Jean-Marie Eveillard's view on the crisis - Buy Gold?

[Eric50]

Good and balanced article from JM Eveillard below.  I like his long term insights and I agree with him that the best way to protect ourselves from the coming inflation is a combination of stocks and gold.

 

Eric

 

 

http://www.firsteaglefunds.com/downloads/news/JMEatDD0609.pdf

[Parsad]

I don't like the buying gold idea.  How the heck do you value it?  I think this idea always comes up in a crisis, yet the best protection for investors long-term is not to lose focus of the "long-term."  Buying investments at a significant discount to intrinsic value is the best protection for any circumstance...in other words, sticking to what we know.  Buying gold is speculative at best, completely misguided at worst.  Does an investor put 5, 10, 15, 50, 70% of his net worth in gold?  How do you calculate that?  I see a small herd of value investors moving that way, and that tells me this probably isn't the right idea.  Cheers!  

[oldye]

What do investors know today about gold that they didn't know 6 years ago when it was 1/3 the price? 

Did the buying power of a dollar drop by 300% over the last 6 years?

 

At best, gold is a speculation at these prices, you better hope some greater fool is willing to buy it from you for more than you paid. 

[SharperDingaan]

 

Gold is simply the elected hedge against the anticipated change - it could just as easily have been oil.

 

The assumption is that central bankers will use gold as their 'store', because that is the history - & everybody can buy gold. The reality is that central bankers also have the SDR (Special Drawing Right) which functions a lot better than gold in almost every regard - & nobody but a central banker can get them.

 

China pushed hard at the recent G8 for USD reserve status (store of value) replacement with the SDR. As the worlds creditor, & a trading partner with a currency pegged to the USD, the inference was clear. China's USD reserves shift into SDR, & the currency gets pegged to SDR vs USD. Yuan effectively becomes the new reserve currency - as it is the only currency backed by SDR . Goodbye gold   

 

Looking backward isn't going to help anyone here.

 

SD

 

 

 

[NormR]

Although I'm not that keen on gold, one can make the case for it as a hedge.  Rigorous rebalancing is usually suggested with a relatively small overall allocation.  Say 5% to 10%. 

 

http://www.efficientfrontier.com/ef/996/rebal.htm

 

PRECIOUS METALS STOCKS -- A SPECIAL CASE

 

The portfolio characteristics of precious metals equity are unique; very low long term return, very high return variance, and near zero correlation with most other asset classes. One of the primary rationales for this behavior is that most of the risk of this asset class is nonsystematic because of its low correlation with other assets -- in other words, it can be diversified away. The above discussion provides another perspective on this paradox. Examination of the theoretical rebalancing formula shows that the addition of a small amount of a high variance zero correlating asset to a portfolio with a much lower variance increases its apparent return by approximately one half of its variance. In other words, since the variance of a typical portfolio of precious metals stocks is about 0.1, its apparent return (IRR) in a rebalanced portfolio will be about 5% higher than its long term stand alone return. This is precisely what is observed by the investor who periodically rebalances the precious metals component of their portfolio as a fixed proportion; a large fraction of the IRR of this component comes from rebalancing per se. Thus, not only is the systematic risk of precioius metals stocks much lower than its stand alone risk, but its rebalanced portfolio return is much higher than its observed stand alone long term return.

 

 

[Guest kawikaho]

Gold, unlike most currencies, has intrinsic value.  It has utility in many industrial applications.  I wouldn't write it off.  And it has been a store of value, compounding along side inflation for the past 100 years.

 

*had to edit some spelling errors

[Parsad]

Gold, unlike most currencies, has intrinsic value.  It has utility in many industrial applications.  I wouldn't right it off.  And it has been a store of value, compounding along side inflation for the past 100 years.

 

From the 2005 Berkshire Annual Meeting.

 

On gold, both Buffett and Munger made their dislike for the yellow metal very clear.

