If you would have bought Gold (the white line) at any time since 1991, it would have been a better investment than the Standard and Poor's 500 index (orange line), with a lot less volatility.
12 comments:
Anonymous
said...
if you had bought zero coupon bonds you would have done even better... with no terminal volatility.. their payoff is guaranteed...
nice one, anonymous. there is quite a bit of terminal volatility in long dated zero coupon bonds after inflation expectations, I guess, but still a more comfortable 20 year ride than owning gold. gold looks great as long as people don't want to cash in on their investments, but one day everybody will need a new buyer. to me that is a bigger worry than realized volatility.
What's the message? We all know that Markowitz MV Optimization would tell us to go long Gold... There is obviously a high risk of gold losing its save haven/investment status when the financial outlook brightens so is it all about forecasting jewelry demand esp. in India?
How about 1 month ago :) Not surprising to find this after a drop in equities and a record run for gold.
Assuming this is total return (including dividends) for S&P 500, what you want is average return and volatility for different time periods (1991 seems arbitrary). IF you don't like average returns, you can calculate 5, 10, 20 yr cum returns with different starting periods and then average them. That should give you a more meaningful return analyses.
B.A. - You can also say that fiat currency looks great until everyone wants to cash in their paper claims on...*nothing* all at once, and shifts into hard assets. At one time Volker made $US more attactive by raising rates drastically but that probably isn't a viable option this time around.
to me fiat currency has a lot more of "market depth" than gold - the market is pretty much the entire economy, where a lot of stuff is waiting for a buyer with cash to spend (for all the money the fed is printing). for me that is sufficient "cover", and don't think we can hope for a better one. purchasing power of currency has had very low volatility. there is a whole lot you can buy with fiat currency in the world, and new stuff is being produced all the time (I want to buy the new mac book air :D).
It doesn't look like the real assets on offer in exchange for paper currency will suddenly dry out any time soon, and even if that were to happen one day, don't think gold would be much help to anybody in that case. we're not flooded with cash yet, or else we'd see it in the price of everything, not just gold, and if we are worried about US turning Zimbabwe style, there are better hedges out there.
by comparison with fiat currency, gold is a smaller and highly speculative market. it fluctuates a lot in real terms. gold has attracted a lot of new buyers and has created huge amounts of mark to market gains on paper. but current owners won't be able to exchange gold for real assets, or maybe do so with huge transaction costs. to benefit from their investment and cash in on the big gains, ALL current owners will need new buyers willing to pay top fiat currency. there will be a lot of people looking to sell one day (probably not soon).
to me gold is a long dated low leverage ponzi scheme. increasing amounts of cash are passed from "new members" to "old members" in exchange for something that nobody ever uses and most don't ever see. that's not true for housing, for instance. you don't have to "pass the buck" to somebody else, if you don't want. you can always live in it, or rent it out to somebody else, whichever makes more sense. with gold you can only sell it. so we might as well forget about the metal and pass the cash around in an orderly fashion, as in a real ponzi scheme :) we'd save some transaction costs.
as a side note, I can't bring myself to think that realized volatility is in any way a useful measure of risk in such a case...
Gold still not ahead given dividends and the cost of carry for gold, but nevertheless, the point is well taken. Cult of equity investors are simply not being compensated for risk as much of modern financial theory requires.
Institutional asset allocations predicated on the existence of an equity risk premium are not sustainable, and bonds will remain a buy as pension funds capitulate and reverse their current 60%+ equity/ 0% Treasury allocations.
B.A. - You write: “purchasing power of currency has had very low volatility.” Well, a 1971 $1 bill (when Nixon bailed on the gold standard) now has the purchasing power of about 18 cents today….so in the sense that a beginner ski trail gets you to the bottom smoothly and without many bumps, I guess it hasn’t been that volatile but that’s hardly the whole story.
Also you write: “…with gold you can only sell it.” Well yeah, it’s money…real money as some (like Ron Paul) would have it. Hard assets that are capable of producing revenue or stuff people need are great but they tend to be things that are difficult to put in your pocket, re-locate or hide from the government – qualities that are starting to come back into vogue just now.
