State of the economy - 2016 edition

[GoodmanBrown]

Not sure if politics/economics is considered off limits in the forums these days, but was curious to hear what posters were thinking regarding the economy. I recall a lot of doom and gloom a few years back and was wondering how people feel about the American and/or global economy.

In the US, the unemployment rate is only 5.0%. That said, labor participation and long-term unemployment remain low and high, respectively.

The Dow Jones and S&P 500 are both down ~3% this year, but still up about 30% from their highs prior to the recession.

People were worried about oil prices, but right now, oil is as low as it's been in 10+ years. This has to do with the economy not being at previous levels obviously, but there's an undeniable increase in renewable energy and domestic natural gas production. Estimates are that the US has over 50 years of recoverable natural gas we could rely on if needed.

Inflation, which was previously posited on this board to be 8%+ in 2007 isn't even 1% this year, using the CPI. The AIER "Everyday Price Index" which started the previously mentioned thread has it roughly the same and is even flirting with deflation given the continued low prices for gas.

None of the above is to offset the fact that wages are pretty stagnant for the bottom and middle class which I think many agree with have long-term negative consequences for the economy. That said, household debt payment as a percent of disposable income is down to near normal levels (~10%), and the total household debt to GDP ratio is coming down (not a whole lot of data for that one though).

That said, Europe is in no better shape (the US is expected to grow faster than any major European economies over the next 2-3 years). And of the BRIC economies, India seems to be the only 1 of the 4 that people are still hopeful about. Brazil is in economic and political upheaval, and Russia's economy has been set back 10 years by their invasion of Ukraine and the resulting sanctions, plus the fall in oil prices. Finally, no one really knows what's going on in China right now apart from the fact that it clear there's a slowdown occurring. Chinese administrators at all levels have been cooking the economic books for so long to get promoted that even the Politburo doesn't have reliable economic figures.

Last, just for some good-natured trolling, are people still pleased about their gold purchases? If you purchased in 2009, you're still good, but I'm hoping people didn't put too much money in gold around 2012.

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[pgg]

I still believe nobody knows nothin' ... In no particular order:

I haven't changed my asset allocation much, just a little less equity and a little more bond compared to a few years ago. Still 10% gold. As a whole has done well, but not because of that.

I still think China is ****ed. I'm saving up my schadenfreude, hoping for a grinding slouch rather than a crash, and hoping the spillover doesn't hurt us too much.

Oil prices are low because the global economy is weak and because the Saudis et al are pumping furiously to harm US domestic production, not because new sustainable sources have come online or because there's a long-term solution to energy needs. Lockheed Martin says they've got compact fusion reactors figured out and just a few years away from commercial use; I'll believe it when I see it. If anyone else made that claim, I'd dismiss it without a second thought, but LM is a real company that makes real things for real profits, and their Skunk Works division has done some amazing work in the past. But I still don't see a long term energy solution short of a paradigm-altering new technology or resurgence in nuclear fission plant construction.

US unemployment is down, but the quality of the jobs, the pay of the jobs, and the benefits of the jobs are poor. The gap in both wealth and income between rich and poor has widened. This long term trend is a bigger problem than any cyclic unemployment figure is up or down a few percent.

It's nice that the EU didn't collapse and splinter. That risk seemed pretty real a couple years ago.


I ticked over 10 years on SDN a week ago. It's fun and occasionally cringe-worthy to read stuff I wrote years ago ...

Revisiting a couple of my old thoughts from the early-2012 thread you linked

1) We've added a few $trillion to the debt. I still don't see a solution to the US national debt that doesn't involve either default or inflation. I don't see how it's even remotely possible to grow our way out of it.

2) It's funny to read that back then I was more or less satisfied with Obama's foreign policy.

3) I never bought a NG fueled car, hybrid, or other super-efficient abomination of a half-vehicle. Fortunately that was just a passing fancy when gas was $4+/gallon.

4) A short gun-control derail on 2 Mar 2012:

The democrats know gun control is a non-issue nowadays (Gabby Giffords....the Ohio school shooting....but yet no new legislation).

