1) Gold is a metal not a rock (atomic number 79 on the periodic table)
2) While the HUMAN value of ANY asset is the output of a subjective reaction function describing some aspect of the HUMAN experience (subjective theory of value)
3) While point #2 holds, I can guarantee you that every gold atom in this 13.7 billion year old universe we inhabit will continue to be in existence for the next 13.7 billion years and beyond...I can't say the same for the USD or any other fiat currency (and yes, crypto currencies are just one example of fiat currency)
Would be interesting to understand why cryptos are (not) a good investment for different type of institutional investors. As this is one of the most used arguments for potential future performance of crypto.
Crypto currencies are not money, they are just another form of fiat currency backed up by the fiat or faith in the network and the liability of the network and blockchain. Government issued fiat currencies are shit fundamentally of course, but they at least that the state theory of money behind them as well as network effects. You can trade crypto (and I do!) but I do not delude myself into thinking crypto currencies have better fundamentals just because they are the new kid on the block. I'm fundamentally long blockchain technology, DLT, digital bearer instruments and decentralized finance but there is a big difference between those things and their future iterations and dodge coin or any of the 1000's of crypto currencies in existence
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).
That's what I was trying to say when I mentioned ''gold is not tied to earnings growth''. It's not a beta play on world GDP and earnings to pick up over time. It's rather a play on real yields, which might work well given the structural trends we live in but you should consider it mostly as a tail risk hedge.
Gold is real money, that's why it just sits there as that is what real money is intended to do. When you denominate your savings in real money you are supposed to simply pay the opportunity cost of doing so; the real risk free rate of real money is zero and thus gold has no yield. When you take your "money" or fiat currency and put it in your checking account and on your personal balance sheet as "cash on hand" that is not real money, that is credit, that is the liability of your bank and ultimately the liability of the central bank that issued your fiat currency. Gold or real money cannot be anyone's liability by definition, no one issues gold, or chlorine, or hydrogen or any other element in the periodic table. Gold is simply the best form of money humanity has access to, I can guarantee you that every gold atom present on Earth right now will still be around in a billion years (and longer), I cannot guarantee say the same for the USD, the GBP or any crypto because they are not money.
Good Q. Their business is basically a balance sheet leveraged play on gold though, so you get additional returns but also idiosyncratic risks from owning them. I'd keep it simple and own gold.
If you wish to own the BlueChip of the sector.......SYMBOL: FNV...........because of the idiosyncratic risk associated with the average miner....GDX would be your Best bet..but with no more than 8% of portfolio.,probably closer to 5%
Never thought about it. It would mostly depend on the implied volatility you're dealing with, and the carry you get out of selling puts. In general, I am always very wary of selling optionalities.
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.
Their business is basically a balance sheet leveraged play on gold though, so you get additional returns but also idiosyncratic risks from owning them. I'd keep it simple and own gold.
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?
Ciao Valerio! Physical ownership is much better as it insulates you from counterparty risk, especially if you own a bit of gold against the tail risk of a monetary reset scenario - in that case, the ramification on the financial system might be pretty big and owning gold in physical rather than ETF format might be preferable.
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
Ahah I have to say I loved this!
Atomic number 79 is issued and backed by the laws of physics, gods are not real or necessary
or gold is a rock. depends on your faith, and your god
1) Gold is a metal not a rock (atomic number 79 on the periodic table)
2) While the HUMAN value of ANY asset is the output of a subjective reaction function describing some aspect of the HUMAN experience (subjective theory of value)
3) While point #2 holds, I can guarantee you that every gold atom in this 13.7 billion year old universe we inhabit will continue to be in existence for the next 13.7 billion years and beyond...I can't say the same for the USD or any other fiat currency (and yes, crypto currencies are just one example of fiat currency)
Capital G, man !
How about crypto instead of gold?
Do you want me to open that Pandora box, mate? :)
One could hold tokenized gold in crypto, such as PAX Gold. Open it!
Yes!
Would be interesting to understand why cryptos are (not) a good investment for different type of institutional investors. As this is one of the most used arguments for potential future performance of crypto.
Crypto currencies are not money, they are just another form of fiat currency backed up by the fiat or faith in the network and the liability of the network and blockchain. Government issued fiat currencies are shit fundamentally of course, but they at least that the state theory of money behind them as well as network effects. You can trade crypto (and I do!) but I do not delude myself into thinking crypto currencies have better fundamentals just because they are the new kid on the block. I'm fundamentally long blockchain technology, DLT, digital bearer instruments and decentralized finance but there is a big difference between those things and their future iterations and dodge coin or any of the 1000's of crypto currencies in existence
Thank you Yelian! Can i ask, what is your preferred instrument(s) to go long the technology and infrastructure of the future of finance?
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).
That's what I was trying to say when I mentioned ''gold is not tied to earnings growth''. It's not a beta play on world GDP and earnings to pick up over time. It's rather a play on real yields, which might work well given the structural trends we live in but you should consider it mostly as a tail risk hedge.
Gold is real money, that's why it just sits there as that is what real money is intended to do. When you denominate your savings in real money you are supposed to simply pay the opportunity cost of doing so; the real risk free rate of real money is zero and thus gold has no yield. When you take your "money" or fiat currency and put it in your checking account and on your personal balance sheet as "cash on hand" that is not real money, that is credit, that is the liability of your bank and ultimately the liability of the central bank that issued your fiat currency. Gold or real money cannot be anyone's liability by definition, no one issues gold, or chlorine, or hydrogen or any other element in the periodic table. Gold is simply the best form of money humanity has access to, I can guarantee you that every gold atom present on Earth right now will still be around in a billion years (and longer), I cannot guarantee say the same for the USD, the GBP or any crypto because they are not money.
Wouldn't goldmine stocks offer the best of both worlds then?
Good Q. Their business is basically a balance sheet leveraged play on gold though, so you get additional returns but also idiosyncratic risks from owning them. I'd keep it simple and own gold.
If you wish to own the BlueChip of the sector.......SYMBOL: FNV...........because of the idiosyncratic risk associated with the average miner....GDX would be your Best bet..but with no more than 8% of portfolio.,probably closer to 5%
Good job! Keep it up!
How about otm put writing on gdx? Thoughts?
Never thought about it. It would mostly depend on the implied volatility you're dealing with, and the carry you get out of selling puts. In general, I am always very wary of selling optionalities.
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.
Their business is basically a balance sheet leveraged play on gold though, so you get additional returns but also idiosyncratic risks from owning them. I'd keep it simple and own gold.
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.
All coherent observations. I used this chart to bring forward a simple point, but it could be indeed presented better.
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.
Chris Coles is one of my favorite fundamental analysts!
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
Ciao Valerio! Physical ownership is much better as it insulates you from counterparty risk, especially if you own a bit of gold against the tail risk of a monetary reset scenario - in that case, the ramification on the financial system might be pretty big and owning gold in physical rather than ETF format might be preferable.
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.