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Respected economist on gold in portfolio
Old 07-30-2013, 01:56 PM   #1
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Respected economist on gold in portfolio

Greg Mankiw (Chair of economics dept. at Harvard and author of leading textbook on economics) has a piece in the NYTimes indicating how an economist would rationally answer the question, should I buy gold for my portfolio? If you go to his blog you can get a link to the NYTimes piece and also see a way to calculate how much gold to have (but the calculation has too much math for most of us.)

Greg Mankiw's Blog

While Mankiw ends up arguing that a small amount of gold may make sense, I recall Wm. Bernstein addressing the same issue with commodities a few years ago. He said it only makes rational sense if you stay the course, but because commodities can lag stocks for a very long time most people get discouraged and sell at the wrong time, so for this reason, he argued it doesn't make sense for most investors.
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Old 07-30-2013, 02:23 PM   #2
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Quote:
Originally Posted by MikeTN View Post
Greg Mankiw (Chair of economics dept. at Harvard and author of leading textbook on economics) has a piece in the NYTimes indicating how an economist would rationally answer the question, should I buy gold for my portfolio? If you go to his blog you can get a link to the NYTimes piece and also see a way to calculate how much gold to have (but the calculation has too much math for most of us.)

Greg Mankiw's Blog

While Mankiw ends up arguing that a small amount of gold may make sense, I recall Wm. Bernstein addressing the same issue with commodities a few years ago. He said it only makes rational sense if you stay the course, but because commodities can lag stocks for a very long time most people get discouraged and sell at the wrong time, so for this reason, he argued it doesn't make sense for most investors.
I have held gold for soooooo long (45 years) that I no longer count them in my portfolio - they are 'purty' gold coins in my deposit box.

And they went from 10% in a much lower portfolio to maybe less than 1% now even counting gold increase and coin collector value.

So looking back did they perform a function in helping me get to ER?

Heh heh heh - hindsight says the lead sled dog was Bogle's Folly - the first index fund available to me 1976/7 in my 401k. In spite of the thrills and chills of Mr Market it far and away trumped all brain pharts I tryed from 1966 on. Dividend stocks were a distant second. Rental real estate was ok - but I don't have the personality for it.

Yes I are are a Boglehead having tryed a lot of other things.

AND I still like gold coins - as a hobby.
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Old 07-30-2013, 02:24 PM   #3
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One assumption in the math is that the expected return on gold is the same as expected return on bonds.

But I think the text says that long term returns on treasury bonds are inflation plus 2.9%, while he thinks gold prices will increase roughly as fast as wages. In the US wages have gone up by about 1% or 1.5% more than the CPI.

So I would have assumed an expected return on gold of 1-2% less than bonds.
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Old 07-30-2013, 02:30 PM   #4
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Here's a blogpost from Josh Brown commenting on Mankiw's article A quick note on portfolio construction and gold (cc: Professor Mankiw) | The Reformed Broker
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What Mankiw, Bartels and many others don't appear to grasp about portfolio construction is that a "small sliver" of two percent weighted toward any asset class, sector or geography is a waste of time in actual practice. It's not ever going to have a large enough impact on a portfolio to matter, up or down. It looks good printed on a page and makes you feel diversified, but in real life, it does no such thing.
I have invested in Vanguards PM fund off an on and have no real views either way but do like to read differing opinions.
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Old 07-30-2013, 03:08 PM   #5
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And for every opinion from a respected economist, I'll bet I can find the opposite opinion from an equally respected economist.

OK, but the last time I had gold (just a few percent) in my portfolio, I did well on it (over 13% profit in the roughly a year I held it). But I was probably just lucky there.

That said, I like to buy gold (generally GLD) whenever it appears to be beaten into the ground and considered worthless by most. That has worked well for me. I follow exactly the same approach with AAPL stock, also with great results.

But just as a hedge/balance/counterweight/whatever in the average portfolio? Probably not the best idea.
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Old 07-30-2013, 06:05 PM   #6
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Here's a blogpost from Josh Brown commenting on Mankiw's article A quick note on portfolio construction and gold (cc: Professor Mankiw) | The Reformed Broker


I have invested in Vanguards PM fund off an on and have no real views either way but do like to read differing opinions.
I completely agree with Josh either do some serious purchasing of gold or ignore it.
My default $1 Million is 750K stocks, $200K bonds, 50K cash. Now imagine we have stagflation or some other real good scenario for gold and the real value of my portfolio drops to 500K stocks, 150K bonds, 50K cash.

