Gold: "dislocation in the market"?

aroominyork

I have never owned or considered owning gold but, with fixed interest looking less attractive than usual as an alternative to equities, it seems a good time to consider gold as an option.

This PensionCraft video (at 14m12s) says that since the pandemic the gold market has become dislocated, meaning the price of gold has moved away from its fair value. His model for fair value takes into account three indicators: inflation, the strength of the dollar and bond yields. His conclusion is that gold is currently underpriced which, superficially, would seem to make it a good alternative to fixed interest.

What are people's thoughts on this? Is the model sensible? Are there important factors the model does not take into account? It is worth adding that the PensionCraft guy is not recommending buying gold unless you think there will be sustained inflation, which he does not think is the likely scenario.

PS Looking at the PensionCraft video again, he says that a weak dollar causes the price of gold to rise because gold is priced in dollars. For us in the UK that driver of the gold price is presumably a zero(ish) sum game – if the price of gold rises because the dollar has weakened, the price of gold converted to Sterling will fall.

Apodemus

aroominyork said:

His conclusion is that gold is currently underpriced which, superficially, would seem to make it a good alternative to fixed interest.

Superficially, perhaps! But for the vast majority of investors, speculation in the price of gold (or anything else prone to large fluctuations in value and that provides no recurrent income) is the very opposite of investment in "fixed interest". Would anyone really consider one to be a good alternative to the other?

aroominyork

Apodemus said:

aroominyork said:

His conclusion is that gold is currently underpriced which, superficially, would seem to make it a good alternative to fixed interest.

Superficially, perhaps! But for the vast majority of investors, speculation in the price of gold (or anything else prone to large fluctuations in value and that provides no recurrent income) is the very opposite of investment in "fixed interest". Would anyone really consider one to be a good alternative to the other?

I guess it depends what you want your non-equity allocation to do. If you want income then obviously gold is no good, nor if you are redirecting relatively low risk FI (eg short duration development govt bonds) which you have as dry powder to invest in equities during a downturn. But if you want to diversify from fixed interest as a long-term holding, then gold has a role and now might be a good time to buy.

Alexland

Gold isn't cheap or expensive - as a lump of shiny metal it's only worth the price people are willing to pay for it and if a model says otherwise then it's probably not considering all the factors correctly.

Sure it can have a role as a diversifier in a medium risk portfolio but I wouldn't be tempted to take a bet on gold just because someone thinks there might be some kind of valuation dislocation.

MaxiRobriguez

I added gold to my portfolio early on in the COVID pandemic as a flight-to-safety play before markets tanked.

I talked myself into holding it as an inflation hedge which I've since unwound and deployed into cash-generative defensive companies instead.

As per Alex's comments it's difficult to judge whether there is value in gold or not so I don't intend to have it in my portfolio for a while again.

Alexland

I've actually watched that bit of the video now and it seems to be a classic case of building a model that backtests correctly which suggests it's working but when new data is known it no longer works. If that new data had been known at the time the model was created maybe it would have been constructed differently to match.

Malthusian

I've just got off the phone with gold. It says its very sorry that its not where PensionCraft thinks it should be and will start going up to "fair value" as soon as its finished the ironing. It doesn't bother with its pants so I'd bash the wine gums on now.

It is worth adding that the PensionCraft guy is not recommending buying gold unless you think there will be sustained inflation, which he does not think is the likely scenario.

Hang on, isn't he meant to be making the predictions here? Why is he asking me what I think will happen to inflation? If he can't predict that then why should I care about his predictions for gold?

PS Looking at the PensionCraft video again, he says that a weak dollar causes the price of gold to rise because gold is priced in dollars.

That is abject nonsense on a stick. Gold is gold, and is sold by exchanges all over the world in exchange for every currency under the sun. The fact that its price is most often quoted in dollars means literally nothing. If the dollar falls in value then gold will go up when quoted in dollars, but so will everything, including shares, noodles and the £GBP pound currency.

TimeSaver230

that chart is rediculess and complete fauls

tebbins

Malthusian said:

I've just got off the phone with gold. It says its very sorry that its not where PensionCraft thinks it should be and will start going up to "fair value" as soon as its finished the ironing. It doesn't bother with its pants so I'd bash the wine gums on now.

It is worth adding that the PensionCraft guy is not recommending buying gold unless you think there will be sustained inflation, which he does not think is the likely scenario.

Hang on, isn't he meant to be making the predictions here? Why is he asking me what I think will happen to inflation? If he can't predict that then why should I care about his predictions for gold?

PS Looking at the PensionCraft video again, he says that a weak dollar causes the price of gold to rise because gold is priced in dollars.

That is abject nonsense on a stick. Gold is gold, and is sold by exchanges all over the world in exchange for every currency under the sun. The fact that its price is most often quoted in dollars means literally nothing. If the dollar falls in value then gold will go up when quoted in dollars, but so will everything, including shares, noodles and the £GBP pound currency.

Can I get the abject nonsense on chopsticks to eat the noodles with?