Gold in the “Everything Bubble”: Effective Diversification?

What do you do when nearly all asset classes are overvalued?

Diversification is one of the oldest principles by which people try to hang on to their wealth, however little they might have. Don’t put all your eggs in one basket, it goes. Diversification is not designed to maximize profits or minimize costs. It’s designed to get you through a smaller or larger fiasco, not necessarily unscathed but with at least some of your eggs intact so that you can go to market another day. This search for stability is a critical concept when looking at gold as diversification of risk in other asset classes.

There are many reasons to own or trade gold that are beyond the scope of my thoughts here on diversification. So I’ll leave them for another day.

The classic and most basic diversification for American households has been the triad of stocks, bonds, and real estate. In the past, it was often held that when stocks go up, bonds decline. This has to do in part with the Fed, which tends to raise rates when things get hot, thus driving up bond yields (which means by definition that bond prices decline). So stocks and bonds balanced each other out to some extent.

Throw in some leveraged real estate – the house you live in – and in the past, your assets were considered sufficiently diversified.

But this no longer applies today: Stocks, bonds, and real estate – both residential and commercial – all boomed together since the onset of QE in 2009. Other asset classes boomed to, including art and classic cars. Almost everything went up together in near lockstep. For a while, gold and silver, which had been on a surge since 2001 continued to surge. In other words, it was very difficult to achieve actual diversification.

It boils down to this: When all asset classes you own move together as they have in the Everything Bubble, you’re not diversified!

And when asset classes have risen together like this, it becomes very difficult to achieve diversification going forward – because now they’re at risk of all going down together.

So how does gold fit in?

Gold surged for a decade, peaked in 2011, and fell. Since 1995, the scope of the chart below, gold provided reasonable diversification to stocks, except for two years, from 2009 through 2011, when gold and stocks – as depicted by the S&P 500 index in the chart – moved in parallel (click on the chart to enlarge):

In the chart above, note that holding gold instead of stocks was a losing game from 1995 until 2008, but then stocks crashed, and gold was there as effective diversification. Then gold continued to surge for two more years, and people who owned gold loved it.

Properly functioning diversification is painful during good times. When one asset class surges, another should decline, giving some stability to the overall holdings, but also reducing performance during good times. This pain has been experienced by owners of gold since the peak in 2011, even as most other asset classes have soared.

Bonds are already heading lower, after their 35-year bull market. Stocks are perfectly primed for a long and complex downtrend. Many segments of commercial real estate and in many markets residential real estate are also primed for long downtrends. Other asset classes that make up the Everything Bubble are primed to head lower, or have already done so.

Will gold offer effective diversification?

As we saw in 2009-2011, stocks, bonds, real estate, and gold can move together. At that time, they moved up together. Going forward they can move down together – because there is no guarantee that diversification actually works as planned!

No one complains when their well-diversified holdings all go up together. But watch the wailing and gnashing of teeth when those well-diversified holdings all drop together. And there is a good chance that this might happen – after the joint run-up.

Gold, nevertheless, remains mostly outside that lock-step dynamic, and there has only been temporary correlation between gold and most asset classes since 1995. So theoretically, gold offers diversification.

Yet gold cycles are very long: Gold stayed below its 1980 peak for 20 years until 2001. And we’re only seven years into the current down-cycle. So there is no guarantee that gold will turn around and surge, or even remain flat, when the Everything Bubble is starting to deflate asset class by asset class. Which shows just how difficult it will be, after nine years of rampant asset price inflation, to achieve functional diversification.

Why are gold and silver price trends so long and so big — both, up and down? Read…  My Theory about Gold and Silver for Long-Term Investors

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  131 comments for “Gold in the “Everything Bubble”: Effective Diversification?

  1. Gorbachev says:

    Cash is also necessary for proper diversification.After all the

    reason for falling real estate ,bonds and stocks are rising

    interest rates.

    • kevin says:

      Does it ever occur to you’all that the reason why everything is in bubble territory, is because they are ALL measured in dollars?

      If you flood the system with cash that CBs can easily print, of course everything else that gets measured against it, will become inflated. You will get a different chart if you measure all other assets against say ounces of gold.

      The catch is finding a market-driven price of say a house or a stock measured in X number of ounces of gold. You really can’t do it. There is no market for exchange (or barter) of X ounces of gold directly into a house you fancy, because even gold itself has to be measured in fiat dollars.

      If you wanted to do so, you would literally have to first convert your gold holdings into fiat dollars, at the prevailing rates, AND THEN buy that house with the dollars. So you’re back to square one, being subjected to the vagaries (and crimes) of the CBs.

      Therefore, the mass of humanity is lodged firmly between the devil and the deep blue sea, because people will always have to take their salary or pay their taxes or rent only in fiat dollars (i.e. monopoly money).
      The plebeians are therefore forced to play this monopoly game, whether they like it or not.

      The defensive recourse is to convert your fiat dollars into an interest-bearing / utility-generating asset as quickly as possible.

      For the reasons I’ve just stated, Gold does not cut it as an asset class. You will lose out and be priced out over time, because gold does not generate any interest / dividend or growth nor utility.

      To further illustrate:
      – A piece of real-estate is an asset class that generates rental income or be able to grow food while holding a certain economic value.
      – A profitable business is an asset class that generates income or grow as an enterprise while holding a certain economic value.
      – A paper stock is an asset class that generates dividends or can grow in price while holding a certain economic value.

      – A vintage car is an asset class if you manage to rent it for a profit, but if it rots in your garage. it becomes like your Gold coins and thus it is NOT an asset class.

