Gold Price - Where is it heading?

[notting]

Gold seems to be giving us the heads up on what's happening in Ukraine. It fell whilst the talk of all out war and invasion was in the headlines but now we have the specter of a permanent ceasefire.
Who would of thought

 

[DeepState]

1. yeah, they don't to all be excellent, just an average portfolio minus the obvious dogs.


2. I never said it was easy, it takes education, time and skill to be able do avoid the dogs. I think the gold bugs are offering the "easy" route, "All you have to do is buy gold"


3. I never said you had to be intelligent, I said a portfolio of intelligently selected assets. Lots of intelligent people do dumb things, especially in the venture capital side of things. There is a reason Warren Buffet is not a venture capitalist.


4. I have never said I have a high IQ, But I do believe I have learned to out perform many people with much higher IQ's than me.


5. Well, I don't like to hold more than 3 years living expenses in currency, to me it's much better to hold it in a productive asset if the time frame is a longer period than that, and if the period is shorter, currency movements are a greater risk than inflation, so I want to keep it in the currency I intend to spend eg AUD. So even if I give you the "Gold is currency" argument, your still at risk of the currency (eg gold price) dropping and losing spending power, and you wont get the interest earning you can get on AUD.


6. as I pointed out for most of the 80's and 90's gold didn't keep pace with inflation, so was a pretty useless inflation hedge, infact AUD was a better inflation hedge at the time simply due to the interest compounding.

G'day VC

1. If the dogs are obvious, wouldn't the market have priced this by and large?

However, in all seriousness and to assist with your endeavour, please check out:

a. the Piotroski screen which basically looks at strong balance sheets. It is not suitable for financials.
b. the concept of earnings quality. Search for Sloan in SSRN (research database). This looks for over-pumped earnings; and
c. low volatility investing. There is simple stuff at Edhec and Research Affiliates. When you are ready to stretch your mind, check out Falkenstein.

The above have been shown to assist in such matters. I will not overstate the forecasting power though.


2. Gold is not the answer to all the ills of the world. That's unless you are fleeing. With that exception, I agree.


3. How can you do something intelligently if you are not intelligent? You can do the best you can if you are not intelligent, but it won't be intelligent because it cannot be produced sustainably. You can't be quick if you are slow. But if you are quick you can be slow. Intelligent people do, however, have great ability to do incredibly dumb things. They also can reach into the really smart areas. etc.

As with activities in venture capital, lots of incredibly stupid things go on in listed equities.


4. I hope I didn't infer that you are of low IQ. I merely wanted to say that most people will overstate their abilities and be found wanting. Whether you are one can only be seen in the fullness of time.

If you actually are a poor investor, you will outperform some very good investors just by luck and also due to the fact that there will always be a wide dispersion of returns for excellent managers. Just because you outperformed some doesn't actually mean that much on its own. However, it is better to be lucky than good and more money is better than less. All power to you.


5. Three years of expenses? No way I'd do that, but the super rich could easily justify it. It's a proportionate calculation.

You may spend in AUD, but you own Disney which has negligible operations in Australia. Although BHP and RIO have listings in Australia with shares expressed in AUD, their 'currency' is bulk commodities which you consume very little of. You are already mismatched all over the place from your consumption basket...of which about 15% is actually sourced from offshore via final consumption imports and a pile more directly or indirectly as intermediate goods in the value chain to your house/table/cupboard... If you want to hedge your consumption basket, you need offshore exposure.


6. The argument about gold as an inflation hedge generally relates to hyper inflation, not run-of-the-mill inflation.

 

[Value Collector]

Gold seems to be giving us the heads up on what's happening in Ukraine. It fell whilst the talk of all out war and invasion was in the headlines but now we have the specter of a permanent ceasefire.
Who would of thought

So not only is it an inflation hedge, it's an investment, a store of wealth, a currency and a commodity, but now it is also a fortune teller.

I think it probably will tell you as much about the future as tea leaves do, And what your noticing is more correlation than causation.