If I had started off with 700K stocks, 200k bonds, 50K cash, 50K gold. Even if the real price of gold doubles, my portfolio ends up at $766K still a significant lost. Now if I have the permanent portfolio I end up with $,116K One or two percent gold would be complete noise.
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Old 07-30-2013, 11:54 PM   #7
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I have 1/16th of my dental portfolio in gold. I'm hoping to keep it at that level.
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Old 07-31-2013, 12:52 AM   #8
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I have 1/16th of my dental portfolio in gold. I'm hoping to keep it at that level.
Heck, I used to have lead in a molar.

But then, my dentist drilled that out when he gave me a porcelain cap.
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Old 07-31-2013, 07:23 AM   #9
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If you invested $100 in gold in 1926 you would have $8K today vs $340K if it were invested in S&P. It's only good for short term hedges against economic collapses.

TJ
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Old 07-31-2013, 08:32 AM   #10
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I would think that for gold to be crisis hedge, society would have to collapse to within a relatively narrow range of chaos.

Collapse generally means deflation, cash would be king, like in the depression or late 2007, and things have to get very out of hand, government would have to disappear, for fiat currency to not be convertable. Stocks and real estate are an absolute hyper inflation hedge, right?

The thing I would more worry about is electric grid collapse, which has happened a couple of times in my area, with ice storms and the big northeast breakdown a decade or so back.

Try shutting off your main switch and then start thinking about how many hours you are from not having potable water, how you would cook your food, heat in the north in the winter or cool your house in Florida summer.

So if you have a wood burning fireplace, maybe you order a few extra cords to quietly sit out there in the backyard. If you have a well, you think about how you would get water out of it if the electric was down (hand crank backup?). If you have access to an unclean river or lake nearby, how would you sterilize the water without electricity. (tablets?)

When the power went down, my mom in her 20th floor condo was very vulnerable. Bought her a radio with batteries and a camping lamp with batteries. Had to walk up 20 flights for everything. So you have all these decisions to make and each has a robustness profile under the crisis lens.

My less urban relatives who are in the exoburbs and further on a couple of acres of land, independent well water, wood heating with electric backup, would be in much better shape during a crisis.

Putting some solar panels on your roof may not make financial sense, but it may make strategic sense, even if they can just generate enough power to keep a dehumidier running, your natural gas furnace running (if the pipelines are not down), your computer and wifi, if the internet is still up.

Propane tank gas stove could end up being worth a million dollars, as it may be the only way to cook food and sterilize water in the neighbourhood.

Access to a lake with fish, tools to catch them, a way to start fire to cook them. A small amount of thought and picking up a $20 rod at Walmart could be the difference between starving or not. If things have collapsed to the point that a dollar is no longer good, you are also going to need a gun to protect yourself from having that fishing rod or your gold taken from you.

Rather than gold, maybe fill a few shelves in the basement with canned stuff, with very long best before dates, that do not require cooking, and be sure to have a canopener and a backup.

Rather than gold, maybe a couple thousand paper one dollars in a safe in case the bank machines and electronic payments systems go down. We used to try to keep a couple thousand low denomination in the safe, and this ended up being very handy in a couple of tricky situations.
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Old 07-31-2013, 09:07 AM   #11
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As a lover of the precious metals, I can only hope that the majority of investing public keep shying away from Gold/Silver and that the price continues its retreat. To me it is insurance on collapse. Bank accounts, 401k, roths, etc are all digital promises that could all go poof one day. I like the fact that I have private wealth that will always (if the pattern of the last couple thousand years holds) hold value. Yes, the chance of a full blown "poof its gone" collapse is slim, but I like to know that my bases are covered. I am definitely willing to sacrifice 10-15 percent of my portfolio for this protection.
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Old 07-31-2013, 09:45 AM   #12
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I can understand why some people would want to hold gold as insurance against real catastrophe. But, Mankiw's piece explicitly avoids that line of reasoning "Hoarding gold seems akin to stocking up on canned beans and ammo as you wait for the apocalypse in your fallout shelter. But,... Despite gold’s volatility, adding a little to a standard portfolio can reduce its overall risk."
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Old 07-31-2013, 09:53 AM   #13
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I can understand why some people would want to hold gold as insurance against real catastrophe. But, Mankiw's piece explicitly avoids that line of reasoning "Hoarding gold seems akin to stocking up on canned beans and ammo as you wait for the apocalypse in your fallout shelter. But,... Despite gold’s volatility, adding a little to a standard portfolio can reduce its overall risk."

Hoarding onto food/guns & ammo/water is not a bad idea either. Hoarding food doesn't even cost anything as you rotate it into your food supply. Having guns and ammo is good fun and the good old fashioned american thing to do. Having some stored water is just the basics of risk mitigation as no human can survive without water more than a few days. The total cost of "prepping" is really pennies for the protection it provides.
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