CPI vs. "Real" Inflation vs. Gold

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ThisDinosaur
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CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Tue Apr 04, 2017 8:26 am

Gold is expensive right now IFF you compare it to official CPI numbers. But, there is some debate about how reliable the consumer price index is as a judge of inflation.

Do you think gold is relatively expensive, cheap, or fairly priced right now? And why do you think that?

Some context for my question:
Robert Shiller says that the current upward stock market trend is different from previous booms in that it is driven by fear-led increased savings. As evidence, he cites the increased price of all assets including gold. As a counterpoint, if you use alternative methods of measuring inflation, gold is actually under-priced.

Some light reading:
http://www.investopedia.com/articles/07 ... eindex.asp
http://www.shadowstats.com/alternate_da ... ion-charts
https://www.5yearcharts.com/historical- ... old-worth/

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Tue Apr 04, 2017 12:28 pm

brute is unsure where "fair" fits on the "overpriced" vs "underpriced" spectrum.

but it certainly feels like a somewhat unprecedented environment - stocks are hot, real estate is hot, gold is pretty hot, bitcoin is hot.. how are bonds doing? most things are hot. and this seems to be true not only for the US, but most countries (brute has looked at).

General Snoopy
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Re: CPI vs. "Real" Inflation vs. Gold

Post by General Snoopy » Tue Apr 04, 2017 4:03 pm

"hotness" is because there is a lot of cash and not a lot of good investment (in the real world, the nonfinancial kind) opportunities. Why this is the case, is a good question.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Tue Apr 04, 2017 8:15 pm

CPI is about as good as it can be. Baskets of goods change, there has been at least one good thread on the topic of CPI vs inflation here.

Asset prices are high. This is where QE money went. The inflation bugs were sure it would cause inflation/hyperinflation. I was one of em. Instead of decreasing confidence in dollars, it has fueled asset bubbles in all assets. Demographics help, here.

I have no good contribution toward gold pricing, other than to point out that if you need "alternative metrics" to justify an investment, it may not be the investment you think it is.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Wed Apr 05, 2017 7:58 am

@BRUTE
I mean how far (direction and magnitude) is the current price from its historical mean, corrected for inflation or compared to other financial assets? As for other countries, most of them have markets that are undervalued compared to the US (on paper). This seems to correlate pretty well with perceived risk; Russia and China have deep value stock markets, probably because of concern about another cold war or a currency war, respectively.

@General Snoopy
QE is one explanation for why all assets are over priced. Another is that a higher percentage of the population is investing (retirement accounts, higher real wages) than in the past.

@Riggerjack
Are you talking about this thread?
http://earlyretirementextreme.com/forum ... php?t=2755

Have you seen the dollar value of your gold go down relative to other investments? When did you buy it?
if you need "alternative metrics" to justify an investment, it may not be the investment you think it is.
If the metrics everyone else is using are wrong, its not the investment THEY think it is.

I'm considering the following possibilities:

1)Gold is overpriced/at an all time high because of QE/ many people remember 2008 and is terrified.
2)Gold is underpriced or close to average, and the false narrative of #1 is being driven by misleading inflation statistics,
3)Neither 1 or 2 matter because Gold will inevitably still go up the next time the stock market drops or there is a recession.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Wed Apr 05, 2017 8:23 am

I don't have any gold.

I can say that after looking into CPI, it is as good a inflation indicator as can be expected.

For a uncorrelated commodity, I used JJG.

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Forskaren
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Forskaren » Wed Apr 05, 2017 1:52 pm

I mainly own some gold to have something to barter with if the digital payments are destroyed or if I have to flee for some reason. I think the best measurement of inflation is how much does your costs change if you keep living at the same standard.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Wed Apr 05, 2017 6:39 pm

BTW, that wasn't the thread I was thinking of. At one point, we broke down the items in the "basket of goods" used in each of the inflation indicators, and how they have changed over the years. I'm pretty sure that was here. This was back around 2012, when QE was sure to lead to hyperventilating or hyperinflation. ( I was on the hyperinflation side, yet mainly experienced hyperventilation...)

Long story short, if I had been running the BLS for 30+ years, I hope I would have done as good a job with the various baskets as has been done. Put that down as a libertarian pointing out a government job well done. It hurts to say it, but it's true.

I'm not a gold bug, and I won't bore you with why, if you want gold, get gold. But don't bet the CPI is manipulated as a justification to buy gold.

