firefox
02-12-2007, 12:47 AM
Below is a good article dispelling some of the myths about gold as an investment. After you read this, see http://www.coinflation.com/ to get an idea of how much of your buying power has been stolen through inflation.
URL: http://www.goldcentral.com/marketcommentary/6538.html
Myth No. 1: Gold is predicted to go to $1,800 an ounce
I agree that unsubstantiated opinions about future prices of anything are inappropriate; nevertheless, claims like this are made by some in the precious metals business. Bear in mind, however, that an inflation-adjusted high of the 1980 peak gold price - US$850 - results in a gold price of US$2,080 per ounce today. As such, a price prediction of US$1,800 may not be that outrageous.
In the early 1970s no one would have believed that gold could reach $850, or silver $50. The same holds true for the NASDAQ. When the NASDAQ was 165 in 1980, who would have dreamed that it could reach 5,000?
Although it should be a separate myth, Smith also scoffs at the idea that any reputable money manager would advise that 10% to 20% of an investment portfolio should be allocated to gold bullion. This is likely true, since most money managers today are not old enough to have experienced the last bull market in gold, or the 1964-1982 bear market in equities. Their entire investment experience has been confined to one cycle - the biggest and longest-running equity bull market in history. While many of the world's wealthiest families do have substantial gold holdings, most US and Canadian portfolios have no allocation to precious metals whatsoever. Many North American confuse gold bullion and mining stocks, and do not appreciate that bullion is an entirely different asset class with vastly different risk and liquidity characteristics.
And yet the majority of money managers claim to provide their clients with balanced, diversified portfolios, even though those portfolios are limited to stocks, bonds and cash. Since there are seven asset classes in total - stocks, bonds, cash, real estate, commodities, precious metals and collectibles - today's typical investment portfolio is anything but diversified or balanced. Many advisors will be faced with massive law suits when investors suffer losses during this cycle, because they only allocated to declining assets and didn't provide adequate diversification.
Because there is very little information or methodology available to assist in determining what an appropriate allocation to precious metals should be, in 2005 I commissioned a study by Ibbotson Associates. Ibbotson is recognized as a world leader in asset allocation, and bases their work on Harry Markowitz's mean-variance optimization paradigm - the heart of strategic asset allocation. Because gold's economic role changed so drastically following US President Richard Nixon's closing of the gold window in 1971, Ibbotson studied the period from 1970 to 2005. That was as far back as they could go to make meaningful investment comparisons.
Ibbotson reached several conclusions. First, they concluded that precious metals are the most negatively correlated asset class to traditional financial assets and, as a result, they act as a hedge for the entire portfolio. During high inflation periods, precious metals outperformed all asset classes. During periods of stress, they provided returns when they were needed most. During low inflation periods, they provided bond-like returns. Ibbotson found that, based on a strategic asset allocation model, investors could potentially improve reward-to-risk ratios in conservative, moderate and aggressive portfolios with allocations of 7.1%, 12.5% and 15.7% respectively. Their work did not take into account any of the risks posed by rising inflation, rising debt levels, federal budget and current account deficits, rising oil prices, geopolitical tensions or any of the current vulnerabilities and imbalances in the economy.
In addition, studies have been carried out by David Ranson, head of research at Wainwright Economics, with respect to the amount of gold necessary to immunize portfolios during periods of rising inflation. He concluded that, for optimum results, investors need 18% for a bond portfolio, and 47% for an all-equities portfolio.
From a tactical asset allocation point of view, a portfolio's allocation to bullion should be much higher in today's economic climate. Tactical allocations should be adjusted to the directional trend of the Dow:gold ratio in order to maximize returns. When the ratio is rising, as it was from 1920-1929, 1945-1965, and 1980-2000, portfolios should be overweight financial assets. When the ratio is falling, as it was from 1929-1945, 1965-1980 and 2000 on, portfolios should be overweight precious metals.
On August 15, 1971 the Dow was 856 while gold was $35 per ounce, for a Dow:gold ratio of 24:1. By January 21, 1980 gold had risen to a peak of $850 per ounce while the Dow stood at 872, for a Dow:gold ratio of 1:1. At this point the cycle changed and the Dow:gold ratio rose until it peaked at 44:1 in 2000. It has been dropping ever since, and now stands at 19:1. Many specialists in cyclical trend analysis believe that, at the end of this cycle, the ratio will again be 1:1.
I have about 20% of my assets in precious metals right now. Diversification is very important! I also just updated my free market investing guide (http://libertarianactivism.com/writings/free-market-investing-tips.shtml).