This was a plausible thing to believe then. But nine months later some ******* shot a bunch of kids in Sandy Hook and the Democrats were all over gun control again. And even today I talk to people who innocently wonder why I can't ever trust or vote for a Democrat, because gun control is a non-issue, not really, they don't really want more guns banned or confiscated. But I digress.

5) Those stupid endangered seals are still closing beaches near my mother's house.


(Edit - the filter got me.)

 

[ambiturner]

My worthless opinions:

I think we'll see a few years of market cooling, a la the early 2000s, but so far there doesn't seem to be an imminent crash. It is funny to look back at oil, especially since people are trying to convince us that low gas prices are a bad thing when just a couple years ago it was high prices that were stifling recovery.

What's most disappointing to me about these boom years is how few people really benefited from them. There are many, many tech workers in the bay area that became jaw-droppingly wealthy, and a few more in NYC, Boston, Texas, etc, but while housing and income shot through the roof in those areas they more or less remained the same in much of the middle of the country. Maybe it's just hindsight but I felt like the wealth of the 90s tech boom was much better distributed, if anybody has numbers that confirms or disproves that it would be interesting to see. Even if the boom ends it seems unlikely that those areas will crash since so much foreign money is being dumped into their real estate and businesses.

 

[GA8314]

I agree with PGG. Nobody knows nothing.... Avoid extremes of thought. Avoid doomsday scenarios, but plan and invest wisely. Whatever that means......

 

[BLADEMDA]

Diversified Portfolio still means assets in Energy and Gold to me. The future is very hard to predict so a diversified portfolio helps to balance out the risk/reward.

As bad as Gold has performed recently Emerging Markets have been worse. Yet, I'm still in Emerging markets even though many pundits say 2016 could be worse than 2015.

The only sector which appears cheap right now is Energy because the commodity has taken a beating. Still, stock prices are not cheap when you look at the future "P" in the P/E ratio.
That said, I like the larger players in the sector longer term.

My portfolio has a value tilt in it with exposure to Foreign Equities which means I'm "negative" for the year; I still like the value tilt going forward with a significant portion of Cash for when the market corrects 6-10% early next year.

 

[BLADEMDA]

Gun Control is a losing issue for the Democrats; they don't have a lot of losing issues vs the GOP but this is one of them.

https://www.washingtonpost.com/poli...e3f896-7293-11e5-8d93-0af317ed58c9_story.html

 

[BLADEMDA]

http://www.usdebtclock.org/

http://www.usdebtclock.org/current-rates.html

As PGG likes to say "the debt doesn't matter until one day it matters." This means at some point, nobody is sure when, we must pay the price for that 20+ trillion in debt.

My hunch is that Chinese currency must begin to take center stage before the USA's debt begins to really hit home.

http://www.businessinsider.com/china-yuan-not-close-to-reserve-currency-2015-12

 

[BLADEMDA]

Conservative hard-liners in Congress were disgusted with the $1.1 trillion spending deal, which boosted funding for most federal agencies.

http://thehill.com/homenews/house/264114-fury-of-the-right-falls-on-ryan

 

[BLADEMDA]

 

[BLADEMDA]

What's fair value for Gold: $1200 an ounce

But, as you know the market can deviate from fair value wildly in either direction. At under $1,000 an ounce Gold is a "buy" because the "all in costs" to mine a new ounce of Gold is more than $1,000 for all gold miners; hence, long term prices at under $1,000 means some miners will need to close higher cost mines.

That said, the market can drive the price of Gold down to $800 in the short term but eventually the law of supply vs demand catches up and restores the value of gold above its raw costs.

Here is what Morningstar.com had to say about Gold:

Gold prices will remain under pressure in the near term as higher U.S. interest rates weigh on investment demand. We forecast gold falling below $1,000 per ounce in 2016.

Although we expect 2016 will be a tough year for gold prices, the outlook is brighter longer term. Consumer demand, led by Chinese and Indian jewelry buyers, will increasingly define global gold demand beyond 2016. Investor demand is likely to diminish in relative importance.

 

[BLADEMDA]

I agree with PGG. Nobody knows nothing.... Avoid extremes of thought. Avoid doomsday scenarios, but plan and invest wisely. Whatever that means......