PS, if you need a metal, buy nickles. Melt value exceeds face value, and none of the liquidity issues of gold.

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Dragline
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Dragline » Wed Apr 05, 2017 8:08 pm

There are enough pundit/prognosticators saying gold is undervalued or overvalued to lead me to believe its pretty fairly valued at the moment.

I don't think it necessarily has any causal relation to the CPI or inflation rates, one way or another.

Alexa1994
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Alexa1994 » Thu Apr 06, 2017 2:43 am

I have invested in gold and the best part is that the gold rarely depreciates.

IlliniDave
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Re: CPI vs. "Real" Inflation vs. Gold

Post by IlliniDave » Thu Apr 06, 2017 7:51 am

I compute my own personal inflation rate--just how my spending grows year over year. I don't remember the number exactly, and I'm too lazy to hop over to my journal thread and look it up, but it's somewhere in the 3.0-3.5% range so I think a little higher than "official" metrics. Some of what I spend money on is consistent year-to-year, some is not. Comparing it to CPI or something is sort of tangerines to oranges.

It's a quibble, but I don't consider gold an investment because it has no internal return mechanism. It's a commodity that can be speculated on. From that perspective whatever someone will pay for it is by definition a fair price. Being a fixed commodity (an ounce of gold is always an ounce of gold) it's general trend over time is to track inflation and last time I saw data the implication was that it's price was still on the high side. Gold is also a place to park wealth, but it doesn't look like a money maker right now, just a diversifier. My rule of thumb is when people are buying airtime and otherwise marketing gold for sale, it's probably not the optimal time to be buying it if the motive is to turn a profit.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Thu Apr 06, 2017 8:55 am

I can't agree any harder with your second paragraph, iDave. Gold isn't an investment because it doesn't have a return. By definition, buying it for a portfolio is speculation. Its a good diversifier exactly because its not a paper asset.

Gold has done well historically, and you can demonstrate a 5% sustainable withdrawal rate on PortfolioCharts by adding gold and LTT to a global stock portfolio. But I can't tell if that's because of a)its diversifying power, or b)because it has been on a time-limited gold bull market that will eventually revert to a lower mean. Is backtesting a high gold allocation just data mining/picking winners? Is buying it now just preparing for the last war?

If gold's current high price is misleading, then I could justify using it as ~20% of my portfolio instead of ~5%.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Thu Apr 06, 2017 9:40 am

@Riggerjack
I'm having trouble finding the thread where you debate the CPI's methodology.

I'm not prepared to bet against the government's statisticians just yet. The narrative about gold is that it holds its value when currencies lose theirs. But the other half of the story is that it overshoots its price when the masses stop trusting governments and markets. If that second thing is happening right now, then gold is overpriced. If the first one is more significant right now, then it may be fairly priced. But you need accurate inflation data to know the difference.

@Dragline
I was using google trends to see if searches for "gold" or "permanent portfolio" were higher or lower than average. Trying to quantify your idea about pundits and prognosticators. It doesn't seem like searches for those terms are particularly high or low. I figure if those terms are unpopular, its a good time to buy and vice versa.

Another way to look at this might be to compare gold price to the Global Market Portfolio vs. this ratio in the past. Like, see how much investors are putting into gold in aggregate and trend it.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 06, 2017 9:43 am

@ thisdinosaur: OK, so you are in accumulation phase. You are buying assets. You know you want to retire with X dollars invested. At that time, you want Y% of X invested in gold. It hardly matters whether you buy that gold now or the day before you retire, as it has no return.
So, you need to work out what your price is. At what point is gold a good deal for you? Then when gold is cheaper than that price, buy it. When it isn't, don't.

I like the portfolio charts site, but you seem to have a lot of faith that gold will behave the same in the future as it has in a short window that started right after Bretton Woods. The site is great, but the map is not the territory. If I had a better dataset, I'd post it. I don't.

My reasoning for avoiding gold is the complete lack of rational thought that surrounds it.
I have invested in gold and the best part is that the gold rarely depreciates.
things like this.

Good investments are not advertised on am radio.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 06, 2017 9:57 am

https://inflationdata.com/Inflation/Inf ... lation.asp

Look at the first chart. Now think of portfolio charts, and where his dataset begins. Now try to tie every stupid thing you have heard about gold into that chart. Now go read Taleb again.