 

“We are not enthused about gold,” Buffett said. He prefers an asset that is “useful.” He said gold has very little economic utility and prefers commodities that have an economic effect - like oil.

 

“Gold is a dumb investment,” Munger cut in.

 

Another statistic:

 

In case you're one of those folks, here is some food for thought: Even though gold has spiked sharply in value recently, it hasn't been a long-term winner for most investors. According to University of Pennsylvania finance professor Jeremy Siegel in his seminal book Stocks for the Long Run, here's what a dollar invested in various things would have grown to, from 1802 to 2001. (Amounts have been adjusted for inflation.)

 

Stocks: $599,605

Bonds: $952

Bills: $304

Gold: $0.98

 

Did you catch that? Over 200 years, you would have lost two cents of your dollar if you had invested in gold.

 

OK, so if your personal investing timeline is less than 200 years, here are some compound average annual returns to consider:

 

Period

Gold

S&P 500

 

1982-2007 (25 years)

3%

11%

 

1987-2007 (20 years)

2%

8%

 

1992-2007 (15 years)

5%

9%

 

1997-2007 (10 years)

8%

5%

 

2002-2007 (5 years)

18%

13%

 

 

Sources: Yahoo! Finance, MeasuringWorth.com

 

Gold as a hedge against an economic shock may work, but as an investment...you're better off buying T-bills in various currencies.  Cheers!

[Packer16]

I think what made gold a good investment pre-New Deal was the fact that gold was used a the reserve currency.  The only firms up from 1929 to 1933 were gold stock because the value of gold increased due to the devaluations of all currencies.  It may be a good investment if gold remains a portion of the reserve currency.

 

Packer

[Guest kawikaho]

Sanjeev,

 

Good to know, but my point is it's a store of value as opposed to currencies like the dollar which has lost 95% of its purchasing power since 60-70 years ago.  Gold compounds alongside inflation, as evidenced by your post (I would neglect the .02 cent price differential since gold has dramatically increased in value since 2001, whereas inflation hasn't).  I have never made any statements that it's a better investment than stocks, bonds, or Treasuries.  I don't understand why you're attacking my line of thought.  I've said this before on this board, the Dow has returned a 1.5% CAGR advantage over gold over 100 years--this is prior to 2009, so it's probably half that now.  Even so, a 0.75% advantage over inflation or gold is still over 2x your money in inflation adjusted dollars over a 100 year period.  There is a caveat: I did this analysis a year ago, so I'm sure that they are nearer parity on returns due to the recent run up in gold spot prices.

 

As for it being an asset that is not "useful", gold is used in many facets of industry, semiconductor manufacturing, and electronics.  It may not be on par with oil, but it's not a completely useless asset with the exception being jewelry.

 

BTW, I meant write, not right.

[Guest kawikaho]

Also, benchmark analysis over various periods like what Siegel is doing is highly flawed and biased.  Ok, let's stretch that period out to 2009 when gold has increased 20% in value, and the S&P has lost 40%.  How do the #'s look then??  Why not just pinpoint the very tops and bottoms?  It's asinine.  What he should do is pick hundreds of periods and do a statistical analysis on the returns.  That would be a fairer assessment.  I think Siegel is highly biased towards stocks, as shown by his books and articles.  You just need to peruse the Wikipedia article on him to find these glaring criticisms:

 

Some have criticized Professor Siegel for being bullish on the stock market back in 2000. In a BusinessWeek interview in May 2000 when asked about the stock market, he replied:

 

Seven percent per year [average] real returns on stocks is what I find over nearly two centuries. I don't see persuasive reasons why it should be any different from that over the intermediate run. In the short run, it could be almost anything.[2]

 

At the 2006 Berkshire Hathaway annual meeting, Berkshire Vice Chairman Charlie Munger called Siegel "demented" for "comparing apples to elephants" in making future predictions.[3] Value Investor Insight].