 

[Value Collector]

No the market doesn't always factor in the obvious dogs, the market is not perfect, and not all market participants are intelligent investors, in fact many distain the idea of investing.

 

[Value Collector]

G'day VC


You may spend in AUD, but you own Disney which has negligible operations in Australia. Although BHP and RIO have listings in Australia with shares expressed in AUD, their 'currency' is bulk commodities which you consume very little of. You are already mismatched all over the place from your consumption basket...of which about 15% is actually sourced from offshore via final consumption imports and a pile more directly or indirectly as intermediate goods in the value chain to your house/table/cupboard... If you want to hedge your consumption basket, you need offshore exposure.


6. The argument about gold as an inflation hedge generally relates to hyper inflation, not run-of-the-mill inflation.

I have no problem with holding longterm productive assets that are exposed to other currencies, I am talking about my spending money, eg cash set aside for living expenses, I only hold about three years of these funds, so hedging them against inflation is not a major concern,

Any other funds are invested in productive assets, that will continually be topping up my three year living expenses fund, these productive assets offer the same inflation protection as gold, with benefit of income to fund my living expenses and also internally reinvested earnings through retained profits that will see my portfolio have capital gains also.

 

[DeepState]

No the market doesn't always factor in the obvious dogs, the market is not perfect, and not all market participants are intelligent investors, in fact many distain the idea of investing.

Not many in the market have disdain for making money at any time horizon.

The market is likely not efficient in pricing securities. That is a far cry from saying that pricing is obviously wrong. Whilst some stocks which actually are dogs may not yet have been pushed down to whatever their correct price is, there will likely be stocks that you regard as obvious dogs that are not.

Here's one from the much-admired Buffett: "Bad things aren't obvious when times are good"

If it isn't obvious to Buffett, how should I take a claim that it is obvious to you?

 

[DeepState]

So not only is it an inflation hedge, it's an investment, a store of wealth, a currency and a commodity, but now it is also a fortune teller.

I think it probably will tell you as much about the future as tea leaves do, And what your noticing is more correlation than causation.

Causality worked from the news to gold.

 

[DeepState]

I have no problem with holding longterm productive assets that are exposed to other currencies, I am talking about my spending money, eg cash set aside for living expenses, I only hold about three years of these funds, so hedging them against inflation is not a major concern,

Any other funds are invested in productive assets, that will continually be topping up my three year living expenses fund, these productive assets offer the same inflation protection as gold, with benefit of income to fund my living expenses and also internally reinvested earnings through retained profits that will see my portfolio have capital gains also.

It is your total wealth that matters. However, you have segmented a notional concept of funds set aside for the next three years from longer term assets. Both have been mentally compartmentalised. This is called Mental Accounting. In any case, lots of people do it, even Markowitz, who invented portfolio theory.

We'll have to disagree on the inflation protection argument. For me, it depends very much on what is causing the inflation. As I have mentioned to you before, inflation is not some homogeneous concept. What has happened in the 1980s and 1990s is unique to that period. If you insist on using that as justification for ignoring gold, I do not believe it is with strong merit. Just because a Sword of Damocles has not fallen does not mean that it won't.

 

[notting]

So not only is it an inflation hedge, it's an investment, a store of wealth, a currency and a commodity, but now it is also a fortune teller.

I think it probably will tell you as much about the future as tea leaves do, And what your noticing is more correlation than causation.

No.

What it means is that those with a real understanding of what is really going on on the ground and politically with Russia are front running the price movements. Nothing to do with fortune telling.
You can then use that as an edge, whilst it's happening to assist in short term trading on other things like Oil going down not up as it normally does when pictures of nuclear bombs going off are on the front pages.

 

[Value Collector]

No.

What it means is that those with a real understanding of what is really going on on the ground and politically with Russia are front running the price movements.

How have you been able to identify these people that have a real understanding of what's going on?
and how have you been able to find out what these people are doing in their portfolio's?

When you look at the market action of gold, How do you tell which market actions are caused by people with real understandings and which market actions are caused by people with false understandings?

to me it just seems you look at a market action, then make up a story to fit, If gold jumps up you would say one thing and if it fell you would say another, both times you would be convinced you know what's going on.

