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View Poll Results: Best Long-term Portfolio Hedge Vehicle
Precious Metal (Gold, Platinum, etc.) ETF or Mutual Fund 4 30.77%
Metal Mining Mutual Fund or ETF 0 0%
Energy ETF or Mutual Fund 5 38.46%
General Commodity ETF or Mutual Fund 5 38.46%
Multiple Choice Poll. Voters: 13. You may not vote on this poll

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Gold! What is your opinion about using it in a portfolio?
Old 08-23-2007, 06:41 PM   #1
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Gold! What is your opinion about using it in a portfolio?

Over the years I have thought about putting some of our portfolio (small %) in some assets as a hedge.

I recently read an article that made me think about it again.

https://flagship.vanguard.com/VGApp/...ewsnewsletters

Bernstein indicates that gold would be a decent hedge (no more than 5%).

What do you think about gold or other precious metals in your portfolio as a hedge? Good idea or Bad Idea?

If you were going to use gold or precious metal, how would you invest. Should I buy gold bars and put it in the safety deposit box, buy a mutual fund, ETF, other? There is a Vanguard Precious Metal fund.


Also, while I am not a timer, I would probably intend to purchase when the asset was out of favor and dump it if it ever did bounce high (assuming that I would use it for income if bad times hit). Any thoughts?

Finally, if not precious metal as a hedge, then what would be a good hedge against some crisis?

Your thoughts and comments are appreciated.
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Old 08-23-2007, 06:53 PM   #2
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For gold to work as a hedge, people have to believe in it as a hedge. You're betting that they flee to it as a safe haven during times of uncertainty.

It didn't work during the most recent market hiccup. Who knows if it'll ever work again.

The simplest hedge is to buy a put on SPY or some other index that has similar risks to your portfolio.

Larry Swedroe has a really interesting approach to limiting downside risk while shooting for stock-like returns. Read about it here:

Bogleheads :: View topic - Larry Swedroe: concentrating risks/minimizing dispersion
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Old 08-23-2007, 07:47 PM   #3
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Although I am not a proponent of gold...

There is that aspect of gold where it is believed to be universally valuable. If after the apocalypse/nuclear exchange/Hilary election or any other large scale disaster you could (in theory) take your gold, and leave your now worthless homeland and other stuff behind. The gold that you have previously stored under your mattress you could then trade for things you may then need (like food for example).

Some call this wealth diversity.
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Old 08-23-2007, 08:20 PM   #4
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Well recently I saw this guy on CNN cashing in his $100K+ CD from countrywide and when the reporter asked him what he'll do with the money, he said "I'm gonna buy gold...".

But seriously, I think that gold (and other precious metals) is worth investing in as an hedge (it is not directly corrolated to the broader stock, bonds or real estate markets, so as such I think it can help diversify your portfolio). Please no more than 5% of your portfolio. I don't believe that the end of the world is coming, so I wouldn't stash gold coins under my mattress (gold coins or bars are costly to buy and sell, and then you might need to insure them). If you are a rational investor, you could use the "GLD" ETF for example. It is super liquid and backed by reserves of the real thing. Of course if you are among those preparing for Armageddon, then holding physical gold is a must. But beware, gold prices are very volatile, and as twaddle pointed out, it does not necessarily go up when things go bad.
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Old 08-23-2007, 08:25 PM   #5
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Quote:
There is that aspect of gold where it is believed to be universally valuable. If after the apocalypse/nuclear exchange/Hilary election or any other large scale disaster you could (in theory) take your gold, and leave your now worthless homeland and other stuff behind. The gold that you have previously stored under your mattress you could then trade for things you may then need (like food for example).
I've heard that historically, people have also used diamonds to carry their wealth accross borders when bad times arose. With diamonds, your life savings can fit in your pocket, and as for gold, the value of a diamond is universally recognized.
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Old 08-23-2007, 08:28 PM   #6
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Quote:
Originally Posted by MasterBlaster View Post
Although
...If after the apocalypse/nuclear exchange/Hilary election or any other large scale disaster you could (in theory) take your gold, and leave your now worthless homeland and other stuff behind. The gold that you have previously stored under your mattress you could then trade for things you may then need (like food for example).
Somehow the idea of schlepping big bags of gold around in nuclear winter makes my arms tired.