 

In August 2007, just two months before the stock market began a 13 month slide of 50%, Siegel advocated investors buy shares, particularly some financials

 

I dunno, I'll take his advice with a grain of salt.

[Guest Broxburnboy]

Eveillard neglects a third option.. non US stocks. I think its obvious by now that US corporate profits (thought by many to be the major factor in determining market prices) are going to continue to weaken as delevering continues and demand for many consumer related goods continues to contract.

The fiscal situation of the US (and state) governments continues to weaken which does not bode well for the strength of the USD versus other currencies and gold. If the buck erodes to the point that there it is replaced as the sole global default currency, we can expect a sudden negative impact on its exchange rates.

Better to be invested in solid companies in jurisdictions where growth is positive and governments on solid footings.

[Eric50]

Silver is an alternative to gold that I personally like better. It has the same store of value characteristic as gold and it also has heavy industrial usage (photographic material and electrical contacts and conductors). Silver demand has been higher than mine production for at least the past 10 years... I think Buffett has had large positions in silver in the past.

[Guest kawikaho]

Sanjeev,

 

BTW, I've been suspect about that 200 years of data that Siegel claims.  Lo and behold, this just popped up on my radar today:

 

http://online.wsj.com/article/SB124725925791924871.html

[Parsad]

Hi Kawikaho,

 

The Siegel number was simply one of the first things that popped up on Google when I did a search for Gold versus S&P500.  The main point was the illustration between real returns on stocks, bonds, treasuries and gold.  Even if you examine data from the last century on, the numbers aren't entirely different. 

 

I think people buy gold because they are afraid of an economic shock, currency devaluation or just plain don't know what to do.  Sometimes, it is better not to do anything, and the main point of my original post was that I see alot of value investors herding into gold at elevated prices.  That is worriesome to me.

 

A company like McDonalds generates over 60% of revenues outside of the United States.  So does Coca-cola, Pfizer and a number of other companies.  How would they be hurt by a depreciating U.S. dollar?  Would they actually suffer?  Funny thing is that due to foreign currency translation, these companies actually did better when the U.S. dollar depreciated, rather than when it appreciated. 

 

My point was that you could put 10-20% of your portfolio in gold, which cannot be valued, regardless of its utilitarian nature, or buy four or five global companies that were undervalued.  Which would be the better investment long-term?  A business that generates a growing revenue stream, pays a dividend and generates much of its income outside of the U.S. would easily be the far better idea...Jeremy Siegel be damned...plus he's annoying during interviews!  ;D  Cheers! 

[Zorrofan]

 

I think people buy gold because they are afraid of an economic shock, currency devaluation or just plain don't know what to do.  Sometimes, it is better not to do anything, and the main point of my original post was that I see alot of value investors herding into gold at elevated prices.  That is worriesome to me.

 

 

Sanj,

 

I will toss in my $0.02 worth. IMHO gold is not an investment, rather it is insurance. The reason for holding gold is for a hedge against economic collapse pure and simple. Other than that you are IMHO correct that owning shares in a well run business will provide a superior long term returns.

 

Cheers

Zorro

[benhacker]

Whether or not you can value gold directly or not may not be relevant.  But I'm *pretty* sure you can value gold in various ways wrt to other precious metals.

 

At least with respect to silver, I think gold is ridiculously overpriced.  No they are not the same, but they are similar enough they should serve roughly the same function.

 

A relative value trade as it were.  I am indirectly (very slightly) long silver as of today.  I'm not a metals guy, but everything in my bone tells me that Gold has seen it's run up to today because of what is happening today... anyone buying here is likely not buying what they think they are.

 

Whether gold is insurance, an investment, etc, the price you pay matters.  Buyer beware if you are new to this.

 

I'm no expert, but gold is *hot* with the retail suckers I know right now.  Maybe it goes to $2000, but I wouldn't bet on it.

 

Ben

[Parsad]

I would agree with that Ben.  I think gold relative to supply and demand is elevated when compared to silver, or even oil for that matter.  Cheers!