 

[Value Collector]

It is your total wealth that matters. However, you have segmented a notional concept of funds set aside for the next three years from longer term assets.

yes, it is total wealth that matters, How ever total market quoted value of that wealth fluctuates, and since I rely on my wealth to fund my life style, It makes sense to have a portion of my wealth equal to about 3 years living expenses in cash, That way I am not relying on selling an asset at half price during a crash just to fund my lifestyle. It's also handy to have cash in case of medical emergency etc.

It's not a notional concept of funds, its a key part of my capital management and family budgeting, I want to make sure my family are spectators in any financial ups and downs, My wife will have the family budget in place regardless of any market fluctuations, dividends being cut, vacancies at rental properties etc, without me becoming a forced seller.

 

[DeepState]

yes, it is total wealth that matters, How ever total market quoted value of that wealth fluctuates, and since I rely on my wealth to fund my life style, It makes sense to have a portion of my wealth equal to about 3 years living expenses in cash, That way I am not relying on selling an asset at half price during a crash just to fund my lifestyle. It's also handy to have cash in case of medical emergency etc.

It's not a notional concept of funds, its a key part of my capital management and family budgeting, I want to make sure my family are spectators in any financial ups and downs, My wife will have the family budget in place regardless of any market fluctuations, dividends being cut, vacancies at rental properties etc, without me becoming a forced seller.

Yep, you're doing what commodity producers do (no tongue in cheek), which is to hedge out their production for a few years so they can plan their budgets for a few years and give themselves time to react if things don't go to plan. There are many different types of risk to manage aren't there.

Although the financial demands of my wife might differ to yours, my whole asset allocation is tilted to make allowance for it. I would not call it the most optimal thing to do in terms of long term wealth by any stretch, but it makes a realistic allowance for the actual pain of the journey along the way, whether that pain is real or imagined.

Hope it goes well for you.

 

[Value Collector]

Yep, you're doing what commodity producers do (no tongue in cheek), which is to hedge out their production for a few years so they can plan their budgets for a few years and give themselves time to react if things don't go to plan. .

I think its a sensible way to handle things for anyone in an industry where income or production is intermittent, and subject to wide variation.

Although the financial demands of my wife might differ to yours, my whole asset allocation is tilted to make allowance for it.

We still live the same way as we did when I was earning a wage, nothing has really changed, we have never ramped up our consumption, we live on about $80K a year, in a debt free house, I have a fortnightly automatic transfer from my high interest account. that transfers our "wages" into our account, just as it did when I was working full time.

My builds up in my account a little faster than we use it, so when more than 3yrs of expenses is there I buy more productive assets or as I did recently paid for a holiday.

I would not call it the most optimal thing to do in terms of long term wealth by any stretch

,

So far no other system has appealed to me,

----

This system is the main reason I made the analogy about one guy owning gold and one guy owning all the farmland (or other productive asset).

In my system my cash account is regularly replenished by my portfolio of productive assets, if I switched and instead owned $2.5Million of gold, eventually my gold stockpile would be exhausted as it was sold off to replenish my cash account.

I am to young to rely on spending my capital assets.

 

[DeepState]

1. I think its a sensible way to handle things for anyone in an industry where income or production is intermittent, and subject to wide variation.

2. We still live the same way as we did when I was earning a wage, nothing has really changed, we have never ramped up our consumption, we live on about $80K a year, in a debt free house, I have a fortnightly automatic transfer from my high interest account. that transfers our "wages" into our account, just as it did when I was working full time.

My builds up in my account a little faster than we use it, so when more than 3yrs of expenses is there I buy more productive assets or as I did recently paid for a holiday.

,

3. So far no other system has appealed to me,

----

4. This system is the main reason I made the analogy about one guy owning gold and one guy owning all the farmland (or other productive asset).