Or not. Your money.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Thu Apr 06, 2017 10:16 am

Riggerjack wrote:
Thu Apr 06, 2017 9:43 am
I like the portfolio charts site, but you seem to have a lot of faith that gold will behave the same in the future as it has in a short window that started right after Bretton Woods. The site is great, but the map is not the territory.
Hang on. I am *extremely* skeptical that gold will behave the way it did when we came off the gold standard. That's why I started this thread. I need a better reason to buy it than its Bestest-Ever performance.

I've actually read that inflationdata.com article before. Right before starting this thread, in fact. And Taleb has said he gave up on gold because it doesn't preserve purchasing power against inflation.
My reasoning for avoiding gold is the complete lack of rational thought that surrounds it.
In another thread I started about gold, someone convinced me that there is nothing rational about financial markets. As Charlie Munger says, if Economics isn't Behavioral, then what the hell is it? Anyone who remembers that thread probably thinks I should just shit or get off the pot.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 06, 2017 11:41 am

I just googled gold inflation adjusted, to find the chart.
I don't know jack about the author. Gold is not my thing.
I wanted the chart, just to show the difference between gold before the portfolio charts dataset, and after. Also, look at the dot-com bubble burst of 2001. Did gold act like you expect? Would it function the way you want it to, the next time there is a burst bubble? Why? And when will you pull the trigger on a rebalance?

You need these answers before you come to that crisis. Otherwise, just buy an index fund, and check it yearly.

Or buy and rent out property.

Or start your own business.

Or spend all your money on peanut butter, and fill your basement. Someday soon, a peanut crop WILL fail, and who will be laughing then!?!

In the end, you have to be comfortable with your strategy. You have to know what you will do when the crisis moments happen, before they happen, or you should find investments not subject to crises.

IlliniDave
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Re: CPI vs. "Real" Inflation vs. Gold

Post by IlliniDave » Thu Apr 06, 2017 11:41 am

ThisDinosaur wrote:
Thu Apr 06, 2017 8:55 am
I can't agree any harder with your second paragraph, iDave. Gold isn't an investment because it doesn't have a return. By definition, buying it for a portfolio is speculation. Its a good diversifier exactly because its not a paper asset.

Gold has done well historically, and you can demonstrate a 5% sustainable withdrawal rate on PortfolioCharts by adding gold and LTT to a global stock portfolio. But I can't tell if that's because of a)its diversifying power, or b)because it has been on a time-limited gold bull market that will eventually revert to a lower mean. Is backtesting a high gold allocation just data mining/picking winners? Is buying it now just preparing for the last war?

If gold's current high price is misleading, then I could justify using it as ~20% of my portfolio instead of ~5%.
My guess is a) is the more likely answer with "diversifying" understood as a correlation story. Of course the difficulty basing things on backtesting is the future could well be different than the past. You seem aware of all of that. I own no gold so really haven't looked into it in detail. If I were to change my opinion on that I would likely opt for the lowest stake I thought I could derive the benefit I wanted from. But that's an emotional/behavioral decision.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Thu Apr 06, 2017 12:28 pm

IlliniDave wrote:
Thu Apr 06, 2017 11:41 am
I would likely opt for the lowest stake I thought I could derive the benefit I wanted from.
That's the other way I'm considering going. A small allocation to gold equal to a year or two's expenses at most. Enough to get me through a crash and rebound if gold does well, not enough to hurt me if it doesn't.

@Riggerjack
That's how I found that article and chart, too. Its interesting that the author has a different take away than you and I do. He is in favor of buying it as a catastrophe hedge. I see the line between before and after the Nixon Shock as evidence of a very fragile story about gold. The sort of thing Taleb might hedge against if he saw a bullshit story endorsed by all the "experts."

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Re: CPI vs. "Real" Inflation vs. Gold

Post by Tyler9000 » Thu Apr 06, 2017 1:07 pm

Riggerjack wrote:
Thu Apr 06, 2017 9:43 am
I like the portfolio charts site, but you seem to have a lot of faith that gold will behave the same in the future as it has in a short window that started right after Bretton Woods. The site is great, but the map is not the territory. If I had a better dataset, I'd post it. I don't.
Well, since the repeal of Bretton Woods changed the fundamental behavior of gold in financial markets then I'd argue the data before that is irrelevant to modern investors. I understand the reluctance to read too much into the immediate spike, but that's why I provide data covering every start date including ones after the spike. The data suggests that the benefit of gold to a diversified portfolio holds up even when one ignores those first few years. For example, it was equally helpful in the 2000s as a complement to stocks.

