Thanks.
Gold is a hedge, not an investment, specifically a hedge against inflation.
Counterintuitively, the price of gold may start going back up once the economy recovers a bit. Indians are mad about gold and import tons of the stuff despite having domestic supply, and the cultural factors which make gold so popular in India are unlikely to change in the short term.
I think a small conservative investment in gold as an inflation hedge against one’s local currency is not an absolutely horrible choice. But it needs to be kept small and it needs to be watched.
Gold metal does not pay dividends and needs to be kept secured. Investments in gold producers have most often proved to be losers as many of the companies are not well run and are located in countries without strict financial reporting standards. I lost a fair amount of money in Jaguar Mining (JAG) that had appeared to be an up an coming producers with new sites in Brazil. Look it up, it’s now a penny stock.
Some safe international mutual funds with assets in foreign currencies might do better. I’ve done well in a couple of those.
Your investment in gold dropped $84. US today. How’s that for a return on your investment. Down 5.38% in one day. At that rate, your investment would be worth zer0 in 19 days. Of course, that won’t happen.
Gold can be nice to own because it tends to not track most other investments. Historically, if you invest in say 50% stocks and 50% bonds, then on days where stock share prices appreciate dramatically bond trading prices tend to go down.
[As a point of clarity, for a bond you’ll still make money if you hold them to maturity unless they default. But daily swings in price for after-market paper is what I’m talking about, they tend to move upward as people flee equities and downward as people dive into equities.]
If you hold cash, your investment won’t go down, and if there is deflation your cash becomes more valuable. But if there is inflation (there usually is), even though your cash’s nominal value stays the same, your cash’s purchasing power goes down. That’s why if you have to hold cash it’s best to do it in some form that earns interest (savings account, CD, debatably money market funds and stable value funds.)
If you hold gold, it’s one asset that is likely to survive inflationary periods very well. Part of this is because of an agreed upon value to gold that is “innate” by most all humans, and gold is not heavily price influenced by how it is used. Gold is used to store value, to make jewelry, and in limited industrial activity. Since it isn’t linked to overall economic prosperity like the demand for copper or oil, it isn’t bound to move the same way as other parts of the economy.
Harry Browne came up with an idea based on these concepts, the “Permanent Portfolio.” Browne basically said there are four types of economic situations: prosperity, inflation, deflation, recession.
During prosperity, stocks performed the best, and bonds usually performed well. During deflation, bonds performed very well, obviously as does cash to a degree. During recession, stocks and bonds tend to both do poorly but stocks usually do the worst by far, and bonds tend to have reduced losses. Gold can go up or down in during a recession, but will often go down. During inflationary periods, gold becomes sought after because it is viewed as being separate from fiat monetary systems and a safe harbor from inflation.
If you understand that you at least see why gold has some value. I don’t really agree with Harry Browne’s investment ideas. For one I don’t believe the economy is “clearly” in one of those four phases, I think those phases overlap to some degree. I also don’t agree with his allocation, 25% stocks, 25% gold, 25% bonds, and 25% cash. But, historically for like 80 years of data such an allocation has protected you from most losses, and when there are losses it is always less than the market’s losses, so it is a “safe” investment strategy.
But I also believe history shows that much higher portions of your portfolio in riskier investments like stocks captures far more appreciation than Browne’s portfolio does, and thus it costs you several percentage points of annualized growth for the safety of his portfolio (which isn’t that much safer, stocks generally have never underperformed Browne’s portfolio over multiple decade spans.) That being said, it isn’t a bad way to invest maybe if you’re nearing retirement and want to protect investment holdings without totally abandoning the opportunity to have appreciation in your investments.
While Browne’s portfolio percentages are out of whack for long term investing, the idea that you need to diversify into more than just straight stocks/bonds is a good one, and precious metals can/should be some small part of that.
Altho you make several excellent points, Gold, now traded like it is, does tend to track the rest of the markets. It didn’t used to, true.
Something else to be kept in mind is currency risk. You’ll note that on days when the dollar take s hit, gold prices, denominated in dollars, go up - obviously. However the opposite is also true. As the dollar strengthens, gold prices in dollar terms go down.