I also am not a fan of gold, for the completely non-financial philosphical
reason that I'd rather invest in enterprises that create value, which I believe the companies held in stock mutual funds generally do.

But I did read something recently (unfortunately can't recall specifics to cite) that basically showed that gold has a pretty dismal record as a pure buy and hold investment (data mining perhaps, I forget the period used except that it spanned several decades). The point was made, however, that it's been sufficiently volatile and non-correlated with other assets that it can sweeten the pot in a diversified and routinely rebalanced portfolio.

For what it's worth.
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Old 08-23-2007, 08:32 PM   #7
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I only invest in assets that grow and throw off dividends. I would never own gold
as part of my portfolio.
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Old 08-23-2007, 08:34 PM   #8
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You can lease gold if you want a dividend. The yield isn't very good, though.

Lease - Forward Rates
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Old 08-23-2007, 08:58 PM   #9
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Quote:
Originally Posted by FIREdreamer View Post
I've heard that historically, people have also used diamonds to carry their wealth accross borders when bad times arose. With diamonds, your life savings can fit in your pocket, and as for gold, the value of a diamond is universally recognized.
While this is true, diamonds have some significant problems, too. They are relatively expensive to trade, their grading is subjective, and their value is due in large part to an amazing marketing and false-scarcity campaign by deBeers. So, they aren't great "end of the world" investments. But, as you point out, if I had to slink across a border and take my assets with me, diamonds might be the best choice.

If >>really< bad stuff starts happening, then gold might not be worth as much as ammunition.

Some folks buy gold mining stocks/MFs to gain when gold goes up in price but also to profit from having a share in a business that still produces some dividends even when gold is just holding steady.

I don't own any of the stuff.
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Old 08-23-2007, 10:13 PM   #10
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Quote:
Originally Posted by twaddle View Post
The simplest hedge is to buy a put on SPY or some other index that has similar risks to your portfolio.
I am about to be guilty of both ignorance and thread-jacking, but
at least the latter seems to be a victimless crime here ...

A put is an option that gives you the right to sell at some fixed
price, right ? So as a hedge, you'd but a put at a price similar to
current prices.

What about the strategy, which we dsicussed on anohter thread
months ago, of putting a bunch of money into T-Bills, and then
using the discount to buy calls at today's price ? So maximum
downside is 0 (notwithshanding inflation) but if SPY goes up, the
calls allow you to capture a good fraction of the gain.

Which strategy works best ?
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Old 08-23-2007, 11:01 PM   #11
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There are countless strategies, and I have no idea which is best. But the attraction to buying puts is that you don't have to change your existing allocation to hedge. It's a lot like traditional insurance: you pay your premium (for the put), and you don't expect or hope to get your premium back, but you insure against the case of your portfolio losing value (and you decide what downside you're willing to accept). You can buy the insurance whenever you want (perhaps when your gut tells you to get out of the market).

There's also the popular buy-write approach in which you limit your downside by selling a call and offsetting downside moves by the premium you receive. In fact, there's an ETN you can now buy that does that for SPY:

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Old 08-24-2007, 04:19 AM   #12
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Thanks for the input.

Some folks mentioned derivatives. They are fine vehicles if employed correctly. But I was thinking of something more long-term (go long) rather than something that expires.

I was thinking more about hedging basic economic mayhem, currency issues, inflation, and the like. Plus the low-correlation to general equities is nice for diversification.

I do have some TIPS in my bond holdings.
  • How about commodity mutual funds? Anybody using something like the RYDEX commodity mutual fund? However, these things typically employ futures, but a professional manages it (for what that is worth).
  • Or how about Energy ETFs.
  • Any other ideas?

I also agree on owning the actual asset. Gold bullion or coins would be a bit of a hassle. I can't imagine buying 10 pounds of gold and putting it in a lock box. Plus, selling it would be a hassle. On a side note: I do know someone who keeps a small amount of the shiny asset in a lock box (for example $25k) just in case. Does anyone hold some hard assets for emergency in a lock box? It seems like a scenario that has a low probability, but not impossible.
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Old 08-24-2007, 06:03 AM   #13
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If owning gold entertains you, own it. Or if you think it makes sense as a stand-alone investment, buy it. But I don't think it is a reliable hedge.