That gold = money is somewhat arbitrary since it has almost no real utility but I suppose it persists as a universal solvent because its scarce, it can’t be fabricated and it’s always had substantial (well above zero) buying power in all advanced civilizations at all times (as far as I know) throughout history. Fiat currency….not so much.
You can only say that about actual, physical AU however and God knows what will actually happen if some large number of derivative claims on a finite amount of bullion are all exercised at once.
Transacting in gold is a pain in the ass granted but I think the metal’s recent popularity derives not from it’s viability as a currency but from the belief that it is the best store of value, the best preserver of wealth in an uncertain world. When confidence returns there may be more appetite in this regard for taking one step away – currency backed by gold.
It will certainly be interesting to see how it all plays out.
“…with gold you can only sell it.” Well yeah, it’s money…real money as some (like Ron Paul) would have it."
for the foreseeable future, gold owners have to sell gold for fiat currency. it is just like any other merchandize. the way it fluctuates in real terms against everything else makes me think it should never become currency again. better stay with the fake and stable one. if I were running a company, I'd be really scared to issue long dated gold denominated bonds to build a new plant. jewelry buyers from india can bankrupt me in no time.
agreed that it has some perceived value and always had, and is good for putting in your pocket or hiding in the back of your garden, but the comparison between gold and cash as a store of value is not the right one. should be gold against financial assets, like bank deposits or government bonds etc. whoever wants to save cash will invest in something rather than keep it in a secret hiding place at home.
if you extend the analysis to the beginning of the 20th century, I bet any kind of low risk financial asset has been a better "store of value" than gold (even in countries that were defeated in the 2nd world war, probably). something with no yield can't keep up for too long with something that has a positive real yield.
I agree it is interesting to see how it will play out.
There are no safe assets. Gold has no counter-party risk attached to it and therefore generates no "interest". Another thing making it so attractive today is that it is not so easily "created" (devalued) by central bankers trying to 1) pump up ridiculously over-valued housing and 2) salvaging ridiculously over-leveraged investment banks.
I don't think standard deviation fully represents the risk of gold. From January 1980 through March 2001, the price of gold fell 83% in real terms. What other mainstream asset class has created such a catastrophic loss of wealth over 20 years?
12 comments:
if you had bought zero coupon bonds you would have done even better... with no terminal volatility.. their payoff is guaranteed...
nice one, anonymous. there is quite a bit of terminal volatility in long dated zero coupon bonds after inflation expectations, I guess, but still a more comfortable 20 year ride than owning gold.
gold looks great as long as people don't want to cash in on their investments, but one day everybody will need a new buyer. to me that is a bigger worry than realized volatility.
What's the message? We all know that Markowitz MV Optimization would tell us to go long Gold... There is obviously a high risk of gold losing its save haven/investment status when the financial outlook brightens so is it all about forecasting jewelry demand esp. in India?
How about 1 month ago :) Not surprising to find this after a drop in equities and a record run for gold.
Assuming this is total return (including dividends) for S&P 500, what you want is average return and volatility for different time periods (1991 seems arbitrary). IF you don't like average returns, you can calculate 5, 10, 20 yr cum returns with different starting periods and then average them. That should give you a more meaningful return analyses.
B.A. - You can also say that fiat currency looks great until everyone wants to cash in their paper claims on...*nothing* all at once, and shifts into hard assets. At one time Volker made $US more attactive by raising rates drastically but that probably isn't a viable option this time around.
@ Mercury
to me fiat currency has a lot more of "market depth" than gold - the market is pretty much the entire economy, where a lot of stuff is waiting for a buyer with cash to spend (for all the money the fed is printing). for me that is sufficient "cover", and don't think we can hope for a better one. purchasing power of currency has had very low volatility. there is a whole lot you can buy with fiat currency in the world, and new stuff is being produced all the time (I want to buy the new mac book air :D).
