185.35. If I look at the CPI inflation calculator, it tells me that $20 is $333.78 of buying power today. I don't know why there's that much of a delta. All I know is that it's good to have some gold for your family. We question it here, but families around the world do not. Fiat currencies don't last forever. That alone doesn't make gold a good investment. It really isn't. It's just the always convertible into the currency you need, when you need it the most, insurance.
Artillery, nice discussion. I do think we tend to underestimate the importance of gold internationally. The Indian and Chinese economies and demand are way more important. What is your opinion of that factor?
I hate to give an opening for Mathjak since his head is already too big, but I do think there may be a place for gold next time the stock market tanks. I am interested in changes that make sense when economic conditions change. We pretty much can see that when the stock market tanks, it is typically too late to sell off stocks. In fact the opposite is true. When the market drops it is time to buy in. There are some other changes that do leave room for allocation changes. Typically commercial real estate drops later on after the recession has become very evident. It might make sense to sell. Gold also seems to have a slow reaction time. Instead of just reallocating more and more bond money into stocks, it might make sense to put some into gold. I am not convinced but that is something I will keep in the back of my mind for the next crash.
the time to accumulate an asset is when few want it . you don't try to buy fire insurance once the wild fires start . so that is why i made my changes now .
no one sees the next down turn coming . every recession has started when markets were making new highs and we see blue skies ahead . the economy looked good ,earnings always look good and bang , right from left field before there is any sign anything has really changed , the next part of the cycle kicks in to high gear . only we all poo poo it like we do all the other black swan events and wait for it to pass as we always do .
so there is no such thing as i will make the changes when i see it coming .
i also would not buy gold as a portfolio strategy without owning long term treasuries . unless it was a 1966 or 1970 high inflation scenario , while gold tends to set a positive real return floor in a recession it is long term treasuries that do the heavy lifting .
so it is the combo of the two that work together pretty well .
at this point i don't really care what i wake up to anymore . whether it is a 2008 style great recession that kicks off as the world dumps dollars because they hate us , or gov't printing presses go in to high gear and flood us with dollars as the world dumps our debt .
i know my gains i have racked up and my portfolio will not be devastated by any single economic outcome .
at this late stage of my life and the bull i want to allow for uncertainty and plan and allow for it , not try to rule it out and think i will have time to make my changes before the damage is done.
like i say , if i was younger 100% equities is the way to go . but when spending down , each year your portfolio is negative in real return , it is having all those extra gains you got sucked right away and you got nothing for sweating through those wild rides , those negative real return years are the great equalizer .
so unless you want to plan around only the best outcomes , odds are pretty good the quick violent drops we have been seeing since 2000 may be the new norm .
for those who think time makes more equities better , that may be true when not spending down . we now have 60/40 producing a lower balance than these defensive portfolio's 18 years later and it happened again the last 10 years .
as long as i can see 3-6% on average in real return no matter where markets go i can live with that in retirement and that is just what these defensive portfolio's have been doing for more than 40 years now . the worst down turn has been under 3% over 40+ years now . even down 5% would be fabulous .
Last edited by mathjak107; 08-19-2018 at 02:40 AM..
We had zero interest rates all over the world for a decade. And gold did have a good run until 2011. Then it died.
Somehow the FED has crucified gold, which is what they want and need to do when they are crucifying the dollar to create inflation (FALSE GROWTH). The public is supposed to run to gold when they lose faith in the fiat currencies - but they haven't. Is it coming?
money goes where it gets the best value . it has been the dollar and treasuries for now . but everything cycles and the dollar will weaken and gold will have it's day once again . it always does , the cycles are just longer than stocks .
as far as inflation , if this is the worst the fed can inflate things and pull us out of what could have been a total financial collapse with the injection of trillions of dollars in the unprecedented qe's then on that end i say they did a good job
Artillery, nice discussion. I do think we tend to underestimate the importance of gold internationally. The Indian and Chinese economies and demand are way more important. What is your opinion of that factor?
I hate to give an opening for Mathjak since his head is already too big, but I do think there may be a place for gold next time the stock market tanks. I am interested in changes that make sense when economic conditions change. We pretty much can see that when the stock market tanks, it is typically too late to sell off stocks. In fact the opposite is true. When the market drops it is time to buy in. There are some other changes that do leave room for allocation changes. Typically commercial real estate drops later on after the recession has become very evident. It might make sense to sell. Gold also seems to have a slow reaction time. Instead of just reallocating more and more bond money into stocks, it might make sense to put some into gold. I am not convinced but that is something I will keep in the back of my mind for the next crash.
gold is up almost 5% since we discussed the use of gold to buffer down markets when equities were making new highs . long term treasuries up 4% .
i will bet dollars to donuts you never saw this drop coming and have not buffered things with either .
this is why the assets that fly traditional fighter cover are bought when those new highs are being made in equities , not after the fact ..
trying to milk every penny of gains usually results in that not happening . as i try to instill here , the cycle ain't over as far as your gains until the smoke clears and you see what is left .
those nice juicy balances never remain all yours until the negative part of the cycle happens .
then you usually find you just ride the wave up to the peaks , fell in to the valley and ended up somewhere in the middle 80% of the time . those more defensive models just took a straighter path .
since jrkliny and i started tracking a traditional 60/40 model when equities were breaking new highs , vs the more defensive models i was talking up , because we were so late in the bull and i thought it was time to get more defensive while still staying invested :
60/40 is down 10% ----- the golden butterfly is down 7% ---------- the permanent portfolio is down 2.50%
Last edited by mathjak107; 12-21-2018 at 02:27 AM..
to put that in dollars , a 1m portolio in a conventional 60/40 is down 100k .. the butterfly down 70k and the permanent portfolio down 25k .
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