That means you hold CASH $$$ when the market is near all time highs and valuations are stretched. Don't get greedy by going "all in" at market tops. Yes, even younger investors can keep a stash of cash to invest on pullbacks or bear markets.

For younger investors a 10-20% cash position or short term bond fund can make sense in terms of deploying that money during severe corrections or bear markets. For older investors that cash/bond position should be much larger than 20%.

You can't ever get the timing perfect but Mr. Market usually gives you at least 1-2 severe corrections per year (remember August 2015?) even in Bull markets. The key is to stay invested for the long term but use the market volatility to your advantage.

https://www.commercebank.com/pdfs/trust/featured/cash-in-your-portfolio.pdf

 

[deleted126335]

http://blogs.wsj.com/moneybeat/2015/12/24/this-simple-way-is-the-best-way-to-predict-the-market/

 

[BLADEMDA]

http://www.cnbc.com/2015/12/25/active-vs-passive-finding-the-best-fund-management-fit.html

Active vs Passive Investing

 

[BLADEMDA]

Swedroe: A Perfect Storm For Low Returns
By
Larry Swedroe

December 18, 2015


Expected Portfolio Return

Using the above information, we can estimate the expected return for a typical portfolio allocated 60% to the S&P 500 Index and 40% to five-year Treasury notes to be just 2.4% ([60% x 4.2%] + [40% x -0.3%]). Again, add in estimated inflation of 2%, and we have a nominal return estimate of just 4.3% for this typical portfolio.

 

[BLADEMDA]

Larry Swedroe:

In short, chasing past performance can cause investors to buy asset classes after periods of strong recent performance, when valuations are relatively higher and expected returns are lower. It can also cause investors to sell asset classes after periods of weak recent performance, when valuations are relatively lower and expected returns are higher.


Effectively, investors who chase recent performance are systematically buying high and selling low. A better approach is to follow a disciplined rebalancing strategy that systematically sells what has performed relatively well recently and buys what has performed relatively poor recently.

 

[BLADEMDA]

 

[BLADEMDA]

https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

Great tool for advanced portfolio analysis

 

[Mman]

Diversified Portfolio still means assets in Energy and Gold to me. The future is very hard to predict so a diversified portfolio helps to balance out the risk/reward.

As bad as Gold has performed recently Emerging Markets have been worse. Yet, I'm still in Emerging markets even though many pundits say 2016 could be worse than 2015.

The only sector which appears cheap right now is Energy because the commodity has taken a beating. Still, stock prices are not cheap when you look at the future "P" in the P/E ratio.
That said, I like the larger players in the sector longer term.

My portfolio has a value tilt in it with exposure to Foreign Equities which means I'm "negative" for the year; I still like the value tilt going forward with a significant portion of Cash for when the market corrects 6-10% early next year.

I have a 20-30 year time horizon til retirement so gold has no place in my portfolio. It just doesn't provide a return over a long time period. If you bought Gold at it's lowest price of the last 100 years, it was roughly $220 an ounce in 1970. 45 years later that has compounded at 3.5% for you. And that is with buying at the best possible purchase point of any of our lifetimes. If you bought it in 1980 you've lost money, let alone not kept pace with inflation.

I can see an argument that if you are in retirement or near retirement gold can provide some sort of a hedge against bad returns, but for anybody with a long enough timeline it's always a bad idea.

In terms of going forward in 2016, I definitely like upping my energy exposure (mostly through big oil). Oil prices cannot stay this low for more than a few years and those companies operate on 25-50 year time horizons with drilling fields. They will continue to muddle along in 2016 and maybe 2017, but should still make tons of cash in the next 10-20 years. Other companies I plan on buying are scattered amongst various sectors. While the market as a whole isn't overly cheap, there are still plenty of individual companies that can be had for a fair price.

My current allocation of retirement assets is 75% stock, 15% bond, 10% cash. Will probably maintain something similar to that in 2016 unless the market goes drastically one way or the other.