IMHO, gold gets a bad rap because even its fans like to over-simplify it. Yes, the price is affected by inflation but it's also affected by a bunch of other factors. I wouldn't personally buy it simply to hedge against inflation, but I absolutely own a good chunk for how it fits into the greater global economic puzzle and fills in the shortcomings of other investment options.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Thu Apr 06, 2017 4:02 pm

@Tyler, gold is supposedly uncorrelated / anticorrelated with US currency, stocks and bonds. But it seems like all four are correlated right now. How is that not significant when considering a buy and hold asset allocation?

Basically every one of the causes of high gold price in that article you posted are satisfied. If I DCA into the PP or GB, and then interest rates go up; the LTTs I own will drop in price. So will the gold. So will the stocks.

Also, your Benchmark calculator shows that an allocation with gold underperforms its equivalent without gold if the First Year of Returns is close to the peak in gold price. What do you think about that given the high price of gold?

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Tyler9000
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Tyler9000 » Thu Apr 06, 2017 4:55 pm

Picking a start date at a peak will always make a portfolio look bad. If you're going to do that, be sure to cast the same critical eye to a stock peak. ;)

No matter what you choose, the best path is the one you're most likely to stick with long-term. IMHO, the beauty of a truly diversified portfolio is that individual asset peaks and valleys are irrelevant. But others think differently, which is why there's no silver bullet.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 06, 2017 5:22 pm

OK, so I'm clear, I have no issues with portfolio charts, the dataset you are working with. It only came up because this dinosaur was referencing it.

My issues with gold may be emotional. I grew up really poor, with an odd exposure to physical wealth. I moved heavy gold ingots as a kid. In my mind, gold, and to a lesser extent, gems, are just dealer's wealth. Why do you want it? Portable (ish). Pretty to look at when you are high. In a pinch, it makes a lousy club. You are better off using a bottle.

So, when I started saving, sure I looked at gold. Inflation hedge. Nope. Uh, for rebalancing in Panics. Nope. Look at the chart. Crash of 87, it rallied a bit,in the middle of a 20 year bear market. Gold lost 85% of its real value from 80 to 2000. It didn't recover in the dot-com bubble burst. If it follows the pattern of the ONLY unmanipulated period on record, it is due to lose value for 13 more years.

Of course, during those 13 years, it'll pay dividends... I mean look pretty, and function as a very poor home defense strategy.

Maybe I'm missing something, but I just can't seem to find a real reason to own it, over almost any other form of wealth. It's just bling.

Or maybe I'm wrong. If you have any counter examples, please share.

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Tyler9000
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Tyler9000 » Thu Apr 06, 2017 5:54 pm

No worries. Gold is always a controversial topic that brings out the natural skeptic in many people.

I generally agree with each of your points if you only think of gold in isolation. But once you start studying how it interacts with stocks it's a lot more interesting. Most people have no problems thinking of bonds that way, but they struggle with applying the same thought process to gold even if it's arguably a better example.

FWIW, I'm currently looking into international portfolio data in different currencies. It's way too early to share the results, but I've already noticed that gold is helpful in a portfolio even when you're thinking outside of US dollars and markets. Think of gold as an independent universally-accepted currency hedge favored by central banks, and perhaps its potential value in the right portfolio may be more evident.

All that said, while I do personally see a lot of value in gold I'm not a goldbug. Never invest in something you don't understand or don't believe in.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 06, 2017 7:37 pm

OK. So, gold plus tsm gets a cagr of 6%.

But just the S&P 500, from 1972 to 2015 gets a cagr of over 10%.

http://www.moneychimp.com/features/market_cagr.htm

Unless you are counting inflation. Adjusted for inflation, it comes to just over 6%.

So how does gold help?

I'm not trying to be antagonistic, I really want to know. My passive investments are all over the board. I certainly wouldn't recommend anyone follow my lead. But whenever I dig into gold, either it is a story someone tells themselves ( that doesn't match the data) or its someone trying to sound confident, and their story falls apart when I dig into details.

Gold doesn't make any money on its own, so the only way I can think of it making money is a rebalance. Okay, but when you look at the price of gold during stock crashes, it hardly seems worth holding for that purpose.

Don't get me wrong, if it's $300-400/oz, I could see it as a good speculative play. But over $1000? There's no place to go but down, long term.

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