In my system my cash account is regularly replenished by my portfolio of productive assets, if I switched and instead owned $2.5Million of gold, eventually my gold stockpile would be exhausted as it was sold off to replenish my cash account.

5. I am to young to rely on spending my capital assets.

Hi VC. This is interesting, I'll touch on gold so we can have an argument against an OT violation.

Gold is a yellow metal. Some people like it. Some people don't.

With that out the way:

1. Actually, the reason why the commodity guys do it is that their key asset (reserves) is not liquid. In some cases the revenue from the assets barely exceeds the expenses (or may not). So, for them, it is managing the mismatch of running cash income and running cash expenses. If they had a stack of liquid assets and limited relative expenses against it, there would be much less need to do so.


2. The reason, it seems, for why you do it is a mental accounting 'fallacy'. Your net wealth in aggregate is what you are supposed to look at. However, you mentally segment the next three year's expenses out from your so-called (I'll call it) longer term assets. You actually have no need for liquidity. Much of your assets are in liquid stuff from the sounds of it. You can sell stuff, at least enough to ride out variations in dividends and interest receipts.

In my case, my wife (ie. "we") like to take on limited risk over a specific horizon. I don't mind that given we are in the 'stay rich' category. However the desire to protect total (real) wealth over shorter periods of time than our full investment horizon is actually a limitation which prevents much more aggressive and long term thinking. A financial planner would think what we are doing is ridiculous given our situation. Meh, whatever.

The alternative is to have a very irate spouse. Now THAT would be an obvious dog of a trade that does not get priced in to the market.


3. There are many roads to Rome. If it works for you, that's good. You've clearly considered a lot of things.


4. This analogy is actually inaccurate for the situation you are in. However, we've discussed it and you have your view on it. Personally, I would not suggest you put anything even vaguely like 100% of your assets into gold, in any case. But, for me, there is an argument for something other than zero.


5. You can put all your assets into Berkshire. It doesn't pay dividends. Does that make it a bad investment if the price is right? No-way. You can consume from dividends as well as capital. What matters is total return. This is, actually, another example of mental accounting. Live off income, don't touch your capital, is a spending rule that many abide by as a discipline. It is not actually an investment concept.

 

[Value Collector]

2. The reason, it seems, for why you do it is a mental accounting 'fallacy'. Your net wealth in aggregate is what you are supposed to look at. However, you mentally segment the next three year's expenses out from your so-called (I'll call it) longer term assets. You actually have no need for liquidity. Much of your assets are in liquid stuff from the sounds of it. You can sell stuff, at least enough to ride out variations in dividends and interest receipts

.

I don't think its a fallacy, I do look at my net worth, however I understand that many of the components that make up my net worth will flucuate in market price, and so having a buffer of funds to live off not only helps me sleep well, but means i wont be forced to sell the assets at times such as the Gfc when they are selling at half price, or directors decide to suspend a dividend, just so I can go and buy some groceries.

5. You can put all your assets into Berkshire. It doesn't pay dividends. Does that make it a bad investment if the price is right? No-way. You can consume from dividends as well as capital. What matters is total return. This is, actually, another example of mental accounting. Live off income, don't touch your capital, is a spending rule that many abide by as a discipline. It is not actually an investment concept.

Even if I did invest in Berkshire, or other non dividend paying growth stocks (which I do), I would still want my buffer cash because I can not guarantee where the Berkshire share price will be in 6 months, if I were in a situation where I was relying on selling $xx worth of stock every month, I may find my self in a position of selling shares at the worst possible time, or at times that didn't make sense for my tax position,

Imagine if Warren passed away, no doubt Berkshire would live on, but the shares may be depressed for a year or two, or if there were a general market down turn, my capital would see potentially a 50% reduction right when i planned to make monthly sales.

On the topic of Berkshire, they are proof of what compounding earnings from productive assets can achieve, what would warrens original $10,000 be worth if he had bought and held gold?

 

[DeepState]

.