 

[BLADEMDA]

I have a 20-30 year time horizon til retirement so gold has no place in my portfolio. It just doesn't provide a return over a long time period. If you bought Gold at it's lowest price of the last 100 years, it was roughly $220 an ounce in 1970. 45 years later that has compounded at 3.5% for you. And that is with buying at the best possible purchase point of any of our lifetimes. If you bought it in 1980 you've lost money, let alone not kept pace with inflation.

I can see an argument that if you are in retirement or near retirement gold can provide some sort of a hedge against bad returns, but for anybody with a long enough timeline it's always a bad idea.

In terms of going forward in 2016, I definitely like upping my energy exposure (mostly through big oil). Oil prices cannot stay this low for more than a few years and those companies operate on 25-50 year time horizons with drilling fields. They will continue to muddle along in 2016 and maybe 2017, but should still make tons of cash in the next 10-20 years. Other companies I plan on buying are scattered amongst various sectors. While the market as a whole isn't overly cheap, there are still plenty of individual companies that can be had for a fair price.

My current allocation of retirement assets is 75% stock, 15% bond, 10% cash. Will probably maintain something similar to that in 2016 unless the market goes drastically one way or the other.

Gold is not a "hedge" against stocks or bonds; instead, Gold is primarily used as a hedge against currencies like the US dollar. Gold does not belong with your Equity or Bond categories but rather in the CASH or ALTERNATE categories of investment. Gold is an insurance policy against the Dollar's devaluation or depreciation. If the dollar is strong (like it is today) then Gold is typically weak (low prices).

I'm not going to debate the value of Gold in a diversified portfolio but considering the massive US debt and possible devaluation of the dollar in the future I believe Gold has a place in a portfolio (3-5%).

Buying Gold as a Hedge against Currency Depreciation

Golds' profound effect on the value of the U.S. dollar and other world currencies
It's been a long held belief that gold, the U.S. dollar and other world currencies have an inverse relationship. When the value of one goes up, the other goes down. You can certainly search the Internet and find an abundance of statements and papers on the subject going back decades.

 

[BLADEMDA]

Gold is first and foremost money. Money that cannot be printed or debased. It therefore insulates its owner from the negative outcomes historically associated with fiat [paper] currencies," Grant says.


http://money.usnews.com/money/perso.../3-ways-to-diversify-your-portfolio-with-gold

 

[BLADEMDA]

Even if neither gold nor financial assets, like bonds or equities, look especially attractive, investors presumably have to put their money somewhere. Chances are that one or maybe two of these asset classes will perform quite well over the next decade or so. The problem is that we don’t know which one it will be in advance. This is the argument for holding a diversified portfolio. In the past, which is no guarantee of future results, holding gold as part of a diversified portfolio would have marginally improved the portfolio long-term risk adjusted returns. Gold would have helped portfolio returns during periods of high inflation, negative real interest rates, war and declining mining supply and would have detracted from portfolio performance in most other periods.

http://www.cmegroup.com/education/featured-reports/gold-useful-portfolio-diversifier.html

 

[deleted126335]

Future EXPECTED NOT GUARANTEED returns for international (including emerging markets), are higher than for the US Stock market. For those that have been thinking about upping their international exposure as a percentage of equity, this would appear to be a good time.

 

[BLADEMDA]

Future EXPECTED NOT GUARANTEED returns for international (including emerging markets), are higher than for the US Stock market. For those that have been thinking about upping their international exposure as a percentage of equity, this would appear to be a good time.

We agree here and that is why I'm still invested in international equities. Pundits are saying EM equities will do poorly in 2016 but Developed Foreign markets could do better than US equities. I'm still holding a significant percentage of my equity portfolio in foreign ETFs and Mutual Funds. In addition, I'm staying invested in EM equities despite the blood bath. In fact, I'm going to invest a bit more in EM next year.

 

[Mman]

Gold is not a "hedge" against stocks or bonds; instead, Gold is primarily used as a hedge against currencies like the US dollar. Gold does not belong with your Equity or Bond categories but rather in the CASH or ALTERNATE categories of investment. Gold is an insurance policy against the Dollar's devaluation or depreciation. If the dollar is strong (like it is today) then Gold is typically weak (low prices).