      Similarly, Cash is not a great asset now because cash in a bank generates very low interest now relative to the rate of inflation. If CBs were to raise rates much higher, then perhaps holding cash in an interest-bearing account may make sense since the cash will grow in and of itself.

      Interest rates are inevitable in the current growth-oriented and debt-based global economic system. When you have interest built into the very fabric of all economic activities, then any “asset” that does not generates equivalent or higher “interest” in returns will naturally lose out over time.

      Money has to MOVE to be useful and hence “valuable”.
      The faster money moves for an economy or for you, the wealthier the economy becomes or the faster you create wealth. Some people call this the “velocity of money”.

      In this sense, Gold is dead money that does not move or transact easily, so unless you have a magic Gold pot that naturally grows more gold coins with the passage of time, then holding gold is a losing proposition,

      I hope the explanation is simple enough for most.
      The earlier you understand this and take appropriate actions, the better you will be financially, and the less of a victim you will become of CBs or be led astray by ’em gold-bugs. lol.

      • Crysangle says:

        Gold is money that exists of its own and is mostly outside of third party manipulation.

        Some people like to save money for later use, as reserve.

        The financial system and fiat are not designed for saving money, they are designed to force competition of its use, and often with the scales tipped by said third party.

        Gold is a neutral proposition, which brings the benefit of holding easily tradeable value outside of the existing system, in a value structure which is age old and widely understood.

        If you do not know what this older structure is, how it works, then obviously any analysis will be incomplete – just like fiat itself is purposefully designed to be incomplete and in need of being spent.

        • kevin says:

          Gold is certainly not beyond manipulation by a third party or otherwise. Read up on Gold’s long history of manipulation by CBs and almost all of the European royalty of old.

          And I also pointed out that even if you save & hide your pile under your bed for decades, eventually it will still be subject to manipulation when you need to use the gold for exchange, since gold is still PRICED in terms of the prevailing fiat dollar. So, you will be subject to manipulation of fiat when you convert your gold as currency in exchange for other useful stuff or assets (such as buying a house).

          I suspect your round-trip costs of using gold will probably negate all the “gains” you think you had after you factor the inflationary rate throughout the decades you held on to the non-interest bearing instrument.

          Yes, saving is a virtue but it ain’t gonna make you rich.
          There I said it, but I’m not the first to say this.

          Smart investing and rolling with the punches is what keeps you smart and on the edge, which in turn gives opportunities to make yourself rich. You learn nothing much when you “save” and leave your money in a bank account or you bury your gold in your backyard for decades.

          The fear of losing is what makes the 99% of people lose in this game of money. Yes, its painful to lose money, but the 1% know that the key is to learn from the money mistakes and keep moving your game to the next level.

          The economy has to move. Life and the economy is all about movement and activity. Money is just a lubricant for the economic engine and a measurement of that economic activity. If you or the economy don’t move at all, then we all might as well be dead and buried in the ground, like precious gold.

          And you have to understand WHY and WHAT you are actually “saving” it for, whatever the “it” you are saving.

          – If you’re “saving” it so that you can accumulate a bigger pile for a better investment opportunity later on? Then fine.
          – If you’re saving it to bury it together with you in your grave, then whats the point?
          – If you’re saving all the gold for your next generation, you learn nothing and they will also learn nothing, so your children will probably squander the gold anyways.

          Don’t you think it is far better to “save” in real-estate that you can also will it to your next generation, or “save” equity in a great business for them to takeover and learn the ropes and continue to play smart in the economic game?

          Who will be smarter financially? The child who inherits a ton of gold (he dug up from his father;s grave or pried from his cold clammy hands ;-) or the child who learnt the ropes of running a business from his father and then inherited the shares of the company?

          So Gold is indeed an neutral proposition. It is inert. It does not react with many chemicals. Its is useless from very many angles.

          I agree that the current value structure is designed more towards endless consumption rather than saving and meaningful investing, but it is still your personal choice what you do with your money. No one can force you to consume the can of Kool-Aid if you don’t want to, or buy into the i-whatever gadget just to keep up with the Joneses.
          And you can still “save” your money in real-estate or a business, which I’m arguing is far better than saving it in inert gold.

          Finally, why do you want to trade or expect to be able to trade “outside of the existing system”?

          I already said there is nowhere to hide in our contemporary global financial system. if you want out of this interconnected system, you would need to immigrate into North Korea or ask Elon to send you on a one-way ticket to planet Mars.

          Once again, I repeat that Gold is NOT easily tradeable for anything in today’s context. You still have to convert it to fiat paper, BEFORE you can even buy a cucumber from your local grocer.

          Look… what “older” structures are you hearkening back to? The feudal system of the Middle Ages? or the barter exchange system of the slave trade?

          Believe me or not, we are already in a literal Golden Age without gold.
          If we ever go back to using gold as everyday currency, doesn’t it imply that human society is regressing backwards or facing certain doom, either economically or ecologically?

          What modern-day scenarios do you offer for Gold as everyday currency…besides the usual post-collapse or post-apocalyptic ones? If that happens, I certainly don’t want to be living in such a scenario anyways. lol.

          So, I can’t think of any contemporary financial model where Gold works. Maybe you can share some possible use-cases for ’em Gold bugs?

        • Crysangle says:

          “Gold is certainly not beyond manipulation by a third party…”

          I agree that its availability and use, therefore its value as exchange, can be changed by the use of force and by attempts at monopoly of ownership. The use of gold as official currency makes that manipulation more obvious because there is no intermediary invented currency used as proxy to its value.

