What happens if/when China becomes the Reserve Currency of the World

[Mman]

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For those who think Gold isn't a currency but a commodity look at the price of Gold vs Oil vs Copper after China's devaluation of their currency.
Gold went UP when the other Commodities went down.

Gold is the safest currency in the world.

Not all commodities move up and down equally or at the same time. A currency, by definition, is widely circulated and accepted as a medium of exchange for goods or services. I've never once shopped in a store or ate in a restaurant that accepted gold as currency. I've paid in dollars, pesos, euros, and pounds, but never in ounces of gold.

Gold used to be the standard around which some countries built a currency, but that day has gone. It's a commodity held in reserve as a store of value by some people and countries, but it cannot be easily exchanged into any goods or services, merely bought and sold with currency (as other commodities are).

 

[bronx43]

Not all commodities move up and down equally or at the same time. A currency, by definition, is widely circulated and accepted as a medium of exchange for goods or services. I've never once shopped in a store or ate in a restaurant that accepted gold as currency. I've paid in dollars, pesos, euros, and pounds, but never in ounces of gold.

Gold used to be the standard around which some countries built a currency, but that day has gone. It's a commodity held in reserve as a store of value by some people and countries, but it cannot be easily exchanged into any goods or services, merely bought and sold with currency (as other commodities are).

Agree that gold isn't a currency - right now. Currency status is fluid, and gold is not a widely used medium of exchange like paper and digital currencies are nowadays. However, that isn't to say that gold won't one day become currency again as it has been numerous times throughout history. Whether or not that will happen is obviously impossible to predict, but currency status should not be the reason to buy gold.

It seems like you agree that medium and long term future for the global economy and financial system isn't very positive. Please correct me if I'm wrong about this assertion. If that is the case, then what better assets are out there today? Fixed income? Equities? Yes, if you bought shares of Coca Cola or Exxon many decades ago, then your portfolio is doing well... much better than if you bought gold at the same time frame. However, if your investment thesis is that the debt fueled system will collapse under its own weight, then being heavy into equities is not the best position. Sure, some of the larger companies will stay afloat, but once the downturn comes, equities in general will take huge hits. Your funds, diversified as they may be, will not escape a large correction. Fixed income would obviously be better in a deflationary event, but yields are nothing, and obviously would not protect you against inflationary policies that central banks are likely to enact in the setting of a deflationary event.

Where does that leave us? Gold and silver? I'm not saying that PMs is a sure thing - far from it. It may be made illegal by the government a la Roosevelt in the 30s. It exposes you to losing them physically. It may never be used as currency, which ultimately puts a cap on its value. All these things are uncertain. However, they will have some value, as they have had for millennia. I don't foresee gold and silver being tossed aside as worthless commodities. I see them as great hedges against current fiat, and if you have a better hedge, please let me know. Guns and ammo is great, but what - are you going to buy warehouses full of them? And I honestly don't believe in apocalypse scenarios so guns and ammo won't be my cup of tea. Gold and silver don't need apocalypse scenarios to retain their value.

 

[Mman]

It seems like you agree that medium and long term future for the global economy and financial system isn't very positive. Please correct me if I'm wrong about this assertion.

Allow me to correct you. I feel the long term future of the global economy and financial system is not only good, it's great. It's fantastic. Think of what percentage of the world's population still needs to be brought into a modern economy. Most of Africa and India are still 3rd world countries. As they become modernized, it will be a financial windfall for the world's global corporations as that is roughly 1/3 of the world's population that they cannot yet sell products to that they will be able to.

I think from a 30+ year perspective, you shouldn't own anything except stocks (through whatever mechanism you see fit such as low cost mutual fund). My point is that if you are working on a shorter time frame when you need your money, stocks can go up, down, or sideaways and anybody making that prediction is as likely to be right as they are wrong.

