CPI vs. "Real" Inflation vs. Gold

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

Post by Tyler9000 »

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.

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

Post by Riggerjack »

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.

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

Post by Tyler9000 »

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.

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

Post by Riggerjack »

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.

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

Post by Riggerjack »

Btw, I'm looking forward to seeing your foreign exchange addition. I have looked, and it's hard to find good data. I'm particularly interested in mid 20th century data. How things looked after WWII...

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

Post by Tyler9000 »

Riggerjack wrote:
Thu Apr 06, 2017 7:37 pm
Unless you are counting inflation. Adjusted for inflation, it comes to just over 6%.

So how does gold help?
Yes, I always account for inflation as real returns are all that truly matter. Precise numbers may vary based on the data source.

Measured over the same timeframe, adding gold to the portfolio maintained a virtually identical real return as the stock market alone but with notably less volatility. Too many people think only in terms of a risk premium where lower volatility means lower returns, but portfolio theory with volatile uncorrelated assets is more sophisticated than that. The result is admittedly unintuitive, and I think a lot of rational people get hung up on the "how" and prefer investing methods where the returns mechanism is easier to understand. Which is just fine, BTW. My goal is simply to share a different way to look at the problem.

Circling back to the primary topic, I believe the positive effect that gold has on a portfolio is about a lot more than inflation. I don't know enough to explain every factor involved, but I personally find the evidence that it works pretty compelling.

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

Post by Dragline »

Maybe its about war and other random uncertainties. Gold up sharply on Trump's missile attack in Syria.

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

Post by ThisDinosaur »

Tyler9000 wrote:
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. ;)
Its appropriate if we are in another peak. Which we may be based on nominal and CPI corrected gold prices.

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

Post by Riggerjack »

Tyler9000 wrote: ↑
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. ;)

Its appropriate if we are in another peak. Which we may be based on nominal and CPI corrected gold prices.
Well, we are on the downhill side of gold, and my point with the inflation adjusted chart was that if history rhymes, there is a lot of room to drop.

Which isn't all that useful, by itself.

You still need to make investment choices, and as bad as gold looks to me, buying stocks at their current level seems even scarier. And I have expressed my reservations about bonds in this market on other posts.

My point wasn't don't invest in gold (though I did kind of rant like that, didn't I?). It was that every investment is looking overpriced, in general. You will need to decide what to do about that.

My solution was to put money in highly speculative plays. JJG, antipating either a crop failure, or a big correction in the stock market. Either way will jack up JJG, and/or drop stocks, and I will buy stocks then. It isn't that I like grain future markets, I was just looking for a commodity that was relatively cheap. We had bumper crops of wheat and soybeans last year. That is going to change. I will cash out when it does. As for stocks, I have bought FTR stock. It is around $2/share, down from over 8. With good reason. But there is a lot of room to gain if it turns around. These are both what I consider very risky trades. I don't post them here as a recommendation, but as an example of how I am dealing with this market. You will find your own solutions. Good luck.

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

Post by ThisDinosaur »

I agree that gold, bonds, and US stocks are all overpriced. This has not been the case, AFAIK, at any point in Tyler's dataset. Which is why I am being all skeptical and trolly. Here are some facts I take at face value wrt investing:

--"Investing" is buying a source of income at a particular price. "Speculating" is attempting to guess what other people will pay you later for something you bought from *them* today.
--The 4% rule that supports most of the online FI community comes from the Trinity study. Tyler9000 has incorporated all that data AND a lot more, including several other asset classes. He has made it malleable for investing laymen like me.
--The results of this data set depend heavily on the stock valuation and high bond yields of the study period.
--US stocks are expensive compared to average earnings. Stocks in other countries are cheap by comparison. BUT, investing in those countries involves a long list of risks including currency fluctuations, variable accounting practices, questionable data about earnings, tax weirdness, geopolitical shenanigans, blah blah blah.
--Tyler's calculators show its easy for me to get a 5% perpetual withdrawal rate with my current portfolio IFF I add a huge percentage of Gold and LTTs. This is profoundly appealing and I would totally do it IFF both of those assets didn't look so different now than they did at any point in Tyler's data set.****<===This is a major point that has influenced my hemming and hawing so damn much about gold.

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

Post by BRUTE »

absent a crystal ball, all sources of income that can be bought today might dry up tomorrow - so all investment is speculation to a degree. what is the degree? hard to tell without the crystal ball. the only guide is history, and it's a famously unreliable source of information.

the exact circumstances that will happen probably never happened in the past. but that doesn't mean "it'll be worse". maybe gold will experience appreciation like never seen before. ThisDinosaur doesn't think so? -> Speculation

there is also no valid null-hypothesis, like with most interesting problems in real life: it's not like ThisDinosaur can fall back to stocks "because those will repeat their historical performance". the historical performance argument is valid for everything.

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

Post by ThisDinosaur »

@Brute, didn't you say something like "history is all there is" when someone trashed portfolio backtesting? How reasonable is it for an investor to speculate that gold will appreciate indefinitely?