          “And I also pointed out that even if you save & hide your pile under your bed for decades, eventual…”

          Same answer as above, but the point is more that you are exempt from events like confication of fiat, bank failure, currency meltdown etc. It is a saving that is outside the system.

          “I suspect your round-trip costs of using gold will probably negate all the… ”

          I don’t look for fiat gains. The statement is speculative, gold in essence is not, but can be used to that end, as well as to avoid speculation.

          “Yes, saving is a virtue but it ain’t gonna make you rich.
          There I said it, but I’m not the first to say this.”

          Yep, but the aim is to store for in time of true need, it stops you ending up poor. Everyone makes their choice on if and how they go about that, even the view that investing properly is saving will do.

          “Smart investing and rolling with the punches is what keeps you smart and on the edge…”

          That is fair too, but people are in many different circumstances. Smallest example is someone active using the structure the fiat system offers vs. someone who has no need or ambition to, or is looking to protect themselves from its excesses…they may be people who have already learned.

          “The fear of losing is what makes the 99% of people lose in this game of money….”

          True also. However owning gold as reserve is to move outside that money game. Bankers know this.

          “The economy has to move. Life and the economy is all about movement and activity….”

          Well there we are into supply side economics, which is justifiably argued. Either way, bad money displacing good money is a well observed feature, so I have no argument with what money people choose to use, choose being the operative word. Someone is going to own the gold, the dollars will all be sat in accounts which are one way or another used for investment. The more active the investment someone chooses the higher the risk tends to be …but that is their choice.

          “And you have to understand WHY and WHAT you are actually “saving” it for, whatever the “it” you are… ”

          I generally agree there, which is why savings in gold are seen as a reserve, as a way to learn to actually save, as an alternative world that may be useful. There are other more serious reasons to transfer into gold but they don’t much apply unless you need to move wealth and yourself internationally. So the 5% rule makes sense in that way. For me gold is only a fraction of wealth, but it is unparalleled in practical terms as a form of holding savings.

          “So Gold is indeed an neutral…. ”

          It is worth what it is worth.

          “I agree that the current value… ”

          I agree that real estate is good if it is based on feasible use of, not price speculation…but the two are somewhat intertwined. Mostly I don’t agree with leverage – if you buy outright then lose money then tough, but if you leverage and end up underwater that is really not good. The tendency with speculation is unfortunately increasing leverage, sometimes of own home, which is usually even less good in my opinion.

          “Finally, why do you want to trade or expect to be able to trade “outside of the existing system”?…..”

          Firstly it is not wanting to. In physical gold you are outside the system. That is reason enough in itself, whether of precaution or out of distaste at the system etc. It can be traded back into the system, using fiat as understood intermediary to other assets , it will outlast the current system and can be traded into whatever follows. If you want out of the financial system you just use cash and the shadow economy – that is not the world of great wealth and financial dealing , but it is where a large portion of the world population lives. In various countries gold is still currency also.

          “Look… what “older” structures are you hearkening back to? The feudal system of the Middle Ages? or the barter exchange system of the slave trade?”

          All trade is barter. You can use fiat, gold is the most traditional unit, and does not rely on forced acceptance.

          “Believe me or not, we are already in a literal Golden Age without gold…”

          We are in an age of technical and productivity enhancement, in some ways being squandered. We are in a new era of untested social organisation/engineering. The basic human character is little changed over the past millenia though. There is a tendency to retain what is known as sound, fair or reliable. The current monetary and political systems are rightly being questioned.

          “What modern-day scenarios do you offer for Gold as everyday currency…”

          Well some currencies ( e.g. Saudi) are still 100% gold backed, a return to gold backed may be one direction the world may take. Equally deregulation of national currencies may see gold as an option amongst various. I don’t push for gold as currency because I see it as currency already, and to a lesser extent use it as currency, even if just as a store of wealth. A lot of other people in the world do also.

          “So, I can’t think of any contemporary financial model where Gold works..”

          It isn’t a financial model, finance can be built on it though. It is money in the classic sense of the meaning, and works as that as it always has.

        • kevin says:

          Sorry Crysangle, you lost me there on most of your arguments… maybe I’m dense but I don’t see any answers that directly addresses my points rather than side-stepping them.

          For argument’s sake, let’s just take my last request for a valid working model(s) for bringing Gold back into our global financial system and supposedly making it more “sound, fair and reliable”, ok?

          I am honestly with you on your statement that “The current monetary and political systems are rightly being questioned.”

          But then, I’m asking further with: Does anyone have a viable ALTERNATIVE since 2008?
          (Bitcoin was a good attempt but then thats a whole new topic and I’m NOT advocating it… at least not in its current form)

          HOW would or could Gold as currency work in principle?

          You pointed out Saudi Arabia where their fiat is still 100% linked to a physical stock of gold (somewhat like the USD was before Nixon era). I’m not sure who can verify that but let’s assume Saudi authorities have their fiat 100% backed by Gold.

          Are they distributing gold coins for the mass market to buy groceries with, or to take delivery of oil barrels in gold ounzes, or accepting payment of taxes in gold, or enabling transactions of real-estate via gold as payment?

          If you’re not advocating for common use as everyday currency, then whats the point of gold then besides merely to store it in some unknown vault? and yes to “save” it for a rainy day.

          If Saudis is not using and touching their gold as everyday currency in their hands, then the Saudis are just placing their faith with their government to hold the equivalent store of gold in some hidden vault, right?