The purpose of cash in a portfolio is to be deployed to buy stocks (or occasionally bonds) that are temporarily mispriced. Having gold in a portfolio doesn't help me if the S&P drops 25% this week. I can't buy stock with gold.

And if you want a hedge against the US dollar, have a mortgage. It's tax deductible and if we have runaway inflation, your future mortgage payments (which are fixed in amount) will be paid with dollars that are much less valuable. Gold is far more of a speculation than a currency hedge. It also doesn't improve 30+ year risk adjusted returns, it actually harms them.

 

[BLADEMDA]

The purpose of cash in a portfolio is to be deployed to buy stocks (or occasionally bonds) that are temporarily mispriced. Having gold in a portfolio doesn't help me if the S&P drops 25% this week. I can't buy stock with gold.

And if you want a hedge against the US dollar, have a mortgage. It's tax deductible and if we have runaway inflation, your future mortgage payments (which are fixed in amount) will be paid with dollars that are much less valuable. Gold is far more of a speculation than a currency hedge. It also doesn't improve 30+ year risk adjusted returns, it actually harms them.

Gold is an "alternative investment" and your statements about not improving returns are not backed up by the facts. You are entitled to your opinion that Gold isn't worthwhile in your portfolio but not the to the fact that Gold can enhance returns as part of a diversified portfolio.

I have provided links from sources that are not very keen on Gold and even they admit it can play a part in a diversified portfolio; Gold will slightly enhance returns. The fact you choose not to own any is fine for you; many others will see the benefit of a portion of their assets in Gold or Precious metals. I, for one, am glad to purchase more Gold in the sub $1,000 per ounce range along with the gold miners (GDX ETF).

You are welcome to the last word on the subject of Gold, but, I urge others to do their own research on the matter and strongly consider some Gold and/or Gold miners as part of their portfolio (3-5 percent range).

http://www.thestreet.com/story/1337...s-may-be-golds-biggest-threat--cme-group.html

 

[cincincyreds]

The best thing to do is really study what you invest in. No one follows the rule, but you want to buy low and sell high. I find it interesting that over the last 15 years now we have had the S and P 500 have a CAGR of 5%. Subtract out inflation which has run 2 or 3% and we have had a real return of 2 or 3%. It's a tough world. I blame the psycho government officals in power who enrich themselves and the 0.1%ers. It's a game we are all losing.

As far as gold, I believe it costs $800 to dig it out of the ground. Gold is not an investment, it is insurance for when the dollar falls and that will be when the dollar loses world currency leader and the Yuan is used for transfer payments for oil payments. And that is why we took out Saddam, Quadaffi, and are currently trying to take out Assad.

That is the way the world works. I look at our country as a giant insurance company[SS,medicare,medicaid] with a giant miliatary that is out of countrol.

And as far as those low unempoloyment numbers, wake up. They don't count people who have stopped looking for jobs after 6 months. So please don't listen to Obama about how great he is. I would have more respect for him if he reported the actual number of people working compared to 30 years ago. I believe we are at the lowest working participation rate in history.

 

[Mman]

Gold is an "alternative investment" and your statements about not improving returns are not backed up by the facts. You are entitled to your opinion that Gold isn't worthwhile in your portfolio but not the to the fact that Gold can enhance returns as part of a diversified portfolio.

I have provided links from sources that are not very keen on Gold and even they admit it can play a part in a diversified portfolio; Gold will slightly enhance returns. The fact you choose not to own any is fine for you; many others will see the benefit of a portion of their assets in Gold or Precious metals. I, for one, am glad to purchase more Gold in the sub $1,000 per ounce range along with the gold miners (GDX ETF).

It doesn't improve a portfolio return over a 30-40 year time span regardless of what a portfolio analyzer that goes back to the 1980s tells you. The best argument made in it's favor is that it adds diversification. But with a guaranteed worse performance over a long enough time span than other things you can invest in, you are diversifying into something assured to do worse which worsens your returns.

Like I said, if you are closer to retirement it can be a good thing to add diversity that performs independent of your stock and bond allocation.

