Anyway, the problem with gold is there is no risk premium you capture from holding it for long periods. It just sits there, and mostly retains value. So the only benefit you get should be from diversification. Which it does provide to a degree. That is, you'll improve your sharpe but not your expected return. So I agree on holding some in the amount you mention (5-10%). Just make sure your portfolio is making up for the lost expected return elsewhere (i.e., use a bit of leverage or hold high volatility assets).
Thanks Alfonso. What about owning gold miners? Clearly a bit riskier but they are generating strong cash flows right now (buy for between 5-10x), and you get the desired exposure to the metal in the ground. Best of both worlds for a manageable element of extra risk.
The JPM bar charts with returns would be far better if someone had (1) Volatility adjusted them and (2) Made them real returns. For example, I would fully expect bonds, not vol adjusted, to have lower returns that equities. Vol adjusted, they are likely as high or higher. Which is surprising given these are periods of rising inflation. Then again, we are in a multi decade bull run for bonds.
Another key issue with this is that markets discount expectations (not levels or changes in levels). That is, what inflation were the bonds discounting prior to the period of increasing inflation? They have had it baked in already. The bond market may have anticipated the inflation, and you saw the decrease in bond prices prior to the actual period of rising inflation. So the periods, as selected, may also be a bit misleading.
Would also be good to separate the EM currency returns from the EM equity returns.
Everyone should read "The allegory of the Hawk and the Serpent" by Artemis Capital.
The last 40 years of secular low interest rate, low inflation and volatility is very special period in history. Special means not universal. Hence, portfolio heavily weighted on stock and bond (main beneficiaries of this period) would not perform very well in other period. And we also have an economic doctrine of stable inflation is good for economic growth which's widely taught in economic class.
I don't think equity (in general) is an optimal option during high inflation + unstable time. After all you can't do a business plan as that happens.
There are a number of issues missing here. This works only if the current debt based fiat system continues, which is mathematically impossible. We know we are in the terminal phase as the lead CB, the Fed, stated in March 20 - unlimited QE! So the countdown has begun. This phase is difficult for the linear mind to handle, as it is exponential. That means it is very slow for a time (seems still linear) and then suddenly explodes, in this case into a hyper stagflationary collapse. This will be triggered in the US when the Fed is forced to stop QE and raise rates today. The stock mkts will crash, allowing cover for a final wave of QE on steroids, triggering a sudden collapse of trust in the currency. The Fed will need to buy everything, including bonds (yield curve control) and stocks. Gold will explode. This will get any remaining weak hands to sell their gold, which is a terrible mistake, for all they will get is currency that is heading for currency heaven. (zero) Gold will quickly go no offer. (unavailable at any price) Gold is the buy of the century here and now. Last chance before it resets as the global SOV (my estimate is 50 - 100X)
The miners won't work as desperate gov'ts either nationalize or windfall tax them. In Gold I Trust!
At what point do you revaluate your base case scenario? What do you have to see going on where you think to yourself, "better allocate more just in case..."?
I thought you said its not right time to own gold, no? are you saying its better to have it for long term but not for short term given the macro envrionment we are currently in?
Ciao Alf! Really happy to read this, I indeed started accumulating back in the Oct 2018, while gold's price was just above 1000€ and some silly Italian financial headlines were depicting its dismal past performance as a further proof of being just a "barbaric relict". I actually started with 1oz coins and bullions before moving to PHAU. Just one question though, what are your thoughts about owning physical gold compared to just the ETF? Wouldn't be the former a better "insurance" in a case of a hypotetical reset? Were "just" the higher spread, purchasing complexities and safe storage costs entailed with physical ownership to tilt your choice or there was something else?
There's some great empirical work out there on asset returns over a 100+ horizon. The way I interpret the literature and current empirical evidence is this: monetary metals do great in fiat currency debasement/financial repression and stagflation. Fiat currency debasement and financial repression refers to nGDP% > nominal rates, negative real yields, yield curve control, debt monetization and fiscal dominance and stagflation refers to low rGDP% in the face of rising inflation but without elements of financial repression. Commodities and equities (especially commodity producers, EM equities) do well during reflationary periods, where reflation refers to current rGDP% > potential rGDP% (aka. short run inflationary gap or short run positive output gap)
Low probability of reset? Whats your % chance? 1934, 1944, 1971 3 resets. I would view it as not low risk. Also, on the gold as inflation protection - we tend to have a short term view of this. I recommend The Golden Constant book to get a few hundred years of golds performance in inflation and deflationary environment. I believe the tail risks that can give rise to certain economic environments are hugely underestimated. Why? Because they aren't tangible and we won't know them until they happen. History tells us...they will happen. Get Gold.
gold is a zero coupon perpetual bond issued by god
How about crypto instead of gold?