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

Post by bryan »

Isn't it interesting that the US penny moved from 95% copper to 2.5% copper in 1982 and the CPI was largely tweaked in 1983? (Though copper really went wild since 2004). I didn't realize the pre-1982 penny is such a good value (melt value), especially if you consider you can't exactly buy copper near spot price for any weight less than a ton. If I'm not mistaken large spools of bare copper wire are ~3x spot price. I think I will start collecting pennies instead of throwing them away or refusing them.. if the government doesn't call them in first :/

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

Post by BRUTE »

ThisDinosaur wrote:
Mon Apr 10, 2017 7:44 pm
How reasonable is it for an investor to speculate that gold will appreciate indefinitely?
how reasonable is it for an investor to speculate that ANYTHING will appreciate indefinitely?

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

Post by ThisDinosaur »

BRUTE wrote:
Mon Apr 10, 2017 10:42 pm
ThisDinosaur wrote:
Mon Apr 10, 2017 7:44 pm
How reasonable is it for an investor to speculate that gold will appreciate indefinitely?
how reasonable is it for an investor to speculate that ANYTHING will appreciate indefinitely?
Have I implied that this is reasonable for some other investment?

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

Post by BRUTE »

ThisDinosaur has asked a question akin to "has brute stopped beating his wife". no, of course it's not reasonable. at one point the sun will explode and a short while later, the universe will die a slow heat death. then, gold will definitely stop appreciating.

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

Post by ThisDinosaur »

Yep. Poor wording on my part.
BRUTE wrote:
Mon Apr 10, 2017 12:27 pm
but that doesn't mean "it'll be worse". maybe gold will experience appreciation like never seen before. ThisDinosaur doesn't think so? -> Speculation
Noone can predict the future, but investing demands an educated guess. Sometimes black swanns happen, but the future, by and large, resembles the past. When it doesn't, its usually because you were looking at the wrong interval. Its possible that stock prices will surpass 100× the earnings of the underlying companies. Its happened once before in japan. But that was followed by a huge, long duration snap back. Its possible gold will get so expensive that a man can own more dollars worth of gold than there *are* dollars. I would not want to be that man when that wave crests.

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

Post by Fish »

Assuming 5% PWR is your investment goal (substitute your requirement if it is not):

1) Is there a portfolio that will sustain PWR of 5% for all possible futures? And if not, are there portfolios that will sustain 5% PWR given what will happen over the course of your lifetime (1 specific future)?

2) Can we know with certainty the composition of any such portfolio today? And if not, can we know the probability that a given portfolio will be viable?

3) What is the min/max allocation to gold among the viable portfolios? How does gold affect probability of portfolio failure?

Is it really worth it to think so hard about gold? If portfolio success is highly sensitive to gold allocation do you really want to FIRE and become dependent on it?

Maybe you would be better served by taking this energy and working on becoming post-scarcity. That is my unsolicited advice to you. But what do I know? I'm young and may be asking these same questions about gold in a few years' time. ;)

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

Post by ThisDinosaur »

@Fish, good questions.

1)100%Small Cap Value gives a 6.1% PWR on portfoliocharts. I have a little money in vanguard's SCV fund, but I'm not counting on it making me rich. Mostly because I've learned more about the small cap premium since I bought it, and I'm skeptical that there's a reason for it to persist. Jacob, who is an active investor with far more depth of knowledge than me about the topic, advocates a 3% pwr. I think its arrogant to believe I can do better. BUT, I also think that @Tyler9000 's calculators are loaded with good, academic-economist quality data. That's the only reason I'm considering a 5% pwr a real possibility. The portfolio I'm considering would be broadly diversified with sound theory by any definition without relying too heavily on chasing past winners.

2)Nothing is certain. Probability in this sense can only be measured with past data. If the conditions of the present are reasonably similar to the conditions of the past, its also reasonable to proceed (cautiously) as though that data is applicable. My issue is whether some very relevant conditions (the relative prices of all involved assets) are significantly different than in the data set.

3)For reasons that probably only @Tyler9000 can explain, the portfoliocharts.com calculators seem to show that equal weight portfolios are better than weighted ones. I don't know enough to say more than that.

Is it worth it? It is if it saves me several more years of work.

Becoming post scarcity is an independent goal of mine. Its also probably more important for to-the-letter ERE as defined by Jacob, than me trying to optimize my portfolio. But I posted this in the "Money Questions" section.

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

Post by bryan »

@ThisDinosaur, which historical interval do you think current->future days resemble?

I do feel like there is a risk of "this time is different" as we come closer and closer to a cyberpunk, crazy future (more of life being in the internet, digital money, cyber warfare, ever cheapening automation (mass-production AND micro-production), massive corporate powers). This is just one holistic-trend among many; you may be better served by focusing more on some other trend.

Related to above is why I am generally an advocate for having some % of your portfolio be crypto-currencies (note, Bitcoin is seen as digital gold by many).

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