          So, how is that different from the “trust” in government or CBs-decreed fiat paper?

          Even if we imagine USD went back to being 100% pegged to gold, what is the mechanism for the mass of people to verify that the sufficient amount of physical Gold held under Fort Knox is really there or not? And what does “100%” backed means?

          The government will still issue fiat and they can still adjust / inflate away your money by simply tweaking the published exchange rate of a dollar verses x fraction of a gold ounce at their whims and fancy.
          So, you are still back to square one and still subject to centralized powers and manipulation by CBs and their ilk; unless you can distribute and use gold as everyday currency.

          I’m saying “saving” gold is not going to save you in our world in which the global financial system has the world enthralled.
          It may have worked as a separate store of wealth in the distant past when there was no such thing as a global economy yet and when Megellan thought you could sail off the edge of the flat Earth.

          Today, the CBs hold sway as the financial priesthood from New York to London to Hong Kong to Sydney to South Africa to Moscow. There is nowhere to hide and there is no “outside of the system” anymore, unless you find another planet to lo escape to.

          You said “Gold isn’t a financial model”. Fine with the rhetoric.

          So how is gold as currency going to work in our mundane everyday context given today’s global economy with internet purchases and what-nots? Please tell me a use-case for gold coins to say buy a house or a cucumber.

          If Gold is NOT meant to be used as everyday currency, then WHEN do we use it or when will it be useful as such?

          By inference, doesn’t it mean we are “saving” gold for the time when some global War, ecological disaster or economic collapse arrives, in order to make the gold finally “useful”?
          In other words, Gold becomes useful only when everything else falls apart.

          Again, I’m don’t want to live in such a time when everything falls apart. I want to make the world economy work for us and improve upon it or propose a viable alternative.

          I may not have all the answers but I know Gold is not a viable solution. If anything, it is likely going to be a devolutionary step backwards for human society.

        • Crysangle says:

          I’ll try to keep it to just the main point of gold in use as everyday currency, because this is getting long. I don’t think you are thick at all either. The idea of gold as currency is that in itself it represents final settlement. It can be 100% backed paper, digital, what have you. If it is not direct physical transfer you then must rely on proper independent audit of where it is stored (private vault, or government vault etc.) so that trust is maintained. If you accept government decree of what a dollar of gold weighs, then you are maybe allowing government to change the gold value of the dollar paper you hold. If private company did this they would be prosecuted, but government has the power of force and to write law, and finds “for the good of all” reasoning to give.

          After that transactions in whatever format chosen represent direct transfer of gold. Finance using gold occurs in the form of discounted future receipts due (say wages) where gold is so lent at a premium (the profit). This is how the whole banking system worked previously, and it was purposefully limited in its extension of finance by the credibility of there being a final settlement. That is to say, if they calculated wrong, if the banks were too soft in their lending, the flow of currency needed to fulfil the agreement would not be met, and bankruptcy would occur.

          This prudence needed created a different kind of economy. Prices adjusted to the more limited flow of lending, meant people demanded oversight of their savings and that audit was relatively straightforward.

          However, there were inconveniences. Firstly the only true guarantee was that the bank invested funds wisely, there was no deposit guarantee as such (the deposit was the guarantee) – for this there existed hierarchy of claims, as well as choice of risk/return.

          Secondly, because the system was inevitably self limiting ( if you stretch the credibility beyond reason confidence goes), and so if only out of caution, it was seen as not flexible enough to guarantee a perpetual expansion of financial influence. This was ultimately the concern of nations – they could lose the bets they made and become bankrupt. Why nations ? Because nations ( government) taxed, borrowed, spent and bet out of the base of gold their economy earned and held. Gold was the natural world currency, and so mismanaged countries became poor, or to put it another way, became financially liable. Some governments did not like this, they basically wanted to spend more, or in more forgiving terms, wanted the most outright control of their own economy . This was part responsible for the failure of the latin monetary union for example – purposeful debasement and inventing currency by some countries, or the US gold standard is often understood as US not being able to (wanting to) balance its international account.

          The resulting choice of fiat gave government and national finance flexibility over its monetary processes, without the final and obvious accountability of gold. The value of fiat is a fraction of the whole wealth of the nation, where the government and finance is able to choose to a degree where attention will be given in terms of valuation by extending ( potentially limitless a la Zimbabwe) credit at will in that direction. Investment (tries to) calculate the relative worth of different countries based on government spending , productivity, organisation etc…. but government is able via finance to direct or influence that also.

          That is a lot of power and decision making in the hands of very very few, where transparency is lacking and corruption or poor calculation is not open to any scrutiny – because the system can change the meaning of the very metric at will, how much money is worth by expansion or contraction of its supply.

          So this is really the crux of the whole debate, it goes way beyond honest accounting and into politics, international relations, corruption, synchronisation, stability and avoidance of stress, fairness, oppression, meaning of sovereignty, socialisation etc. etc. etc. , much of which is subjective.

          People being what they are are able to make a mess of just about anything, so it really is more a question of understanding what they are up to, and gold is quite good at that. Maybe that is why it is disliked by some, but respectfully held by others all the same…it should not be obsessed about really either so just seeing it as something inert is fine – as money it is like a durable and nice counter that cannot be copied.

          Here is a quite readable intro into the concept of money, just to introduce the theme from a more “Austrian perspective” in a way that is understandable

          And I have to leave it there on this post and hope that that explains something of the question someway somehow.

        • kevin says:

          I read through carefully on your entire comment, but I still couldn’t find any mention of a practical use-case for gold as everyday currency use.