I, too, encourage people to research the value of gold over time and compare it with stocks and bonds over the long term.

John Bogle: "Gold is not an investment at all"
Warren Buffett: "I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot. It's a lot better to have a goose that keeps laying eggs instead of a goose that just sits there and eats insurance and storage and a few things like that.

As for hedging the US dollar, your stocks can do that just fine for you, especially since you live and spend your money in the US.

I don't hate gold. It's a commodity like any other. I just caution people from putting actual earning power into it for a long time because it won't do anything for you except remain shiny. I make my money work for me.

 

[deleted126335]

There is not one source that shows it will improve the returns of a portfolio over a 30-40 year time span. None. The best argument made in it's favor is that it adds diversification. But with a guaranteed worse performance over that long of a time span than other things you can invest in, you are diversifying into something assured to do worse which worsens your returns.
.

If you are talking about the price of gold whether physical or "paper gold", I agree with you. I don't any gold (except my wedding band). But there is a case to be made that sacrificing some portfolio return for a significant lowering of portfolio variance is beneficial. Adding physical or paper gold will do that to a portfolio, if faithfully rebalanced to target and an investor has the discipline to stick with their plan.

If you are talking about Precious Metal Equity, (gold mining stocks) there is strong case that an allocation to that asset class, if faithfully rebalanced to target and an investor has the discipline to stick with their plan will improve a portfolio both in therms of variability and total return via a rebalancing bonus and low/negative correlation to stocks/bonds.

It is the bolded phrase that causes the problem. History has shown that price trends for gold and precious metals equity persist for decades (not years) and the asset class has horrific volatility. This leads most people and institutions to bail after years of under performance. So if one has the patience, the discipline, the resources to ride out multi decade trends, and the stomach to do so, Precious metals equity is a very reasonable choice. I consider myself a relatively patient and disciplined investor. But precious metals and their equity is one party I will not be attending. If I was doing something like setting up an autopilot portfolio for a newborn grandchild's retirement I would feel differently.

 

[Mman]

But there is a case to be made that sacrificing some portfolio return for a significant lowering of portfolio variance is beneficial.

If you are disciplined and investing for the long term, variance is your friend and lowering your return to lower variance is not wise.

 

[deleted126335]

If you are disciplined and investing for the long term, variance is your friend and lowering your return to lower variance is not wise.

I said there is a case to be made. Not that I bought into it.
One of the most widely used measures of risk adjusted returns is the Sharpe ratio. It is the reward to variability ratio of a portfolio. Portfolio variability is one measure of risk.

Also, since you claim to have a long term perspective and are disciplined, you should be the person embracing an allocation to precious metals equity. Precious metals equity has near S&P like returns with a very low correlation coefficient. The disciplined long term investor who has rebalanced into a portfolio of 50/50 S&P 500 and PME has enjoyed a portfolio with a better return and a lower variance than either portfolio alone. Sounds like a slam dunk. Except the price is the ulcer inducing volatility and the persistence of one or the other asset classes greatly underperforming the other for a long time.

 

[Mman]

I said there is a case to be made. Not that I bought into it.
One of the most widely used measures of risk adjusted returns is the Sharpe ratio. It is the reward to variability ratio of a portfolio. Portfolio variability is one measure of risk.

Also, since you claim to have a long term perspective and are disciplined, you should be the person embracing an allocation to precious metals equity. Precious metals equity has near S&P like returns with a very low correlation coefficient. The disciplined long term investor who has rebalanced into a portfolio of 50/50 S&P 500 and PME has enjoyed a portfolio with a better return and a lower variance than either portfolio alone. Sounds like a slam dunk. Except the price is the ulcer inducing volatility and the persistence of one or the other asset classes greatly underperforming the other for a long time.

precious metals have returns far inferior to stocks over the long haul and have gotten absolutely destroyed the last few years.

 

[deleted126335]

precious metals have returns far inferior to stocks over the long haul and have gotten absolutely destroyed the last few years.