Like many "investments", it is actually a speculation. If it gets really, really cheap, buy some because likely sooner or later something will happen to make it go up at least somewhat. The thing that happens may be only that some guru will manage to successfully promote it as a hedge.

But when it goes up 2x or so, consider selling unless it seems to be catching fire in a bubble formation.

This has been my moderately successful technique. One present time bullish factor for miners, if not necessarily gold itself is that the ratio of gold the metal to the XAU index is high-roughly 5x. Historically this has meant well for the miners.

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Old 08-24-2007, 09:20 AM   #14
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Quote:
Originally Posted by JohnEyles View Post
I am about to be guilty of both ignorance and thread-jacking, but
at least the latter seems to be a victimless crime here ...

A put is an option that gives you the right to sell at some fixed
price, right ? So as a hedge, you'd but a put at a price similar to
current prices.

What about the strategy, which we dsicussed on anohter thread
months ago, of putting a bunch of money into T-Bills, and then
using the discount to buy calls at today's price ? So maximum
downside is 0 (notwithshanding inflation) but if SPY goes up, the
calls allow you to capture a good fraction of the gain.

Which strategy works best ?
If you are starting from an uninvested position - the two strategies would be equivalent since:

Stock + Put = T-Bill + Call

If your equity portfolio is already in place, a put overlay is an insurance policy with the strike price playing the role of the deductible.

Also, even if your portfolio is not the S&P 500, buying a put on the S&P 500 will still protect the "market component" of your portfolio, so if you are a good stock picker, the out-performance will help defray the cost of the put.
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Old 08-24-2007, 02:45 PM   #15
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Plus the low-correlation to general equities is nice for diversification.
Personally, I think the low-correlation religion is a bit overhyped. Yes, you want assets that will zig while others are zagging, but you also want a risk premium. There is no risk premium for owning gold. It's not really an investment, and it's not even a hard asset that the world really values any longer.

If you have to own it, at least buy mining stocks since they'll earn revenue from the stuff. Likewise with commodities. Most of (all?) the run-up in commodities is due to energy, so go with a fund of energy stocks.
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Old 08-24-2007, 02:52 PM   #16
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Originally Posted by twaddle View Post
Likewise with commodities. Most of (all?) the run-up in commodities is due to energy, so go with a fund of energy stocks.
I agree with what you said about gold, but I don't think your statement about commodities is true. Base metals, ags, softs, almost all have been in a huge bull market for several years anyway.

To me energy looks best going forward, but the others have been very strong so far. The % change in some of the metals has beaten crude hands down, and NG is a laggard, depending on what time you choose for the base.

Ha
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Old 08-24-2007, 02:57 PM   #17
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Yes, in the last few years other commodities have had quite a run, but I looked at the long-term history a while back, and energy was largely responsibile for both the returns and variance wrt stocks.

I could be wrong, of course, and guys like Rogers think that ag commodities are the future....
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Old 08-24-2007, 03:08 PM   #18
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Yes, in the last few years other commodities have had quite a run, but I looked at the long-term history a while back, and energy was largely responsibile for both the returns and variance wrt stocks.

I could be wrong, of course, and guys like Rogers think that ag commodities are the future....
Agree, in the long term or medium term oil and gas are getting scarce and there are no real substitutes. They are the foundation of the modern world. OTOH, if the stupid corn to ethanol program were scrapped corn would lose at least $1.00 overnight. Copper, nickel, lead etc. are not in endless supply, but they are reclaimable. Try to reclaim gasoline from your tailpipe!

Also, if oil prices cause industrial production to be throttled back metals will lose support.

Ha
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Old 08-24-2007, 04:41 PM   #19
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Twaddle -

Have you looked at historical correlations between prices of commodities and interest rate environments?
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Old 08-24-2007, 04:55 PM   #20
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I added a poll.

I would like a count.
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