          Consider this example:
          Let’s say over a span of the last 20 years, I converted a proportion of my cash money into gold and squirreled it away in my basement.
          For some reason, I now think the time is ripe and I want to use my gold savings to buy an apartment in a nice city.

          Pray, tell me HOW to do it, without first exchanging it for fiat paper or being sic. “taken to the cleaners by the banking system”.

          What is the sequence of actions from using that gold to getting a fair price for the apartment vis-a-vis its weight in gold?

        • Crysangle says:

          It is counter intuitive. Though there are ways to do this outside of the US official system (which is one reason why people store and transfer gold in private foreign accounts, why people use private offshore companies for registry of ownership etc. – which the US does not like and pursues in the name of tax avoidance, counter terrorism and so on) , what you are otherwise doing in plain terms is reentering the US system with your gold.

          The current system has dominance, I don’t deny that, it is the “ambient reality”. What you will have done while you had gold is to keep your savings outside of that reality, in a form that is still transferable or usable no matter what that reality is when you choose to reenter, or if you preferred, could be carried or transferred to the reality of another country. That means during that time you are not locked into the “ambient reality” of your country… your other registered assets and bank deposits will be, and completely at the mercy of it. It is a choice, depends on the confidence you hold with the state of your own nations , with its direction, its authorities. It depends on you worldview also. You might be completely happy with the US system, or have enough confidence in it, but people who know what it is to be caught out – and even being on the ball is not good enough because some events happen by surprise (US is not EU, but look at Cyprus for a recent example…there are many examples scattered throughout history) – make the purposeful choice to keep part of their wealth, their accounting, independent.

          That is why gold is counted as a proper saving, can be and is used, as money.

          It is a choice, and I am not here to force that view, but people should at least know about it as an option of precaution, or diversity.

        • kevin says:

          You are now going roundabout doing philosophical ruminations about “ambient reality” (whatever the heck that means) and it makes no sense at all.

          There is nothing counter-intuitive in a simple scenario of buying an apartment.

          Look, I’m not forcing any views here…All I’m asking is a very practical and relevant question, on how to use all my gold now buy an apartment, and no answer was forthcoming.

        • Crysangle says:

          Now, you are going to normally convert it back into dollars (unless you find someone who will accept payment in gold). In the future likely the same. In the future though, anyone might be thankful they put some money aside in gold, because their property investment might have crashed, their accounts been frozen, the real value of their cash halved. You don’t know, and nor do I. The value of gold is an international value, if the dollar or any currency you are using, its economy, caves, you have an understood transferable usable money that is outside of that whose value is of local product. Gold is a long term hedge or saving for such circumstance. That is what I mean by ambient reality – the economic/political/monetary/practical circumstance that for now seems that is how it will always be . Gold is relatively stable, independently. I say might – it is a choice to save in gold , usually people just hold a small fraction as ultima ratio, a known they know they can work with if need be . Gold is also good for people who just cannot save, but want to. Because it is more hassle to convert gold back into dollars than spend cash, people often just add to a small amount of gold they keep, when they feel like it, and there they have a true saving outside of anyone else’s control. In other countries using gold for payment is understood even, but that is not what we are talking about. It is also a legal way to transfer assets without paying certain heavy taxes in some countries.

          So here is another real example, not your buying property but as own reserve. I travel, have you ever had a card not work for technical reasons ? It is a hassle, read up on the effect of IT outages for some people. Fine, you carry cash… but how much and for what evetuality? You know Murphy’s law , so you like to have what is needed for several days, maybe even to pay some local bill ( rent, hotel etc.) or a flight… in case. You can do traveller’s cheques or similar also. Well if you ever had been carrying a few thousand in cash drawn from a main bank and after it got damp found all the colours had run ( own experience) , or I could mention the saver in Greece who stashed in a wall, and when he oppened it later found only a mouse’s nest….etc. Gold is very stable and resilient, I know I can exchange it in any nearest town if need be… so I carry gold as backup, it can be worn or easily hidden.

          There is no point applying examples of when gold is not really worth using, that is easy . It is meant as a backup, a long term saving for adverse circumstance, that may or may not give profit, that avoids most of the pitfalls of other asset classes . Some actively speculate but that is something else. Some stay maximum in gold or other alternate currencies for other reasons, but that also is something else.

      • Ian L says:

        One way to hedge owning gold is to own certified, graded and slabbed US antique gold coins. The grades must be mint state (i.e., never circulated) and graded by one of the top-tiered grading companies (i.e., NGC or PCGS). By doing so the value of the investment is a blend of the spot price of gold and numismatic value of the coin. Given that old coins only get older and tend to diminish in population counts the numismatic value will tend to appreciate independent of the value of the bare metal. As a bonus the quality of the art work of the pre-1933 US coins is impressive. One go-to coin is August Saint-Gaudens’ final creation: the $20 Double-Eagle, preferably a 1907 or 1908 NM edition. His effort was so impressive the obverse design is still being struck today by US Mint.

      • R Davis says:

        The Pot of Gold:
        Leprechauns find gold coins buried in the earth & store them in a pot at the end of the rainbow. The fact that a rainbow doesn’t have a fixed spot should be discounted for the sake of the story.
        Quite why Leprechauns need gold is another matter entirely as they can’t actually spend it. Some researchers suggest that this gold is used as a means of tricking humans & giving Leprechauns propensity for trickery.
        Beware, the midget Snake Oil Salesmen in green & red suits.

        Great comment, thank you.
        Great article also, Sir.