I view gold as an asset that negatively correlates with stocks. And since stocks will go up long term, owning gold long term is a guaranteed bad play. But if you need your investment to turn into cash on a much shorter time frame maybe it can be of use to you.

As an example, I'd bet my life the S&P 500 will be higher 30 years from now than it is today. It just will. How much higher? I don't know. It might go up 10% per year or maybe only 5% per year on average, but it will go up and a lot. Gold price 30 years from today? I have no idea, but it could be cheaper than it is now. There is zero chance of that with stocks, so long term they are less risky than gold.

 

[bronx43]

Allow me to correct you. I feel the long term future of the global economy and financial system is not only good, it's great. It's fantastic. Think of what percentage of the world's population still needs to be brought into a modern economy. Most of Africa and India are still 3rd world countries. As they become modernized, it will be a financial windfall for the world's global corporations as that is roughly 1/3 of the world's population that they cannot yet sell products to that they will be able to.

Wow... just wow. How anyone can come to this conclusion within the current socioeconomic milieu is beyond me. But, honestly, I don't care enough to argue this with you. We'll just have to agree to disagree. You keep doing your thang.

 

[deleted126335]

BLADE post from May 2010:

"
My stance on savings/investment is simple:

1. Gold- at under $1500 an ounce I would be a buyer of gold. It deserves a place in a diversified portfolio (10-20%).

2. Bonds/CD- Again, the risk of the market is huge so this should be an important part of a portfolio (20-30%)

3. Commodities- You need a real hedge against possible inflation. Yes, we are deflating now but inflation is real risk going forward.

4. Stocks- It is a trader's market. Over the next few years the market is likely to gyrate a lot and go nowhere. So, those who trade well have a big advantage over "buy and pray" investors."

Prices on the day of that post:

Gold price then $1,200 Today $1,125
Dow 10,100 Today 17,400
Oil $80/bbl Today $44

 

[Mman]

Wow... just wow. How anyone can come to this conclusion within the current socioeconomic milieu is beyond me. But, honestly, I don't care enough to argue this with you. We'll just have to agree to disagree. You keep doing your thang.

Is now different than any other time in the last 200 years? If so, in what way? WWI, WWII, Korea, Vietnam, Cuban missile crisis, US invading Kuwait/Iraq, tech bubble bursting, Black Monday, oil embargos in the 70s, 9/11, etc.

If you are a pessimist, the world is always ending. There is always something. And in the long run, stocks always come out ahead anyway. The absolute smartest investors in the world are still betting heavily on stocks long term and with good reason. There is almost no way for the stock market to not continue to make you oodles of money if your timeline is long enough.

 

[bronx43]

Is now different than any other time in the last 200 years? If so, in what way? WWI, WWII, Korea, Vietnam, Cuban missile crisis, US invading Kuwait/Iraq, tech bubble bursting, Black Monday, oil embargos in the 70s, 9/11, etc.

If you are a pessimist, the world is always ending. There is always something. And in the long run, stocks always come out ahead anyway. The absolute smartest investors in the world are still betting heavily on stocks long term and with good reason. There is almost no way for the stock market to not continue to make you oodles of money if your timeline is long enough.

It's not different from any other time in history. I'm not calling for the end of the world. I just happen to believe that we're closer to 1930s than we are to 1950s, and my worldview and investment outlook pertains to the next 20-30 years, and not the next 100-200 years. I also wouldn't toss the other wars into the same category as WWI and WWII. The big events of the 20th and 21st century are the two world wars (which is really one war separated by a two decade long armistice), cold war, and financialization.

 

[Mman]

It's not different from any other time in history. I'm not calling for the end of the world. I just happen to believe that we're closer to 1930s than we are to 1950s, and my worldview and investment outlook pertains to the next 20-30 years, and not the next 100-200 years.

If you invested 100% of your money at the peak of the stock market in 1929 and never put another penny in, it took about 20 years for you to see returns after taxes that exceeded inflation. But beyond 20 years, you did even better.