Anyway, the problem with gold is there is no risk premium you capture from holding it for long periods. It just sits there, and mostly retains value. So the only benefit you get should be from diversification. Which it does provide to a degree. That is, you'll improve your sharpe but not your expected return. So I agree on holding some in the amount you mention (5-10%). Just make sure your portfolio is making up for the lost expected return elsewhere (i.e., use a bit of leverage or hold high volatility assets).
Wouldn't goldmine stocks offer the best of both worlds then?
Good job! Keep it up!
How about otm put writing on gdx? Thoughts?
Thanks Alfonso. What about owning gold miners? Clearly a bit riskier but they are generating strong cash flows right now (buy for between 5-10x), and you get the desired exposure to the metal in the ground. Best of both worlds for a manageable element of extra risk.
The JPM bar charts with returns would be far better if someone had (1) Volatility adjusted them and (2) Made them real returns. For example, I would fully expect bonds, not vol adjusted, to have lower returns that equities. Vol adjusted, they are likely as high or higher. Which is surprising given these are periods of rising inflation. Then again, we are in a multi decade bull run for bonds.
Another key issue with this is that markets discount expectations (not levels or changes in levels). That is, what inflation were the bonds discounting prior to the period of increasing inflation? They have had it baked in already. The bond market may have anticipated the inflation, and you saw the decrease in bond prices prior to the actual period of rising inflation. So the periods, as selected, may also be a bit misleading.
Would also be good to separate the EM currency returns from the EM equity returns.
Everyone should read "The allegory of the Hawk and the Serpent" by Artemis Capital.
The last 40 years of secular low interest rate, low inflation and volatility is very special period in history. Special means not universal. Hence, portfolio heavily weighted on stock and bond (main beneficiaries of this period) would not perform very well in other period. And we also have an economic doctrine of stable inflation is good for economic growth which's widely taught in economic class.
I don't think equity (in general) is an optimal option during high inflation + unstable time. After all you can't do a business plan as that happens.
There are a number of issues missing here. This works only if the current debt based fiat system continues, which is mathematically impossible. We know we are in the terminal phase as the lead CB, the Fed, stated in March 20 - unlimited QE! So the countdown has begun. This phase is difficult for the linear mind to handle, as it is exponential. That means it is very slow for a time (seems still linear) and then suddenly explodes, in this case into a hyper stagflationary collapse. This will be triggered in the US when the Fed is forced to stop QE and raise rates today. The stock mkts will crash, allowing cover for a final wave of QE on steroids, triggering a sudden collapse of trust in the currency. The Fed will need to buy everything, including bonds (yield curve control) and stocks. Gold will explode. This will get any remaining weak hands to sell their gold, which is a terrible mistake, for all they will get is currency that is heading for currency heaven. (zero) Gold will quickly go no offer. (unavailable at any price) Gold is the buy of the century here and now. Last chance before it resets as the global SOV (my estimate is 50 - 100X)
The miners won't work as desperate gov'ts either nationalize or windfall tax them. In Gold I Trust!
Does this mean we are moving to Quadrant 4??
Your explanation using the Quadrant is a very effective Compass..
At what point do you revaluate your base case scenario? What do you have to see going on where you think to yourself, "better allocate more just in case..."?
I thought you said its not right time to own gold, no? are you saying its better to have it for long term but not for short term given the macro envrionment we are currently in?
Ciao Alf! Really happy to read this, I indeed started accumulating back in the Oct 2018, while gold's price was just above 1000€ and some silly Italian financial headlines were depicting its dismal past performance as a further proof of being just a "barbaric relict". I actually started with 1oz coins and bullions before moving to PHAU. Just one question though, what are your thoughts about owning physical gold compared to just the ETF? Wouldn't be the former a better "insurance" in a case of a hypotetical reset? Were "just" the higher spread, purchasing complexities and safe storage costs entailed with physical ownership to tilt your choice or there was something else?
Grazie mille
There's some great empirical work out there on asset returns over a 100+ horizon. The way I interpret the literature and current empirical evidence is this: monetary metals do great in fiat currency debasement/financial repression and stagflation. Fiat currency debasement and financial repression refers to nGDP% > nominal rates, negative real yields, yield curve control, debt monetization and fiscal dominance and stagflation refers to low rGDP% in the face of rising inflation but without elements of financial repression. Commodities and equities (especially commodity producers, EM equities) do well during reflationary periods, where reflation refers to current rGDP% > potential rGDP% (aka. short run inflationary gap or short run positive output gap)
Low probability of reset? Whats your % chance? 1934, 1944, 1971 3 resets. I would view it as not low risk. Also, on the gold as inflation protection - we tend to have a short term view of this. I recommend The Golden Constant book to get a few hundred years of golds performance in inflation and deflationary environment. I believe the tail risks that can give rise to certain economic environments are hugely underestimated. Why? Because they aren't tangible and we won't know them until they happen. History tells us...they will happen. Get Gold.