1. I don't think its a fallacy, I do look at my net worth, however I understand that many of the components that make up my net worth will flucuate in market price, and so having a buffer of funds to live off not only helps me sleep well, but means i wont be forced to sell the assets at times such as the Gfc when they are selling at half price, or directors decide to suspend a dividend, just so I can go and buy some groceries.





2. Even if I did invest in Berkshire, or other non dividend paying growth stocks (which I do), I would still want my buffer cash because I can not guarantee where the Berkshire share price will be in 6 months, if I were in a situation where I was relying on selling $xx worth of stock every month, I may find my self in a position of selling shares at the worst possible time, or at times that didn't make sense for my tax position,

Imagine if Warren passed away, no doubt Berkshire would live on, but the shares may be depressed for a year or two, or if there were a general market down turn, my capital would see potentially a 50% reduction right when i planned to make monthly sales.

On the topic of Berkshire, they are proof of what compounding earnings from productive assets can achieve, what would warrens original $10,000 be worth if he had bought and held gold?

1. You are engaging in a form of asset liability matching. However, the way you are matching expected expenditure is sub-optimal for your purpose. The primary reason why it is sub-optimal is that you segment, even if you are somehow aware of total wealth. For every objection you list, there are symmetric upsides which are not expressed.

Your productive asset without obvious dogs argument actually works against your current practice. Tax favours allocation to productive assets for the most part unless the asset is in run-off.


2. Another hindsight biased statement, VC.

Warren Buffett started to accumulate stock in Berkshire in the early 1960s. He would not have been regarded as particularly remarkable at the time and I doubt you would have been speaking effusively and quoting him at every opportunity.

So, please tell me, what would have been the relative gains of each stock in the Russell 2000 that was alive at the time on a buy-hold basis? That would be a fairer statement to make if you want to discuss productive assets vs gold as opposed to productive assets which have done well against gold with the benefit of hindsight. A monster difference. The NASDAQ example provides a clue as to the importance of the difference and that was only over a period that is far shorter than the one we are talking about here.

 

[Value Collector]

I really can't see why you would be against holding 5% to 10% of your portfolio in cash when your in my position, what would you suggest as being a better alternative?

 

[DeepState]

I really can't see why you would be against holding 5% to 10% of your portfolio in cash when your in my position, what would you suggest as being a better alternative?

Yeah, it's not an obvious concept when you are coming in from an income replacement mindset.

I'll make a couple of points.

1. You don't need cash for liquidity in the way that a commodity producer does. You have liquid assets that can be disposed of in a click and whose settlement proceeds arrive in your account in a couple of days. If liquidity demands are larger than a modest cash buffer that you might have and this is required before settlement, then you can borrow for a couple of days via your credit facilities (ie. MasterCard).

You don't need liquidity.


2. What matters is: having enough to spend over your investment horizon...which is multi decades from the looks of things.

Your spending patterns will probably expand in line with inflation somewhat and gradually decline as you age before surging again in the last few years of life. There will be a lot of variation around this.

If you are holding cash to back the next three years of expenditure and this totals 5-10% of assets, you are tracking very well indeed. Well done. You'll need a pre-tax return of around 9% per annum to sustain this expenditure indefinitely (I am assuming 30% tax rate, but yours might well be higher depending on how you set this up. If so, the pre-tax return required is obviously higher), allowing for inflation of about 2.5% per annum.

If you fall below this, your total pool of assets will erode. Holding cash will almost certainly lead to erosion through time relative to productive assets. It is a very similar argument to an economy where you hold all the cash and someone else holds all the farmland. The fact that cash pays interest is irrelevant and is akin to investing in some form of Zimbabwe currency where the money stock keeps increasing despite production staying the same.

Although the value of your portfolio will fluctuate more wildly than the expenditure stream in the short term, protecting this with a 3 year cash buffer means you have reduced your exposure to productive assets. You have done this for reasons that do not make sense from a liquidity basis. When you are in a relatively strong financial position, selling at lows etc. is a minor consideration relative to increasing your return expectation. This calculus changes if you are barely hanging on. You are not.