Right now, and you see this especially in the case of Japan, the central banks of many developed countries are actively trying to weaken their currencies. This helps them because it makes their exports cheaper and tends to stimulate their economies as well as help with balance of trade.
The dollar however, being the world’s reserve currency, occupies a unique and somewhat protected position. Therefore it is likely to remain strong almost regardless of the economic situation here as long as there is instability globally. Therefore the odds in favor of a strong dollar vis-a-vis other currencies is good. That means that the odds in favor of lower price of gold as denominated in USD might also be better than average.
I don’t know… that guy in the commercial looks pretty serious. I think we can trust him 
This x100.
I have a few friends that are bordering on gold buggers (all have been buying gold for a few years now), and I just want to scream at them.
Look. Gold. It’s pretty, it has a few (very few) actual manufacturing/engineering/science applications, but c’mon. You can’t eat it, you can’t get energy out of it, and there’s a finite amount (on Earth, at least.) When you rant and rave about it being the only honest alternative to fiat money, I find myself thinking that you’re an idiot. People only buy and sell it on a near-fiat assumption that is has value, which seems to me to be a carryover from antiquity.
I’m sure there’s plenty of people that have made money on the gold market, and good for them. But all they’ve done is exploit the lower chumps that keep buying into this market.
It’s not an investment. Not a terrible store of value, but “investing” in gold is ridiculous.
What I find interesting is that, if conservatives paid as much attention to the Bible as they claim, they’d notice that Jesus was pretty clearly against this sort of “investment” strategy. The man who had five talents and the man who had two talents both put them into business ventures that grew, and profited from it. The man who had one, though, was so risk-adverse that all he wanted to do was guarantee that his talent would never be worthless, and so he just hoarded gold. With the result that he has nothing to show for his stewardship, and so loses everything.
Question: Is there some (possibly leveraged) portfolio of stocks (e.g. gold mining stocks) and stock derivatives (but not commodity futures or derivatives) which will roughly track the price of gold? If so, what is it and does it under- or out-perform gold itself?
If you want to roughly track the price of gold, buy something like IAU.
If you buy a portfolio of gold mining stocks, you are a step removed from the market price of gold because so many other factors come into play. Gold is generally cheaper to produce than the market price reflects.
Gold is an investment, like any other (the confusion upthread to the contrary), and mechanisms to invest in it abound.
If you asking questions like whether or not “stock derivatives” under- or out-perform, that complexity of investment is probably not for you. If there were an answer to such a question, everyone would do it. As with any other investment, ones related to gold can go up or down.
There has been an interesting psychological shift regarding gold, I think. Because so many people consider it more sound than fiat money, there is a widespread assumption that the value of gold will survive a governmental collapse. So investing in gold has become associated with extremists–and even doomsdayers–betting the government will fail.
Fun stuff, betting on the sentiment of masses to help you retire well.
I will say that, should the government fail (economically), it’s incorrect–from a historical perspective–to assume that gold wouldn’t survive a total collapse of world order. Gold actually has a very good track record of being as valuable as bread when all structure is gone. However long before that, the cost of gold in fiat money would soar if the financial endgame ended up being hyperinflation. And there’s a nice history of that, too.
I personally intend to go much longer on gold than I am now, if the masses continue to be persuaded that unlimited borrowing is sound economics.
If gold’s market cost tracked the production cost, mining shares would move little in price. Moreover, you apparently missed part of the post you respond to: “(possibly leveraged) portfolio of stocks (e.g. gold mining stocks) and stock derivatives.” From your comments, I’m not sure you understand “leverage.” Very briefly, it allows one to construct a portfolio which returns a function of a stock’s return. As a simple example, if gold quadruples over a period where mining shares double, a 50%-margined mining stock purchase would have also (almost) quadrupled. Call options are another way to achieve such leverage.
Again: You misread the post you respond to. The suggested experiment is to fashion a portfolio whose price would most closely approximate gold based on historical data and compare its performance with bullion.
True enough. It sounds like you’re an investment expert! 
Let’s give us all a little credit, and understand that I’m asking that data prior to 2013 be used to answer my question; not data after 2013.