• 
  PRECIOUS METALS STOCKS -- A SPECIAL CASE
  
  The portfolio characteristics of precious metals equity are unique; very low long term return, very high return variance, and near zero correlation with most other asset classes. One of the primary rationales for this behavior is that most of the risk of this asset class is nonsystematic because of its low correlation with other assets -- in other words, it can be diversified away. The above discussion provides another perspective on this paradox. Examination of the theoretical rebalancing formula shows that the addition of a small amount of a high variance zero correlating asset to a portfolio with a much lower variance increases its apparent return by approximately one half of its variance. In other words, since the variance of a typical portfolio of precious metals stocks is about 0.1, its apparent return (IRR) in a rebalanced portfolio will be about 5% higher than its long term stand alone return. This is precisely what is observed by the investor who periodically rebalances the precious metals component of their portfolio as a fixed proportion; a large fraction of the IRR of this component comes from rebalancing per se. Thus, not only is the systematic risk of precioius metals stocks much lower than its stand alone risk, but its rebalanced portfolio return is much higher than its observed stand alone long term return.

Cited from:

http://www.efficientfrontier.com/ef/996/rebal.htm

Please note. I am talking about precious metals equity not Precious metals.
They are very different.

 

[mostwanted]

The best thing to do is really study what you invest in. No one follows the rule, but you want to buy low and sell high. I find it interesting that over the last 15 years now we have had the S and P 500 have a CAGR of 5%. Subtract out inflation which has run 2 or 3% and we have had a real return of 2 or 3%. It's a tough world. I blame the psycho government officals in power who enrich themselves and the 0.1%ers. It's a game we are all losing.

As far as gold, I believe it costs $800 to dig it out of the ground. Gold is not an investment, it is insurance for when the dollar falls and that will be when the dollar loses world currency leader and the Yuan is used for transfer payments for oil payments. And that is why we took out Saddam, Quadaffi, and are currently trying to take out Assad.

That is the way the world works. I look at our country as a giant insurance company[SS,medicare,medicaid] with a giant miliatary that is out of countrol.

And as far as those low unempoloyment numbers, wake up. They don't count people who have stopped looking for jobs after 6 months. So please don't listen to Obama about how great he is. I would have more respect for him if he reported the actual number of people working compared to 30 years ago. I believe we are at the lowest working participation rate in history.

I think you hit it on the head, all of those guys were taken out to preserve petrodollar dominance. I think it is foolhardy to think perpetual growth over time, when country is in over 18 trillion in red.

 

[cincincyreds]

I think you hit it on the head, all of those guys were taken out to preserve petrodollar dominance. I think it is foolhardy to think perpetual growth over time, when country is in over 18 trillion in red.

Yup. But very few Americans understand this. Hence our intervention in Ukraine and Syria. If you notice the enemy always changes. Used to be Saddam and Al-Queda, not it's Assad and ISIS and Putin. Sounds like an excerpt from 1984.

 

[pgg]

You mean nations take economic, political, and military action to secure, preserve, and expand their national interests? That must be a new phenomenon.

 

[Mman]

• 
  PRECIOUS METALS STOCKS -- A SPECIAL CASE
  
  The portfolio characteristics of precious metals equity are unique; very low long term return, very high return variance, and near zero correlation with most other asset classes. One of the primary rationales for this behavior is that most of the risk of this asset class is nonsystematic because of its low correlation with other assets -- in other words, it can be diversified away. The above discussion provides another perspective on this paradox. Examination of the theoretical rebalancing formula shows that the addition of a small amount of a high variance zero correlating asset to a portfolio with a much lower variance increases its apparent return by approximately one half of its variance. In other words, since the variance of a typical portfolio of precious metals stocks is about 0.1, its apparent return (IRR) in a rebalanced portfolio will be about 5% higher than its long term stand alone return. This is precisely what is observed by the investor who periodically rebalances the precious metals component of their portfolio as a fixed proportion; a large fraction of the IRR of this component comes from rebalancing per se. Thus, not only is the systematic risk of precioius metals stocks much lower than its stand alone risk, but its rebalanced portfolio return is much higher than its observed stand alone long term return.

Cited from:

http://www.efficientfrontier.com/ef/996/rebal.htm

Please note. I am talking about precious metals equity not Precious metals.
They are very different.