If you dollar cost averaged your investing starting in 1929 and heading into the depression, you did very well for any horizon > 20 years.

Even if we head into something equivalent to the great depression for the next decade, you almost can't find a better investment idea than stocks for 30+ year horizons. Particularly true if you are still working and saving as you continued to invest it what would be a falling market, you'd get even more bang for your buck each year going forward.

It's like the Nasdaq at the peak of the tech bubble. It took something like 15 years for it to return to > 5000. But somebody that started investing in the Nasdaq index at it's peak in 2000 would have earned a return of something like 10% per year during those 15 years on their money because it fell so far before coming back up that all the money invested at the bottom earned a massive return.

If you are looking at a long term horizon, stocks are your friend. I don't know what the S&P will be next year or the year after or even 5 years or maybe even 10 years from now. But 30 years from now it is a mortal lock to be well above the current level. The worst 30 year return you can find for stocks is something like 6.5% annual growth.

 

[BLADEMDA]

We agree stocks are the cornerstone of a portfolio. No arguments and it's tough to time the market. I'm invested in stocks and will be until the day I die.

But, in 2013 I developed a diversified portfolio of stocks, bonds, real estate, cash and gold. My cost basis for my gold is around $1200 an ounce. I'm not worried that I'm slightly negative on gold with positive gains on stocks.

I like gold in my portfolio both in ETFs and physical gold at home. Unlike you I view gold as convertible currency at my local gold store or coin shop. This isn't like oil or copper because I can't exactly convert them to dollars in just a few hours.

I'd rather have some of my excess currency in gold than US dollars or yuan. I view gold as stable currency with easy convertibility to US dollars.

These days I use a balanced portfolio approach to my investing (ETFs) with an occasional dabble into stocks.

Doze has converted me into a diversified investor with a keen eye on allocations. I'll be adding to my gold positions if gold goes below $1,000 an ounce or selling my gold if it reaches $1400 an ounce. I'll add to my stock ETFs if the market pulls back 5 percent from here.

Right now oil and natural gas look dirt cheap along with the gold miners. I'll likely add to my positions if/when oil drops under $40 per barrel.

 

[dhb]

S&P Nasdaq etc... the points you count now do not take into consideration the companies that have failed and been replaced by others in the index (no wonder the numbers are always up)

And Mman you might have traveled a bit but you haven't been at some places at the right time; in Argentina during their crisis you probably could have bought anything with gold.
I don't think you need a post nuclear war scenario for gold to be useful and with interest rate going negative i rather hold gold than paper.

 

[Mman]

S&P Nasdaq etc... the points you count now do not take into consideration the companies that have failed and been replaced by others in the index (no wonder the numbers are always up)

And Mman you might have traveled a bit but you haven't been at some places at the right time; in Argentina during their crisis you probably could have bought anything with gold.
I don't think you need a post nuclear war scenario for gold to be useful and with interest rate going negative i rather hold gold than paper.

You know what's interesting, even if you include all the companies that fail it's up. When a stock goes down, it becomes a lower percentage of your allocation. When it goes up, it becomes a bigger portion. So the rising ones more than make up for the failing ones.

If you bought $10,000 of each of 2 stocks and 1 went up with a CAGR of 10% for 20 years and 1 went down with a CAGR of -10% for 20 years, you'd end up with almost $69,000 in the end from your original $20,000 purchase despite 1 stock going up by the same rate 1 went down.


If you like personally holding gold more than paper, that's fine. It's just not very useful. And even in Argentina back then, trading your gold for a sandwich at the corner store wouldn't be exactly possible and if it was you'd be getting fleeced in the transaction. I was in Venezuela recently and you can't buy anything with gold there.

 

[Mman]

Doze has converted me into a diversified investor with a keen eye on allocations. I'll be adding to my gold positions if gold goes below $1,000 an ounce or selling my gold if it reaches $1400 an ounce. I'll add to my stock ETFs if the market pulls back 5 percent from here.