My question seems straightforward, but its complexity may not be for you. Note that I’m not looking for some fancy way to “beat the market” – just trying to test part of the oft-heard hypothesis that buying mining shares is better than buying gold directly.
If you’re thinking in terms of leveraged etf’s like the ones that advertise that they return 2x or 3x of the underlying asset, those not only tend to have very high fees but they also have to reset periodically so they’re not appropriate for anything but very short term speculation. At least that’s what I’ve read. I don’t play around with them myself.
What would be your object with this strategy. you can alway buy gld on margin if you want leverage - just as an example.
edit: or buy mining stocks on margin, if you don’t want the metal
Well yes, one could buy stocks or gold. :smack:
My question, which seemed straightforward enough, wasn’t whether these strategies were allowed, but what a comparison of historic returns might reveal.
I had no “object with the strategy.” I simply wonder whether anyone has compared bullion price with that of a sufficiently leveraged mining stock portfolio.
I really think my question was clear, and wonder where the confusion comes from. Please reread my post and decide if I was asking for comments on the strategy … or asking a straightforward question easily answered by anyone with historic price data and simple software.
I guess that people don’t generally ask academic questions in this context. Generally when someone is interested in tracking a commodity they have a specific interest. For example I was interested in buying an instrument to tract the price of cotton recently. Why? Because it’s impractical for me to own physical cotton or buy cotton futures. So I settled on the BAL etf which has performed reasonably well so far.
There seems to still be significant differentiation to me. (link–check out the 5/10 year views, the default is just a few days and not useful)
I believe most instruments that try to track gold without actually owning gold tend not track the spot price closely enough for most gold investor’s tastes.
Now, is there a leveraged portfolio of gold mining stocks that would outperform gold? There could be (it wouldn’t be too hard to find out), but most people that invest in gold are looking for asset diversification. They aren’t looking to “outperform” gold, they’re looking for the fact that gold can oftentimes rise in value when other assets fall. There is a general expectation that gold will not be the highest performing part of your portfolio, at least among what I call the grown up gold investors (as differentiated from gold bugs who are mostly investing irrationally.)
On gold investing in general, personally for my purposes I’d want to be in an ETF that holds physical gold. It will not perfectly track spot price, because the overhead in stockpiling gold and the fund’s fee will mean that during periods of flat gold prices you actually lose money, but it’s close enough. Plus physical ownership of gold doesn’t track spot price either, let me know if anyone can actually buy gold at spot price. The cheapest sources of gold bullion online you still typically pay a significant (to my mind) premium over spot price. The only way to even get it close is with very large capital outlays like if you’re buying over $100,000 in bullion I’ve seen ways you could get your premium over spot price down to around 1.5-2% but that’s still not great compared to the expense ratio of GLD or IAU. GLD is by far the better known fund, but IAU is the stronger investment at this point. IAU intentionally has a lower expense ratio than GLD because it knows it does not have GLD’s name recognition so it is trying to attract investors with its lower expense ratio (.25 vs .40).
I’ve never invested in one, but I think instead of a leveraged instrument holding gold stocks or derivatives in a strategy designed to both outperform/track gold at the same time simply holding an 2x leveraged ETN that tracks gold could be a smarter move. There are several such products out there. Most gold investors do not like gold ETNs because they are only valuable if the issuing bank has the ability to make good on them, but for my money I wouldn’t be afraid of buying a 2x Leveraged gold ETN backed by Deutsche Bank or another large institution like that.
Most leveraged ETFs can only try to meet good on their advertising, but a leveraged ETN the bank is promising that at redemption you get back 2x (or whatever the multiplier) the performance of the underlying tracked asset/index etc. The bank will have taken your money and tried to invest it in a way that it can pay that out without it being a loss, but if they fail to do so they are still liable for paying the ETNs advertised performance. (This is what scares some investors, they fear a bank could go belly up and their entire investment would be lost.) ETNs do have negatives aside from just a lot of exposure to one bank’s finances, there are annual fees and etc that erode from their return.
The gold market is always a zero-sum game: one person’s loss is someone else’s gain.