Gold (for diversification and balance)

Jim1980

Gold and particularly silver are very cheap at the moment. Dow Jones vs gold. This ratio has been 2 to 1 in the past, at the moment the ratio is 12/13 to 1. Stocks and shares are massively overvalued compared to gold and silver currently. 

bowlhead99

Jim1980 said:

Gold and particularly silver are very cheap at the moment. Dow Jones vs gold. This ratio has been 2 to 1 in the past, at the moment the ratio is 12/13 to 1. Stocks and shares are massively overvalued compared to gold and silver currently. 

As the Dow is invested in productive industry which generates profits over time, while gold just sits there, one would expect the index of major companies to diverge in value from a piece of metal in a vault.  So, it's not particularly surprising that 2 to 1 at some point 40 or 90 years ago has become 12 or 13 to 1. It would be many times this if you were using a total return version of the index that included the dividends that stocks paid to their owners which would have been available to reinvest over time.

Back around August - September 2011, the ratio of Dow at about 11000 to gold at $1700-1900 was about 6 or 7 to 1, implying that gold then was only half as good value then as it is today, but still much better value than when it had 'been 2 to 1 in the past'.  What happened next ?  Over the following four years it lost about 45% of its dollar value and took another four years to get back to only being down 15-20%.

So observations on what constitutes 'massively overvalued' from looking at snapshot ratios at a point in time, should be taken with a pinch of salt.

Sailtheworld

DiggerUK said:

Accusing posters of trying to "time the markets" is a criticism  in the realms of a straw-man argument. 

Some do indeed manage to pull that trick off, it's what attracts many to go day trading.

What is being falsely argued  here is that nobody can read the markets or see great dangers, a totally different kettle of fish. That is a falsehood. Digger Mansions did that correctly from the start of the century, eventually putting all our retirement savings in to gold.

Exceptions don't make rules.

Sailtheworld

coachman12 said:

EdGasketTheSecond said:

goldieandblackie said:

The Gold boat has long since sailed away from port and only a fool would invest now the price is over $2000 per ounce

That is simply not true. It is not too late to get into gold and silver now to preserve value against debased fiat currencies and future inflation. Gold is still cheap by many measures; just not in ever devaluing fiat currency.

I agree with Ed. I will not start another thread about my 100 Krugerrands but I WILL always recommend any form of gold as an investment at any price, and I have continued to hold stocks of the stuff for many years.

Oh please do. I never tire of hearing about your Krugerrands and your full time wealth manager.

Sailtheworld

Jim1980 said:

Gold and particularly silver are very cheap at the moment. Dow Jones vs gold. This ratio has been 2 to 1 in the past, at the moment the ratio is 12/13 to 1. Stocks and shares are massively overvalued compared to gold and silver currently. 

There's a couple of problems with this analysis. One is that a divergence should be expected - busineesses add value; gold doesn't. The other is, for all you know, a ratio of 12 to 1 is just right and represents a correction from when gold was overvalued and/or the Dow Jones was undervalued.(EDIT: or neither because the ratio is just part of a human need to create narratives to explain randomness).

There's a lot of success bias going on too. Gold trading is zero sum so, taking costs into account, it's loss making - you'd think it was a one way street.

Jim1980

So Sail are you telling me that gold is over valued and Dow is undervalued? You may be right. 12 to 1 might be correct. I think the ratio will go lower than 6 to 1 possibly to 2/3 to 1 again. The difficulty is so much money has been put into the market by central banks that this will take a while to play out. We will know in the next few years, it is sure to be interesting to watch. 

bowlhead99

Jim1980 said:

The difficulty is so much money has been put into the market by central banks that this will take a while to play out. We will know in the next few years, it is sure to be interesting to watch. 

If there are a lot more pounds and dollars in circulation, then each one of them should logically have less 'spending power' because there's only so much 'stuff' to go around for people to buy with their currency. So a share of a profitable business may be worth more dollars just like a bar of gold may be worth more dollars. 

If individuals and businesses have less access to easy borrowing in the future then people will have less money to throw at stocks, but they will also have less money to throw at gold, and if interest rates do increase in future as part of 'returning to normal' over time, that's not particularly positive for gold due to gold not paying any income.

If we have inflation and the prices of goods and services go up, owning a share in a stockmarket listed business is one way to be protected from that because proportionately higher revenues minus proportionally higher costs is higher profits. Gold may also offer some 'protection' on the basis that one can speculate that if things cost more money generally, a bar of gold might also be worth more money, though all the charts show that gold only works some of the time as inflation protection and one can find plenty of cherry-picked periods where it did a terrible job.

So other than the obvious platitude that 'we don't know what will happen over the coming years but it will be interesting to watch', it doesn't seem that gold is an obvious thing to put your money in or that stock prices are definitely wrong as a long term play. But to come back to the OPs question, yes gold can be a diversifier and so plenty of people have it in their portfolios without it having been too much of a drag for the volatility reduction it has sometimes offered, even though others are dead against it.

DiggerUK

Jim1980.......The difficulty is so much money has been put into the market by central banks that this will take a while to play out.......

That has given me a Eureka Moment. In the aftermath of GFC1 2007/8, the banks were deemed "too big to fail" and the "Masters of the Universe" were bailed out with QE.

Now we seem to have reached the point we're QE has totally distorted business and the markets with fabricated values. GFC2, which was prospering nicely before the 8ollocks of lockdown now seems inescapable. 
This time it looks like they will have to declare capitalism "too big to fail". Yes, equities will continue to boom, but all that glistens.........

Therein for me is further truth about the wisdom of holding gold.....The price of gold has not been artificially boomed with QE, it's the price it is on its own merits.

sixpence, you would be well advised to start regular purchases of gold to a %ge  you're agreeable to. In my opinion, the higher the better..._

Sailtheworld

Jim1980 said:

So Sail are you telling me that gold is over valued and Dow is undervalued? You may be right. 12 to 1 might be correct. I think the ratio will go lower than 6 to 1 possibly to 2/3 to 1 again. The difficulty is so much money has been put into the market by central banks that this will take a while to play out. We will know in the next few years, it is sure to be interesting to watch. 

Neither. I think you may as well read tea leaves.

Do you really think there's a special ratio that informs when to buy and sell and the market doesn't already price this in? If there was people would front run it to avoid the drop, then they'd have to front run the front runners and so on - anyone in possession of special predictive powers would need to keep the basis of these secret.

The market has priced in the money issued by central banks AND taken a view on future actions. To make money you need to be better at pricing these future events, you need to spot where the market is wrong and you also need to know the market will come around to your way of thinking. I know the record gold price makes anyone withl a gold filling look like an investment genius but, really, what are the chances of people having these skills let alone getting them lined up? Slim I'd say.

AlanP_2

DiggerUK said:

Accusing posters of trying to "time the markets" is a criticism  in the realms of a straw-man argument. 

Some do indeed manage to pull that trick off, it's what attracts many to go day trading.

What is being falsely argued  here is that nobody can read the markets or see great dangers, a totally different kettle of fish. That is a falsehood. Digger Mansions did that correctly from the start of the century, eventually putting all our retirement savings in to gold.

sixpence is struggling to revise their game plan going forward to meet an obvious threat to wealth values, which seems to be getting rebuffed on the grounds that everything is hunkey dorey, not possibly on a one way ticket to Palookaville..._

Have you compared your return against what you would have got if left in whatever is was in at the start of the century, or against a 60/40 equity/bond portfolio (say HSBC Global Balanced as an approximation for that)?

I've seen your posts on gold over time on here and intellectually, as an investment that will increase my wealth over time, I just don't get it, actual numbers may help.