You believe timing the stock market isn't a good idea but you believe timing the price of gold is?

 

[BLADEMDA]

You believe timing the stock market isn't a good idea but you believe timing the price of gold is?

No. It's not "timing" but fair value analysis which I utilize for my allocation adjustments. Morningstar places recommendations on equities, gold, oil, etc based on a fair value analysis with a discount to that fair value. Gold is below fair value as is oil. The stock market is close to fully valued.

 

[BLADEMDA]

 

[BLADEMDA]

Personal Capital Review Summary I love the free services provided by Personal Capital. They offer a lot and ask for nothing in return. I wouldn’t pay for their investment advice, but their fees are comparable to many financial advisors, so I’ll leave that up to you. - See more at: http://cashcowcouple.com/service-reviews/personal-capital-review/#sthash.WEIxku2Y.dpuf

 

[dhb]

You know what's interesting, even if you include all the companies that fail it's up. When a stock goes down, it becomes a lower percentage of your allocation. When it goes up, it becomes a bigger portion. So the rising ones more than make up for the failing ones.

If you bought $10,000 of each of 2 stocks and 1 went up with a CAGR of 10% for 20 years and 1 went down with a CAGR of -10% for 20 years, you'd end up with almost $69,000 in the end from your original $20,000 purchase despite 1 stock going up by the same rate 1 went down.


If you like personally holding gold more than paper, that's fine. It's just not very useful. And even in Argentina back then, trading your gold for a sandwich at the corner store wouldn't be exactly possible and if it was you'd be getting fleeced in the transaction. I was in Venezuela recently and you can't buy anything with gold there.

What i mean is how can you compare an index over time when it's components vary over that time period

 

[pgg]

No. It's not "timing" but fair value analysis which I utilize for my allocation adjustments.

How is buying and selling based on your assessment of value and where you think that value is likely to go not timing? 🙂

 

[BLADEMDA]

How is buying and selling based on your assessment of value and where you think that value is likely to go not timing? 🙂

Timing involves an exact moment or day where you buy an equity or currency like Gold. Fair Value allows you to tweak your investments based on allocations and historical P/E ratios within a certain range. The concept is based on reversion to the mean and historically works quite well. The goal behind "fair value" is minimizing volatility with reasonable returns. It all starts with your allocation plan:

Equities- 50% (range 40-60%)
Real Estate- 10% (range 8-12%)
Bonds/CDs-30% (range 20-40%)
Gold- 5% (range 2-8%)
Cash-5% (range 5-20%)

My portfolio is flexible on the allocations based upon fair value; that fair value is determined by historical analysis of earnings, revenue, P/E ratio, etc which I obtain from Morningstar. I'm not concerned about beating any index but rather remaining focused on VALUE which has been shown to outperform GROWTH over the long run.

When any individual sector or equities as a whole becomes significantly undervalued I will shift assets into those areas; I will only slightly overweight any individual sector to minimize risk. Since Equities are expensive right now I am holding about a 45% allocation with 18% invested in Large Foreign Blend or Large Foreign Value ETFs/Funds.

My Gold is at 4% right now and I would add to it at under $1,000 an ounce.

 

[BLADEMDA]

How to use a Margin of Safety when Investing
A fundamental part of value investing is to ensure that there is a margin of safety with your investments.

What this means is that you buy a stock when its price is not only lower than or equal to your calculated fair price, but that it’s significantly lower. This provides you with some gray area where your assumptions about the company can be a little bit off, and yet the investment will still turn out okay over the long run.

The margin of safety means that your assumptions would have to be significantly off course for that investment not to work out. But even then, by diversifying across 20+ companies and into other asset classes, the scenario becomes statistical in nature. For example, if you invest in 20 companies, and you only invest when a stock is trading at least 15% below your calculated fair price, then one or two of them can go bad while your overall portfolio will still perform admirably.