  2. Fernando says:

    Wolf, you always explaining complex things in simple and practical terms. Wish you had a book out with all of this. Thanks!

    • Wolf Richter says:

      Thanks. A literary agent tried to encourage me to come up with a book proposal. He said it would really be a good compliment for my site. But when am I supposed to do this? I have near-zero free time as it is….

      • Crysangle says:

        …I for one comiserate. Sometimes a project takes time to build an impetus, or for it to be “all there” to complete, then it takes its own priority and finds time. I don’t think it is something you can really force…at least now you know there is an audience waiting for if/when you do write on the topic.

      • d says:

        Again the rules of diversification were thrown out the window along with the financial and investment rules on almost everything else by.


        Until the effects of QE are removed from the global markets non QE rules can not apply.

        As china is now one of the bigger economies (Look how chinese QE radically increase the size of US market bubbles) it is still seriously still engaging in huge amounts of clandestine QE, and bank finance manipulation, via state controll.

        It will take much time and effort to return western financial markets to the pre QE rule status. It may not even be possible to do so, untill overt and covert QE. Is ended, in almost all major economies including china..

        • David Young says:

          Similarly, gold pricing is also working under a new regime in which the price is suppressed by the selling of “paper gold” ounces that were never intended to be delivered, a rolling process that keeps the price down while the previous contracts are settled for a small cash payment at expiration. Meanwhile, massive quantities are changing hands from West to East at the suppressed prices. How long will those behind this regime keep the forward-rolling scheme going? Forever?

  3. Bobber says:

    Many financial advisors say you should have about 5-10% of your portfolio in gold as a long-term holding, for diversification purposes. Even Jim Cramer, the biggest stock bull of all time, tells you this. He calls it insurance against an economic catastrophe.

    As a separate matter, I’ve noticed that gold moves opposite the USD on a daily basis, so if you have a lot of money in USD fixed rate instruments like CDs or bonds, gold seems to be a decent currency hedge. Of course, you can hedge the USD in other ways too.

    The main reason I hold gold today is the story factor. Amazon, Tesla, pot growers, tulip bulbs, Bitcoin, etc., all had (or have) a story that cannot be disproven and creates some excitement. And there can be lots of stories told that involve the yellow metal.

    For example, people may think gold will skyrocket if fiat currencies inflate and go down in flames. We may already be seeing the beginnings of that. Further, it might be credibly said that gold is the only asset that has had enduring value throughout history. It’s the only asset with a fixed supply, etc. You get the point.

    I wouldn’t be surprised to see gold rise 1000%. I also wouldn’t be surprised if it was the same price 20 years from now.

  4. Crysangle says:

    The simplest strategy for gold is to buy some and hope you never have to sell it. If you don’t sell it then you know that your strategy is working, if you do have to sell then you are thankful that you have it to sell. If you sell and you think that you could have invested in something else that would have kept better value, realise that you are not thinking straight, because your gold was not bought as speculation on its dollar value.

    That strategy beats all bubbles, everything bubbles, total bubbles and more.

    • Old dog says:

      A couple of questions from a gold neophyte.

      Are you talking about buying bullion/gold bars?

      If so, where would you buy them? The shops that advertise “We buy/sell gold” do not inspire any confidence. I presume they scam desperate folks out of their jewelry.

      • andy says:

        Buy it on the internet. Ship it back for full refund if you dont like the quality or the hue is off. It must be shiny but not too shiny, goldish color.

      • Wolf Richter says:

        Old Dog,

        Here is a WOLF STREET reader who shared his experiences of buying physical gold — the nitty-gritty. Lots of useful comments too if you’re trying to buy. So this might be helpful…

        • andy says:

          Gold is very popular, talked about more than bitcoin. Comprehension of the value is about same as bitcoin. Perhaps all signs of common dislike of the dollar (fiat is another popular word).

      • Crysangle says:

        As Andy and Wolf replied. I keep some physical gold stored out of the way is all, can be coins or whatever – people have their preferences for different reasons, as well on as how much they like to keep. There are no hard and fast rules, but it is good to read up a bit to get some idea of how other people go about it. For me it doesn’t do much but sit there, gets forgotten mostly, but when you feel circumstance might stress you it is reassuring to remember it is there, even if you do not ever sell it. It is something of a precaution to own some gold, and brings a small feeling of independence or reassurance.

        • HowNow says:

          If you want to “read about it” you may first want to read an old but excellent essay on gold by Warren Buffet (easy to find on the Web). When I feel the need for independence and reassurance, I just wait until that feeling passes… it always does. Better to buy a good set of hand tools than buy gold. If things really go south, a gold coin will probably only get you a gun fight. At least the hand tools might get you a lunch for your labor.

        • Crysangle says:

          Oh I own handtools and much else of practical use also.

          I don’t think Buffet will be talking about using or keeping gold as money, so I don’t think I will find reassurance from him. It is necessary to read on how gold is bought, kept and used because learning by trial and error can be expensive.

        • JZ says:

          If you listen to Warren Buffet, he will get rich and you will get poor. He want you to compete in a game he is better than you. That is the money game. If currency is as reliable as gold, people don’t have to play that game against him. People can just hold currency as they hold gold and they will be fine. But no! We have to “debase” the currency, unlink it from anything tangible and inflate prices of everything, your move? You get into a place competing against Warren Buffet.

        • Dale says:

          It is true that Ray Dalio, the most successful hedge manager, believes that everybody should hold 5%-10% of their net worth in gold.