That link refers to a cobbled together index from 1969 to 1996. 27 years. Hardly long term. And it's been decimated since then showing far worse returns. From inception 2000-today, the Vanguard Precious Metals and Mining Fund is down 21.17%.

 

[BLADEMDA]

That link refers to a cobbled together index from 1969 to 1996. 27 years. Hardly long term. And it's been decimated since then showing far worse returns. From inception 2000-today, the Vanguard Precious Metals and Mining Fund is down 21.17%.

That's exactly when it is a good time to start buying those stocks- after a decimation. Cost averaging into the GDX ETF at today's prices could be a good investment.

Second, the cost to mine an ounce of gold is around $1150 per ounce not $800. Only the lowest cost produces can mine gold for $800 or less per ounce. Persistent Gold prices of $900 or less will cause miners to close mines and/or go bankrupt.

Judging by recent earnings reports, the average all-in sustaining costs for the industry fall between US$1,100 and US$1,200 an ounce. In other words, margins in the gold sector are incredibly tight for all but the top-tier mines.

http://business.financialpost.com/n...much-does-it-cost-to-produce-an-ounce-of-gold

 

[BLADEMDA]

I think you hit it on the head, all of those guys were taken out to preserve petrodollar dominance. I think it is foolhardy to think perpetual growth over time, when country is in over 18 trillion in red.

The chance to buy Oil/Gas stocks when they pull-back from here is a good long term investment. When we see $30 per barrel of oil that's a nice time to take another look at this beaten down sector. I don't know how long we will see $30-$35 oil but my hunch is it won't be for very long (less than 3 years). I can wait out this cycle in quality energy stocks.

 

[Mman]

That's exactly when it is a good time to start buying those stocks- after a decimation. Cost averaging into the GDX ETF at today's prices could be a good investment.

I agree that buying when down is good. I'm just pointing out the long term numbers that overall they are an inferior investment. If I'm going to time the purchase of something, I'd prefer it to be a better investment over the next few decades.

 

[deleted126335]

http://www.efficientfrontier.com/ef/adhoc/gold.htm



Annualized Return

7/1963-12/2004

Precious Metals Equity

9.21%

S&P 500 Stock Index

10.74%

Long-Term Treasuries

7.53%

30-Day T-Bill

5.87%

Inflation

4.51%


41 years of data. Equity like returns before a rebalancing bonus. The fact that it has been savaged recently while the S&P has done well is showing its benefit as a diversifier. I don't own it because my time horizon is not long enough, nor is my stomach strong enough.

 

[Mman]

http://www.efficientfrontier.com/ef/adhoc/gold.htm



Annualized Return

7/1963-12/2004

Precious Metals Equity

9.21%

S&P 500 Stock Index

10.74%

Long-Term Treasuries

7.53%

30-Day T-Bill

5.87%

Inflation

4.51%


41 years of data. Equity like returns before a rebalancing bonus. The fact that it has been savaged recently while the S&P has done well is showing its benefit as a diversifier. I don't own it because my time horizon is not long enough, nor is my stomach strong enough.

From 1963-2015 it's got far worse returns than 9% per year.

 

[deleted126335]

From 1963-2015 it's got far worse returns than 9% per year.

You obviously don't understand what I am trying to communicate regarding diversification benefits and rebalancing bonus. I will stop trying.

 

[Mman]

You obviously don't understand what I am trying to communicate regarding diversification benefits and rebalancing bonus. I will stop trying.

I get it. I'm just pointing out those articles you link would have a very different conclusion if written today. The math no longer works like it did for the shorter time frame and the particular period they looked at. If you run the same tests with the data from more recently, the conclusion reached is different. Over a long enough time frame, the return from precious metals equity approaches bonds. And while it doesn't correlate with the stock market returns and diversifies the risk, it also lowers your long term return. There is no logical reason to suspect otherwise.

So you can diversify and lower your expected returns with it. And that's OK for the right person in the right situation. Just need to remember you likely aren't improving your expected return. I am not, however, arguing against diversification. Just being realistic with the math.