Gold Aversion

[BRUTE]

So, gold clearly has no value in and of itself beyond the fact that fearful people will trade their REAL resources for it *sometimes*.

this is true for everything. stocks also only have value if other humans will give ThisDinosaur "real resources" for it. same for cash. everything removed from immediate use ("realness" of a resource) only has speculative value in the eyes of the beholder.

[Dragline]

+1

[jennypenny]

Does it make sense to try to compare gold to stocks? To my mind, investing in gold is more similar to investing in art, which can also perform well when other investments don't. It's hard to get rich collecting art, but returns run around 6% on average for quality pieces. Of course, there's a learning curve with art collecting that there isn't with gold, and storage issues are more complicated. OTOH, you can enjoy art in a way you can't with gold unless you buy jewelry.

[ThisDinosaur]

@BRUTE
jennypenny's point above is close to what I'm trying to say. That there is a speculative nature to purchasing both gold AND stocks, but with stocks its not ONLY the speculation that you're purchasing, but also the productivity. I gather that you disagree. To clarify, do you think that purchasing gold and stocks are essentially two different forms of the same thing? One interpretation of MPT and the efficient frontier is that all investing is essentially a game, and the more coins you're flipping/die you're rolling, the more you're likely to win. I submit that there is another dimension to getting positive returns in that you're not just collecting winnings from the losers if you own stocks. You're also collecting profits from the consumers of company products that adds more capital into the investors' playing pool.

[ThisDinosaur]

@jacob. Who am I in that story? Are you the CEO telling me to paint stuff?

[jacob]

@ThisDinosaur - In terms of investing, I think you're the "young jacob who just tossed a pile of sand at the embankment 20 years ago" and I'm currently the boss#2(*) except I'm not him as it relates to you and you haven't found him yet. In particular, I'm not the CEO who knows enough to direct you to a new boss. IOW, I don't think I'm able to tell you how to go to the next level due to this ... https://en.wikipedia.org/wiki/Curse_of_knowledge ... because I did not anticipate your response as it was---mainly because I wasn't sure of your starting point. I was expecting something more along the lines of JL13's response from/to you. I was wrong.

(*) Boss#2 had the metacognition to recognize that other people might not be able to understand/learn at a given level. Boss#1 did not. IOW, Boss#2 operated at a Bateson learning level that was 1 level higher than boss #1. CEO was possible one level above boss #2. That's why he made the big bucks.

However, I do understand where you're coming from now, but I don't know which direction to point you in because I haven't been at your stage since about 2006 and I've forgotten how that was (the things I didn't know back then). I wish I was the CEO but I'm not. I'm definitely not boss#1 telling you to go paint stuff (unless you want to punt which is okay)... Rather, I suggest keep searching for boss #2. In particular, look for people who've just left the stage you're currently aspiring to enter.

Communication of knowledge/learning has a limited range. The best teacher is not someone who knows a lot more than you. It's someone who knows slightly more than you and still remembers how it is not to know the stuff you don't know. This is why, in college, you'll learn more from good TA's than good professors.

NB: I intend this to be [very] helpful. Not dismissive! I'm basically telling you that trying to learn from me is inefficient and that there are very likely people out there who would be more efficient. If you keep trying, though, I'll keep providing ever-more frustratingly vague hints

[JohnnyFactor]

@ThisDinosaur: If it helps, you can follow the gold "chain of value" further down the line. For every ounce of gold you buy, an ounce is removed from the global supply. You have increased the demand and reduced the supply, putting pressure on gold miners to produce more. In a small way, you are contributing to the productivity of a business.

[ThisDinosaur]

Yes. I am an investing novice with no formal education in finance. But talk slower, and I'll try to catch up. Given my particular demonstrated level of ignorance, what specific facts, concepts, assumptions did I miss in my answer?. With regards to JL13 s answer, I feel point one was implied in my answer when I suggested selling the mine or comparing geological estimates of how much remaining gold was in said mine. In point 2, I said that the conversion to dollars was necessary because I live in a place where green paper with presidents faces on it are the preferred medium of exchange. I then corrected for purchasing power because that seems like the important variable.

If you two (jacob and JL13) have a level of formal training that I lack, it makes sense that you would have a shared parlance, jargon, and set of understood assumptions that I missed.

Ok....be gentle.

[jacob]

The fact that there are different models/frameworks of understanding value ... (and formal education if just one of those frameworks and an lagging one at that)... think about value of gold in the ground vs gold being extracted and sold as income vs gold being evaluated in terms of USD vs gold in the ground evaluated in terms of gold price, ... all give different "fair values" ... why is that if the market is truly efficient? Answer that and step up

For questions 2, ponder this link in terms of volatility (which is how you previously saw gold): http://pricedingold.com/dow-jones-industrials/ (less or more volatile?)

[JL13]

I was basically interested in the concepts that Jacob was hinting at and thought if I added some more specific questions that might get your brain jogging along the right path. I don't normally think much about gold so it seemed like an interesting thought experiment. I don't have anywhere near Jacob's insight into this (or at least I probably don't think of it the same way he does). I think it's likely that I'm somewhere in between the two of you but too far away from one (or both) of you to communicate the concepts.

Regarding 1.) I was meaning to get you thinking about whether it matters if you own gold in your hand, gold in a vault in London, or gold in the dirt in wherever they mind it. If you don't need it for 50 years, then likely they're all equivalent to you. If you need to put your hands on it tomorrow, they're vastly different.