          “If you don’t own gold…there is no sensible reason other than you don’t know history or you don’t know the economics of it…”

      • John Taylor says:

        I’d been buying from
        It seems like a big US based operation that has decent spreads for buying and selling.

      • Ambrose Bierce says:

        There’s a shop in Canada they advertise on 321gold, they now have “vaultchain” purchasing. Check it out.

      • Duke DeGuise says:

        Stay away from “We Buy Gold” shops.

        I’d suggest buying physical gold – government-issued coins like Eagles, Buffaloes (a beautiful coin) and/or Maple Leafs – online from Kitco, Gainesville Coins or Apmex.

        If you live near NYC, you can also find bullion coins in the Diamond District on west 47th St.

      • alex in san jose AKA digital Detroit says:

        Old Dog – your “We Buy Gold” stores have a certain clientele: people who are not good with their money. So there’s the monthly selling-off of the latest gold chain your babydaddy bought you to compensate for the latest black eye, the young kids whose parents left them a coin collection that’s not nearly so useful as meth, the person who lost their job and no resources to fall back on but the ring their mother left them, etc.

        The stories are pathetic and laughable at the same time.

        I was in one of those stores with my latest garage-sale find (bought for literal pennies on the dollar) and a cab driver was in, trying to get something for a sort of gold-washed coin with a buffalo, i think, on it. The gold buyer was very patiently explaining to him that it was not worth $200, or even the $40 or so fare he’d been paid with it.

        I was there for my short-term “flipping profit” and I think got $60 or so for that chain ….

        Gold buying is for long-term thinkers, or for the unbanked. Americans don’t seem to think about the billion+ people in India who keep their savings in gold, and that gold buyers in the US have an endless ability to buy gold because they can always sell it overseas.

        But! – gold buyers often pay something like 60% of “melt” value. So yeah, “scam desperate people out of their money”, “taking what profit the market will bear”, “covering their asses”, “babydaddy’s kids can’t eat a musty old gold ring for dinner”, see it as you will :-D

  5. Petedivine says:

    Gold is ageless and you only have to be right once. With all the bubbles, fraud, and fin-tech that abounds to separate you from your savings a little gold is probably a good idea. I always wondered why central banks call it a reserve. Why not just stick with Treasuries from a country that has over 21 Trillion debt and a 500 billion annual trade deficit. What the he’ll. I’m sure the failing soft coup de’ tat is a passing misunderstanding between TPTB.

    • andy says:

      Water is ageless, and amazing, and source of life, and pays dividend if one invests in utility, but i digress.

      • IdahoPotato says:

        One can live without gold. The next big wars will revolve around water.

        • Bobber says:

          What’s the basic proposition for water? It’s a renewable resource that falls freely from the sky, so I don’t get it.

        • IdahoPotato says:


          By water I meant “fresh water”.

          I just got back from Hyderabad, India, also known as “Cyberabad”. It’s a tech hub. Someone I was visiting in a high rise in a decent middle-class neighborhood who used to receive running water 24 hours a day until 6 months ago, now has to ensure someone is at home between 9 and 10 a.m. each morning.

          That is when they get water in their taps during summer. The association now is planning to pay extra to get tankers in daily from out of town.

          Here in the U.S. all my neighbors are trying to xeriscape their lawns instead of having grass in the high desert. The city water bills are creeping up steadily and the restrictions on water use are rising as well.

        • polecat says:

          And food as well ..

        • Wisdom Seeker says:

          No, the big wars will revolve around who gets to live on the land that has water, as opposed to deserts.

          The problem isn’t a shortage of water, it’s overpopulation on desert land. The solution is lower birthrates.

          On most semiarid land (California), the problem isn’t even overpopulation, it’s misallocation of the available resource.

    • Jon says:

      Dont really understand the allure of Gold
      Not really useful industrially
      Does not give you any dividend

      Needs to be secured

      Once general public understands this.. it’d lose all of its value

      • Jos Oskam says:

        A “general public” of millions of people over thousands of years has relied on gold as a unit of account, a store of value and a means of payment.
        They obviously did not understand something that you do. /sarc

        • HowNow says:

          Is it the same “general public” that long thought that draining the bad blood out of people will restore their health? Or the ones that would say “God bless you” when you sneeze to keep the devil from jumping into you while you’re sneezing? Or the public that could identify your personality by the shape of your forehead? Is this “our” general public or one that resides on Pluto?

      • Bobber says:

        You should be asking central banks that question. If they thought it had no value, would they be major holders of gold?

        There’s really only one plausible explanation. The banks must believe fiat could lose it’s worth in a crisis, and they want to be ready in the event we return to a gold standard. It happened before. It can happen again.

  6. Yellowcake says:

    One thing about owning gold is that it cannot go bankrupt and won’t go to zero. Compare that to TSLA, WeWork (private) and other money hemorrhaging ventures.

  7. Flip says:

    See Harry Browne’s Permanent Portfolio strategy. 25% each in cash, long term Treasury bonds, stocks, and gold with rebalancing.

  8. RD Blakeslee says:

    “There are many reasons to own or trade gold that are beyond the scope of my thoughts here on diversification. So I’ll leave them for another day.”

    Much of the “expert ” opinion re financial matters is shallow, opinionated and biased, so there’s great need for the kind of analyses you publish, Wolf. That’s particularly true with regard to precious metals, I think – almost all of what we see comes from dealers.

    So I hope we see your “another day” pretty soon.

    • Yellowcake says:

      Agreed. Much of the “expert” opinion is just mindless regurgitation of old maxims. There are plenty of reasons to own gold – not only because of a potential disaster, but because all of the other currencies are essentially worthless.

