Buffet No Likey Gold

One of the traits for every asset class we have at my firm is it must have an expected return.
Can someone explain to me the expected return on Gold and where it comes from?
This is a serious question.
 
^^ this is what i’ve talked of.
gold’s price is based on the probability of fiat currency implosion, either with the USD or all currencies worldwide. in either scenario, we will likely not have enough gold to use it as a currency for 7 billion people anyway and so in turn, we will have to re-establish a new fiat currency. in both the worriless and a worrisome scenarios, gold’s value/utility is thereby nil. i’ll reiterate once again, goldbugs should honestly reconsider being goldbugs and consider being gun-toting apocalyptos b/c that’d be the smarter thing to do, in both the short- and long-term.
 
Its very simple. If you expect currency A to depreciate, you buy currency B. If you expect both currency A and B to depreciate, you buy gold. Considering just about everyone gov’t has been handing out money like candy, I think the thesis of expecting all currencies to depreciate is pretty sound.
 
You’re right that expected return needs to be positive. Not only positive, but also higher than the risk-free return. However, when you are talking about real purchasing power, risk free return becomes much more problematic.
In fact, the only risk-free return would be a zero-coupon inflation indexed return by a security issued by a sovereign government with seignorage (ability to print money).
Expected returns can come in the form of profitability from intelligent business management and organization, or in long-term shifts in supply and demand, or both. With commodities, you generally don’t have the business aspect, but you can make judgements on likely supply and demand dynamics.
Remember that the lower the correlation with other assets in a portfolio, the lower the expected return needs to be in order to become an attractive portfolio addition. But low correlation is never a justification for buying something with a negative expected return (unless you are using the security to hedge another one).
 
Buying gold makes you well prepared for times for which you could do the same much cheaper by buying bullets !!
 
When I think of the price for gold, unlike other precious metals which have some real consumed value, I think of the relationship between gold, inflation, the US$ currency value, oil price, and all kind of events/shocks that affect gold prices.
While other commodity prices are more affected by supply/demand fundamentals (prices go up when market is in deficit and vice versa) gold price is not. It is more about how much do people want to keep gold as bars/coins/jewelry and how much central bank keep gold as reserves. And I don’t think the concept of keeping gold (instead of say platinum) as an investment will change anytime soon so yes I still go for gold.
 
At this point it’s only gold’s demand as a safe haven that is driving its value. The correlation coefficient for gold vs risk compared to gold vs inflation shows that gold vs risk is higher. Gold is very simply put, a very poor inflation hedge. Stocks or housing, excluding the recent housing insanity, outstrip gold, by far, in their ability to provide superior returns.
I do have to laugh at people who point at any 10 year period and say “well, gold is superior to stocks in the last 10 years”, yet they forget that gold was at 872 in 1982 or so, what happens if we take those 27 years and compare gold to stocks?
Anybody who read Snowball, or any other biography of Buffet, knows that his upbringing leaned towards being a gold bug. His father and uncle were both doomsdayers. His father, a devout Republican, thought FDR and the Democrats were destroying the currency and country. His hedge against this collapse was to stock flour and sugar in the attic, as well as purchasing a farm in the boonies with the uncle. While his father didn’t retire penniless, he certainly didn’t rack up tens of billions like his son.
When it comes down to it, times aren’t great right now. That doesn’t mean it won’t get worse, but it WILL get better at some point. When it does and people seek more risk, gold will fall.
 
spierce Wrote:
——————————————————-
> At this point it’s only gold’s demand as a safe
> haven that is driving its value.
This is why I was asking questions above. I have the same feeling right now.
 
spierce Wrote:
——————————————————-
> At this point it’s only gold’s demand as a safe
> haven that is driving its value. The correlation
> coefficient for gold vs risk compared to gold vs
> inflation shows that gold vs risk is higher. Gold
> is very simply put, a very poor inflation hedge.
> Stocks or housing, excluding the recent housing
> insanity, outstrip gold, by far, in their ability
> to provide superior returns.
>
> I do have to laugh at people who point at any 10
> year period and say “well, gold is superior to
> stocks in the last 10 years”, yet they forget that
> gold was at 872 in 1982 or so, what happens if we
> take those 27 years and compare gold to stocks?
>
> Anybody who read Snowball, or any other biography
> of Buffet, knows that his upbringing leaned
> towards being a gold bug. His father and uncle
> were both doomsdayers. His father, a devout
> Republican, thought FDR and the Democrats were
> destroying the currency and country. His hedge
> against this collapse was to stock flour and sugar
> in the attic, as well as purchasing a farm in the
> boonies with the uncle. While his father didn’t
> retire penniless, he certainly didn’t rack up tens
> of billions like his son.
>
> When it comes down to it, times aren’t great right
> now. That doesn’t mean it won’t get worse, but it
> WILL get better at some point. When it does and
> people seek more risk, gold will fall.
Nice post. I agree with the sentiment.
Gold provides you with no income so it has an infinite P/E (or is that undefined?). That’s enough of a reason for me to avoid it.
 
I think the P/E would be undefined since it is a vertical line. Right? RIGHT????
 
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