In the example of this chart, the time to buy would be when the stock price (red line) falls below the intrinsic fair value (blue line). It’s easier said than done, because you won’t have the benefit of seeing the rest of the chart in front of you, and the intrinsic fair value (blue line) is your calculated estimate of what the stock is worth rather than an absolute truth.

By sticking to sound value investing principles, however, you can do well. As can be seen in the chart, the fair value of a healthy company will be far less volatile than the stock price can potentially be, with only minor adjustments occurring each year based on new information.

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

I've spoken to a few financial advisers, one with DFA, and they all agree that I am the one to decide risk/volatility vs returns. Hence, I developed a long term strategy with my allocations based on historical evidence and returns. Because I hate trading and rebalancing my portfolio I started out in a moderate portfolio with investment bands on all my allocations. I use 'fair value analysis' to determine whether that particular class is a buy or a sell but at no point do I stretch the band beyond its breaking point (maximum or minimum allocation).

Morningstar and Personal Capital keep me abreast of my allocations and I follow fair value analysis every few days if not daily to see if there any buying opportunities.

 

[Mman]

What i mean is how can you compare an index over time when it's components vary over that time period

For one thing the index funds that track it change their holdings over time to stay consistent with the makeup of the index. So the long term return of the index is essentially the same as the index funds that track it, even as companies in it change. Also worth noting that the actual turnover is fairly low, approaching 1% annually at times.

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

 

[BLADEMDA]

Based on Today's valuations I would be in Conservative Growth category but well-diversified. If we get a 5% pullback in the stock market I'll invest more money from cash/CDs into equities. It would take a market correction of 10% or more for me to change my allocation into Moderate Growth.

Today's climate makes diversification more important than ever .

 

[deleted126335]

The Twelve Commandments of Gold by Barry Rithholz

1. Gold is a Currency: This is rule No. 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.
2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of central bankers and politicians. It’s a conspiracy, and we know who the guilty parties are.
3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior rule of gold manipulation. Gold runs up despite the overwhelming opposition to it.
4. The world MUST return to the gold standard one day: It is inevitable that we will return to a gold standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a gold standard, we can derive prices of gold in the $7,000, $10,000 or even $15,000 range. Hence, we know it’s cheap even at $2,000.
5. Central bankers are printing money relentlessly, and this can only drive gold prices higher: NOTE: You must ignore, for the moment, that gold had not gone higher for the two years prior to April 2013 (when Barry originally penned this list), as central banks around the world ramped up quantitative easing. This only means that, ultimately, gold will go much, much higher.
6. Gold works whether the economy is good or bad: When we have a red-hot economy, gold is your hedge against inflation. When we have a bad economy, gold is a safe harbor against collapse. It is a one-way trade that never fails!
7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles down around you. Get yourself some gold coins and a Glock, and you will be just fine when the whole world goes to pot. We welcome the era envisioned in the movie “Mad Max.”
8. Never admit that gold is essentially a sucker’s bet: Never discuss how, in the last century, gold has run up only to be trounced in repeated massive sell-offs. Always blame rule No. 2 for this. Do not discuss how this has happened in 1915-1920, 1941, 1947, 1951-1966, 1974-1976 1981, 1983-1985, 1987-2000 and 2008.
9. Gold is a rejection of government, and its control of fiat money and finance: There are no printing presses that produce gold. It is finite, natural and God-created. How much we can scrape out of the ground each year is limited, and is the only variable to the old equation. Just ignore man’s natural tendency to organize into city-states over the past 12,000 years.
10. All gold discussions must contain ominous macro forecasts: Your description of why gold is going higher must consist of spurious correlations, unprovable predictions and a guarded expectation of bad things in the future. Avoid empirical data at all costs.
11. Gold is always rallying in one currency or another: Sure, gold may be down 30 percent in dollars, the reserve currency it’s priced in, but you can always find a currency falling faster than the dollar and claim you own gold in that denomination. Last week, it was up in Japanese yen. This week, it is up in Zimbabwe dollars.
12. China and India know the value of gold; the Western world does not: The massive buying of gold by consumers in China and India reflects the culture, intelligence and investing savvy of the people in those countries. The West doesn’t get it, and it is its loss.