It doesn't look like the real assets on offer in exchange for paper currency will suddenly dry out any time soon, and even if that were to happen one day, don't think gold would be much help to anybody in that case. we're not flooded with cash yet, or else we'd see it in the price of everything, not just gold, and if we are worried about US turning Zimbabwe style, there are better hedges out there.
by comparison with fiat currency, gold is a smaller and highly speculative market. it fluctuates a lot in real terms. gold has attracted a lot of new buyers and has created huge amounts of mark to market gains on paper. but current owners won't be able to exchange gold for real assets, or maybe do so with huge transaction costs. to benefit from their investment and cash in on the big gains, ALL current owners will need new buyers willing to pay top fiat currency. there will be a lot of people looking to sell one day (probably not soon).
to me gold is a long dated low leverage ponzi scheme. increasing amounts of cash are passed from "new members" to "old members" in exchange for something that nobody ever uses and most don't ever see. that's not true for housing, for instance. you don't have to "pass the buck" to somebody else, if you don't want. you can always live in it, or rent it out to somebody else, whichever makes more sense. with gold you can only sell it. so we might as well forget about the metal and pass the cash around in an orderly fashion, as in a real ponzi scheme :) we'd save some transaction costs.
as a side note, I can't bring myself to think that realized volatility is in any way a useful measure of risk in such a case...
Gold still not ahead given dividends and the cost of carry for gold, but nevertheless, the point is well taken. Cult of equity investors are simply not being compensated for risk as much of modern financial theory requires.
Institutional asset allocations predicated on the existence of an equity risk premium are not sustainable, and bonds will remain a buy as pension funds capitulate and reverse their current 60%+ equity/ 0% Treasury allocations.
B.A. - You write: “purchasing power of currency has had very low volatility.” Well, a 1971 $1 bill (when Nixon bailed on the gold standard) now has the purchasing power of about 18 cents today….so in the sense that a beginner ski trail gets you to the bottom smoothly and without many bumps, I guess it hasn’t been that volatile but that’s hardly the whole story.
Also you write: “…with gold you can only sell it.” Well yeah, it’s money…real money as some (like Ron Paul) would have it. Hard assets that are capable of producing revenue or stuff people need are great but they tend to be things that are difficult to put in your pocket, re-locate or hide from the government – qualities that are starting to come back into vogue just now.
That gold = money is somewhat arbitrary since it has almost no real utility but I suppose it persists as a universal solvent because its scarce, it can’t be fabricated and it’s always had substantial (well above zero) buying power in all advanced civilizations at all times (as far as I know) throughout history. Fiat currency….not so much.
You can only say that about actual, physical AU however and God knows what will actually happen if some large number of derivative claims on a finite amount of bullion are all exercised at once.
Transacting in gold is a pain in the ass granted but I think the metal’s recent popularity derives not from it’s viability as a currency but from the belief that it is the best store of value, the best preserver of wealth in an uncertain world. When confidence returns there may be more appetite in this regard for taking one step away – currency backed by gold.
It will certainly be interesting to see how it all plays out.
hi mercury,
“…with gold you can only sell it.” Well yeah, it’s money…real money as some (like Ron Paul) would have it."
for the foreseeable future, gold owners have to sell gold for fiat currency. it is just like any other merchandize. the way it fluctuates in real terms against everything else makes me think it should never become currency again. better stay with the fake and stable one. if I were running a company, I'd be really scared to issue long dated gold denominated bonds to build a new plant. jewelry buyers from india can bankrupt me in no time.
agreed that it has some perceived value and always had, and is good for putting in your pocket or hiding in the back of your garden, but the comparison between gold and cash as a store of value is not the right one. should be gold against financial assets, like bank deposits or government bonds etc. whoever wants to save cash will invest in something rather than keep it in a secret hiding place at home.
if you extend the analysis to the beginning of the 20th century, I bet any kind of low risk financial asset has been a better "store of value" than gold (even in countries that were defeated in the 2nd world war, probably). something with no yield can't keep up for too long with something that has a positive real yield.
I agree it is interesting to see how it will play out.
There are no safe assets. Gold has no counter-party risk attached to it and therefore generates no "interest". Another thing making it so attractive today is that it is not so easily "created" (devalued) by central bankers trying to 1) pump up ridiculously over-valued housing and 2) salvaging ridiculously over-leveraged investment banks.
I don't think standard deviation fully represents the risk of gold. From January 1980 through March 2001, the price of gold fell 83% in real terms. What other mainstream asset class has created such a catastrophic loss of wealth over 20 years?
Note current prices of gold and S&P 500 versus as of the publication date of this post... "Sometimes they do ring a bell."
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