One of the arguments in relation to gold apart from being an alternative currency is that it is a good diversifier for risky assets. Its inclusion into a portfolio helps to stabilize returns in a way that cash does not. Given that you can buy it synthetically, its inclusion does not even have to consume capital from deployment into productive assets.

If 10% of your portfolio is held in cash and the difference in the pre-tax return between cash and productive assets is, say, 6%....you do the math for how it impacts long term wealth when all compounding is considered.

 

[Value Collector]

Yeah, it's not an obvious concept when you are coming in from an income replacement mindset.

I'll make a couple of points.

1. You don't need cash for liquidity in the way that a commodity producer does. You have liquid assets that can be disposed of in a click and whose settlement proceeds arrive in your account in a couple of days. If liquidity demands are larger than a modest cash buffer that you might have and this is required before settlement, then you can borrow for a couple of days via your credit facilities (ie. MasterCard).

You don't need liquidity.


2. What matters is: having enough to spend over your investment horizon...which is multi decades from the looks of things.

Your spending patterns will probably expand in line with inflation somewhat and gradually decline as you age before surging again in the last few years of life. There will be a lot of variation around this.

If you are holding cash to back the next three years of expenditure and this totals 5-10% of assets, you are tracking very well indeed. Well done. You'll need a pre-tax return of around 9% per annum to sustain this expenditure indefinitely (I am assuming 30% tax rate, but yours might well be higher depending on how you set this up. If so, the pre-tax return required is obviously higher), allowing for inflation of about 2.5% per annum.

If you fall below this, your total pool of assets will erode. Holding cash will almost certainly lead to erosion through time relative to productive assets. It is a very similar argument to an economy where you hold all the cash and someone else holds all the farmland. The fact that cash pays interest is irrelevant and is akin to investing in some form of Zimbabwe currency where the money stock keeps increasing despite production staying the same.

Although the value of your portfolio will fluctuate more wildly than the expenditure stream in the short term, protecting this with a 3 year cash buffer means you have reduced your exposure to productive assets. You have done this for reasons that do not make sense from a liquidity basis. When you are in a relatively strong financial position, selling at lows etc. is a minor consideration relative to increasing your return expectation. This calculus changes if you are barely hanging on. You are not.

One of the arguments in relation to gold apart from being an alternative currency is that it is a good diversifier for risky assets. Its inclusion into a portfolio helps to stabilize returns in a way that cash does not. Given that you can buy it synthetically, its inclusion does not even have to consume capital from deployment into productive assets.

If 10% of your portfolio is held in cash and the difference in the pre-tax return between cash and productive assets is, say, 6%....you do the math for how it impacts long term wealth when all compounding is considered.

I still prefer my current method, I just ran the numbers and I am holding 7.8% cash, I am pretty comfortable holding the cash, because I hold it in a way where it has a higher than average interest rate and the interest it generates is actually increasing my property holdings, which in turn will offer more inflation hedged income and capital in the future, but that's probably a story for another thread.

 

[notting]

How have you been able to identify these people that have a real understanding of what's going on?
and how have you been able to find out what these people are doing in their portfolio's?

When you look at the market action of gold, How do you tell which market actions are caused by people with real understandings and which market actions are caused by people with false understandings?

to me it just seems you look at a market action, then make up a story to fit, If gold jumps up you would say one thing and if it fell you would say another, both times you would be convinced you know what's going on.

You don't have to identify any body.

How ridiculous.

You watch the action and you put it together from that.

It's not always possible, mostly not.

This case was a clear one for me so I shared it. Especially in the light of what oil did leading up to the occupation of Crimea. Before anything happened with Crimea analysts all over the world were wrong footed by the price rise in oil, Crimea was not on the agenda as yet. Russians and probably the Chinese, buying for a kill, one might presume, which becomes supported of course by algos and technical and short term trend followers. It then peaked settled then slowly started coming down as Ukraine unfolded which was supposedly a much more serious issue.
Of course this could be a strategy pause on Putins behalf which is also being 'played'. But Gold and oil definitely gave clear indicators of what is to happen next and will continue to do so.
What fricken portfolio?