 

[zero0]

It won't.

 

[BLADEMDA]

The Twelve Commandments of Gold by Barry Rithholz

1. Gold is a Currency: This is rule No. 1. It is not a decorative or industrial metal, it is a permanent store of value, as dictated by Greeks in Lydia around 700 B.C. And, it shall be ever thus.
2. The price of gold cannot fall, it can only be manipulated lower: When gold’s price falls, it is an unnatural act. It can only occur as the result of an international cabal of central bankers and politicians. It’s a conspiracy, and we know who the guilty parties are.
3. If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise: This is the corollary to the prior rule of gold manipulation. Gold runs up despite the overwhelming opposition to it.
4. The world MUST return to the gold standard one day: It is inevitable that we will return to a gold standard. We all know this to be true. When we compare the size of the money supply to past amounts when there was a gold standard, we can derive prices of gold in the $7,000, $10,000 or even $15,000 range. Hence, we know it’s cheap even at $2,000.
5. Central bankers are printing money relentlessly, and this can only drive gold prices higher: NOTE: You must ignore, for the moment, that gold had not gone higher for the two years prior to April 2013 (when Barry originally penned this list), as central banks around the world ramped up quantitative easing. This only means that, ultimately, gold will go much, much higher.
6. Gold works whether the economy is good or bad: When we have a red-hot economy, gold is your hedge against inflation. When we have a bad economy, gold is a safe harbor against collapse. It is a one-way trade that never fails!
7. Gold will survive after the world economy crumbles: Gold is the ultimate currency, as it has a value that will survive even after the whole world tumbles down around you. Get yourself some gold coins and a Glock, and you will be just fine when the whole world goes to pot. We welcome the era envisioned in the movie “Mad Max.”
8. Never admit that gold is essentially a sucker’s bet: Never discuss how, in the last century, gold has run up only to be trounced in repeated massive sell-offs. Always blame rule No. 2 for this. Do not discuss how this has happened in 1915-1920, 1941, 1947, 1951-1966, 1974-1976 1981, 1983-1985, 1987-2000 and 2008.
9. Gold is a rejection of government, and its control of fiat money and finance: There are no printing presses that produce gold. It is finite, natural and God-created. How much we can scrape out of the ground each year is limited, and is the only variable to the old equation. Just ignore man’s natural tendency to organize into city-states over the past 12,000 years.
10. All gold discussions must contain ominous macro forecasts: Your description of why gold is going higher must consist of spurious correlations, unprovable predictions and a guarded expectation of bad things in the future. Avoid empirical data at all costs.
11. Gold is always rallying in one currency or another: Sure, gold may be down 30 percent in dollars, the reserve currency it’s priced in, but you can always find a currency falling faster than the dollar and claim you own gold in that denomination. Last week, it was up in Japanese yen. This week, it is up in Zimbabwe dollars.
12. China and India know the value of gold; the Western world does not: The massive buying of gold by consumers in China and India reflects the culture, intelligence and investing savvy of the people in those countries. The West doesn’t get it, and it is its loss.

Clearly, Gold is an item that is traded, manipulated and mined like other commodities. But, it is also viewed as currency by many in the world. That said, Gold should not be the main stay of anyone's portfolio and it acts as a diversifier in a portfolio. Since the cost of an ounce of gold ("all in") is around $1100 an ounce in today's US dollars the purchase of Gold above $1500 probably isn't the best financial decision vs the acquisition of Gold below its costs at $1,000 an ounce. Gold is likely to go to $880-$950 an ounce before going back up to $1200.