Regarding 2.) I was digging into the idea of gold as a currency. If your investment in the gold mine delivers your dividend of one gold oz per year, then that oz of gold will buy you a nice suit in 1700, 1800, 1900, 2000, and likely 2010. So what does it matter to you if the value of gold doubles, if all your going to do with it is buy a suit? Do you measure everything with gold (including your portfolio)? Or just suits?

[BRUTE]

for an ounce of gold, that should be a VERY nice suit.

[JohnnyFactor]

I was digging into the idea of gold as a currency.

That may be the crux of the whole question. Gold is the worlds 2nd most popular currency, behind the US dollar. It has no productive value beyond it's own existence. Since you can literally buy things with gold directly (some things at least), it has the same intrinsic value as a paper dollar. This is the main reason why gold was chosen for the PP. It's currency property is also why it responds to inflation.

Donald Trump Accepting Gold for Real Estate Payment
http://www.wealthwire.com/news/metals/1860

At Least 10 States Have Introduced Gold Coins-As-Currency Bills
http://talkingpointsmemo.com/dc/at-leas ... ency-bills

[jennypenny]

Is something automatically considered currency if it's accepted for payment? This week I'm trading a tiller for some landscaping work, but that doesn't make the tiller currency. I thought it had to be accepted as payment on taxes to be considered currency. Trading gold for real estate strikes me as barter more than a financial transaction.

Don't get me wrong, I'm not arguing against gold's usefulness in a portfolio. I just question whether everyone is judging it's value correctly or is even using the correct metric.

[JL13]

@BRUT

for better comparability along time, let's say it's a non-imported suit.

[JohnnyFactor]

Gold is not legal tender so it cannot be directly substituted for cash. It's also not traded on Forex as a currency. However, it has the advantage of having a globally agreed upon value and is easily converted to fiat almost anywhere. If you had a price in mind for the tiller, the buyer could offer that amount in gold and you could have it changed to the same amount in cash within minutes. That's why it's (unofficially) referred to as the worlds 2nd currency.

[ThisDinosaur]

jennypenny pointed out toward the beginning of the thread that gold "tightens up those lines" in portfolio growth. That Priced In Gold link helps explain why very nicely. Because of gold's relatively constant purchasing power (compared to cash), the other more volatile assets hug close to that line. Likewise stocks, as the only growth asset in the PP, contribute to it's upward slope over time. That link also destroys my comment about just "waiting out" a stock decline. When nominal stock returns are positive but less than inflation, that's where you get the biggest bang from selling gold.

I'm familiar with JL13's concept of a nice suit costing the same thing now in gold as it did a century or more ago. As for your last question, I would measure my portfolio value in "suits," aka, purchasing power. (Like walking by a car dealership everyday thinking, "I could buy that car right now if I wanted to." )

Incidentally, I think I'm coming around to gold now due to the "frameworks of value" comment and the one about pricing gold in my hand vs. yet to be dug out of the ground.

Here's my thinking now. So, If I compare a gold mining stock to another stock; say, Apple or GM. I could hold my hard asset in the form of the output of any of those companies. I could put a quarter of my net worth into a stockpile of iPhones or SUVs. The value of those things is at least partly subjective and based on what the market of consumers is willing to pay for them. This is also true of gold. I think I was missing the point that the output of the businesses I own in stock are all purchased by consumers based on there own personal preferences, whatever they may be. Same for gold. If people collectively decide they don't want Apple or GM products any more, then those things lose their subjective value. Just like gold. Before this conversation, I only saw that gold had no inherent value beyond the collective and unpredictable opinion of the masses. Now I see that that's true for damn near everything else you can trade for.
Brute was making this point for company stocks, and I was arguing because I didn't extend my thinking to the PRODUCTs of those companies.

As for Jacob's question about how this all relates to an "efficient market," my answer is that any apparent efficiency in the market would have to stem from a consensus of subjective opinion about what something (i.e.,un-mined gold + the cost and effort of extracting it) is worth. If it has no "inherent value," then its value is determined by the opinion of the mob at large. Profit in this system then, would come from someone with a DIFFERENT opinion, who the mob at large comes to agree with later.

[tylerrr]

I like owning gold in my PP for diversification against stocks and possibly inflation(but that's debatable). There's a historic track record with the precious metal being considered valuable by the majority of people. Some people say there is no utilitarian use, but it's considered beautiful in the creation of jewelry and other ornamental items.

I'm not sure if anyone else has mentioned that gold also has scarcity built in....This gives me added comfort in owning it. You can't just print gold. There is a limited amount on Earth so I believe that also adds to its long term value. Does it not?

[ThisDinosaur]

On the other hand, how is gold not like tulips?

[stayhigh]

Because people believe in golds value for centuries. Investing is also based on peoples believes, not pure numbers.

[jennypenny]

Because people believe in golds value for centuries. Investing is also based on peoples believes, not pure numbers.

Didn't Harari make that point in Sapiens about money -- that it relied on narratives? If so, gold's reinforcing narratives not only go back centuries but also cross over to many different cultures and many different classes of people. That kind of narrative history goes far beyond any other asset class's belief system. It also shows why a currency alternative like bitcoin will struggle with legitimacy until a compelling narrative develops to support it.