Would I be right in assuming that few, if anyone, reading this post has guarded against inflation and changing market conditions in this way?
URL: http://www.goldcentral.com/marketcommentary/6538.html
Myth No. 1: Gold is predicted to go to $1,800 an ounce
I agree that unsubstantiated opinions about future prices of anything are inappropriate; nevertheless, claims like this are made by some in the precious metals business. Bear in mind, however, that an inflation-adjusted high of the 1980 peak gold price - US$850 - results in a gold price of US$2,080 per ounce today. As such, a price prediction of US$1,800 may not be that outrageous.
In the early 1970s no one would have believed that gold could reach $850, or silver $50. The same holds true for the NASDAQ. When the NASDAQ was 165 in 1980, who would have dreamed that it could reach 5,000?
Although it should be a separate myth, Smith also scoffs at the idea that any reputable money manager would advise that 10% to 20% of an investment portfolio should be allocated to gold bullion. This is likely true, since most money managers today are not old enough to have experienced the last bull market in gold, or the 1964-1982 bear market in equities. Their entire investment experience has been confined to one cycle - the biggest and longest-running equity bull market in history. While many of the world's wealthiest families do have substantial gold holdings, most US and Canadian portfolios have no allocation to precious metals whatsoever. Many North American confuse gold bullion and mining stocks, and do not appreciate that bullion is an entirely different asset class with vastly different risk and liquidity characteristics.
And yet the majority of money managers claim to provide their clients with balanced, diversified portfolios, even though those portfolios are limited to stocks, bonds and cash. Since there are seven asset classes in total - stocks, bonds, cash, real estate, commodities, precious metals and collectibles - today's typical investment portfolio is anything but diversified or balanced. Many advisors will be faced with massive law suits when investors suffer losses during this cycle, because they only allocated to declining assets and didn't provide adequate diversification.
Because there is very little information or methodology available to assist in determining what an appropriate allocation to precious metals should be, in 2005 I commissioned a study by Ibbotson Associates. Ibbotson is recognized as a world leader in asset allocation, and bases their work on Harry Markowitz's mean-variance optimization paradigm - the heart of strategic asset allocation. Because gold's economic role changed so drastically following US President Richard Nixon's closing of the gold window in 1971, Ibbotson studied the period from 1970 to 2005. That was as far back as they could go to make meaningful investment comparisons.
Ibbotson reached several conclusions. First, they concluded that precious metals are the most negatively correlated asset class to traditional financial assets and, as a result, they act as a hedge for the entire portfolio. During high inflation periods, precious metals outperformed all asset classes. During periods of stress, they provided returns when they were needed most. During low inflation periods, they provided bond-like returns. Ibbotson found that, based on a strategic asset allocation model, investors could potentially improve reward-to-risk ratios in conservative, moderate and aggressive portfolios with allocations of 7.1%, 12.5% and 15.7% respectively. Their work did not take into account any of the risks posed by rising inflation, rising debt levels, federal budget and current account deficits, rising oil prices, geopolitical tensions or any of the current vulnerabilities and imbalances in the economy.
In addition, studies have been carried out by David Ranson, head of research at Wainwright Economics, with respect to the amount of gold necessary to immunize portfolios during periods of rising inflation. He concluded that, for optimum results, investors need 18% for a bond portfolio, and 47% for an all-equities portfolio.
From a tactical asset allocation point of view, a portfolio's allocation to bullion should be much higher in today's economic climate. Tactical allocations should be adjusted to the directional trend of the Dow:gold ratio in order to maximize returns. When the ratio is rising, as it was from 1920-1929, 1945-1965, and 1980-2000, portfolios should be overweight financial assets. When the ratio is falling, as it was from 1929-1945, 1965-1980 and 2000 on, portfolios should be overweight precious metals.
On August 15, 1971 the Dow was 856 while gold was $35 per ounce, for a Dow:gold ratio of 24:1. By January 21, 1980 gold had risen to a peak of $850 per ounce while the Dow stood at 872, for a Dow:gold ratio of 1:1. At this point the cycle changed and the Dow:gold ratio rose until it peaked at 44:1 in 2000. It has been dropping ever since, and now stands at 19:1. Many specialists in cyclical trend analysis believe that, at the end of this cycle, the ratio will again be 1:1.
I have about 20% of my assets in precious metals right now. Diversification is very important! I also just updated my free market investing guide (http://libertarianactivism.com/writings/free-market-investing-tips.shtml).
Would I be right in assuming that few, if anyone, reading this post has guarded against inflation and changing market conditions in this way?