      I have long said that in this country, we have a government office of Weights and Measurements to insure that standards are met and that things are what they are. Why do we not have this same standard applied to our currency???

  9. Michael Gorback says:

    Other than coal, what asset do people dislike the most? Precious metals. But it’s a long term game.

    • andy says:

      I’d say ‘disliking precious metals’ is an oximoron, but i’d be breaking the rules on the numbers of comments i think.

    • Cristian says:

      The nuclear industry.

    • Tinky says:

      Yet another remarkably myopic comment.

      I understand that few Americans have travelled to either the Far East or India, but between China and the latter country alone, there are roughly 2.75 billion people who view gold very differently.

      • MooMoo says:

        Actually, not so much in India (once a big backbone of gold demand) anymore. As the Indian economy develops, they are starting to become interested in equities… I guess gold isn’t the only way to deflect Modi’s insanity.

  10. mattis says:

    Gold was around $275 an ounce in 2000. My belief is that buying by China using cheap money pumped it to its current inflated price.

    So how is an asset that was inflated by the same cheap money as everything else going to protect me? It might be less inflated, but it’s not negative correlation.

    The gold-Chinese Yuan connection is real and you’ll note every time the Yuan drops, so does gold. The only big play in gold is a pop when the trade war is resolved.

    Holding gold in a crisis will likely get you killed as many have noted here.

    • Tinky says:

      I am flabbergasted by the amount of nonsense being spewed on this thread.

      Gold has not only performed supremely well for thousands of years during times of crises, but continues to do so today! Those in Argentina, Venezuela, Turkey, etc. who held gold over the past few years have retained wealth to a far greater degree than most. Gold has been by far the most effective hedge against currency devaluations over millennia.

    • Duke DeGuise says:

      In a SHTF scenario, what about gold for wealth protection (and possible investment during a crisis, if possible), and silver for everyday transactions?

  11. Michael Francis says:

    For all those who remember the story of ‘The Tortoise and the Hare’.
    Stocks, property and bonds are the Hare and cash is the Tortoise.

    At the end of the day, the Tortoise won.

    • HowNow says:

      Michael, at the end of the “fairy tale” the tortoise won.

    • Wisdom Seeker says:

      Don’t forget that for most of US history the “dollar” WAS gold, at either $20/ounce or $35/ounce.

      Wolf is mistaken in saying that people traditionally diversify with stocks, bonds and real estate. That’s only been true since Wall Street took over everyone’s mindset about investing. Up until the 1970s everyone’s rainy-day fund – the first thing you accumulate when you start saving – was gold in the form of dollars in the bank that were freely convertible. So gold was literally the FIRST thing people diversified into.

      Going farther back, my sense is that most colonists and pioneers saved money (gold), bought real estate and started small business ventures. “Investing” wasn’t even a thing. Risk-takers funded trading ships and hoped it came back loaded with profitable goods. Stock ownership was only done by a very small elite.

      The whole idea that a personal home might be considered an “investment” or “asset” rather than a lifestyle expense is historically quite new. And I think it’s quite wrong too, particularly at the tail end of a 30 year decline in interest rates.

      • bungee says:

        Wisdom Seeker, I completely agree. History and mindset are so important when looking at money’s big picture. People talk about these ‘historical’ gold charts as if they go back to Babylon. We’ve been on a strange system indeed since the seventies and it is just aching to balance out. The collective hope of what we Americans think we are worth is going to hit a wall of reality. Few will be allowed to cash in. There are just too many people who think they will churn an income from ‘passive investing’ (what an oxymoron!). Look at all the comments recommending ‘income producing assets’. Never once mentioning providing a service or product!

        I may be wrong, but it seems Wolf is predicting a Japanese-style walk down of this ‘everything bubble’? a few lost decades of malaise with no single krakatoa? Maybe. Idk. But looking at Japanese suicide stats is very depressing.
        from wiki:
        ‘In 2014 on average 70 Japanese people committed suicide every day’
        (for comparison, also from wiki, the U.S. has 121 suicides a day but has 2.5 times larger population)
        and in 2009
        ‘Suicide was the LEADING CAUSE of death among men aged 20–44’ that is just scary.
        Hitting the wall of reality is not fun. It is also NOT less painful if it is dragged out “gradually”. Young people have every right to be distrustful of such a strategy. However, the swift switch of a system has long-term dragged out effects as well; see Russia. Russia had an explosion of alcoholism, crime, suicide and murder when they tried to ‘rip the band aid off’ with Yeltsin that lasted at least a decade. Western demographers didn’t even believe the numbers at first.
        My point is that history happens. When thinking about gold we need to think in terms of history, not trends. I don’t know if the U.S. can or cannot “gradually” back away from tsunami-sized debts and liabilities. But I will point out that if we’re truly calling this a ‘bubble’ then it pops by definition. It doesn’t unwind.

        Thank you, Wolf for this blog and forum. The company is varied and fun here! I hope you get around to the ‘unmentionables’ about gold at some point, including physical vs. paper!

  12. Paulo says:

    regarding statement: “Throw in some leveraged real estate – the house you live in – and in the past, your assets were considered sufficiently diversified.”

    Instead, how about: “Throw in a paid for house and some property, and everything else you might want to invest in doesn’t really matter, you are safe and able to survive.”

    Of course there are property holdings and there are worthwhile property holdings. Arable land, water access, treed property in a low-tax rule-of-law country might be a tad more valuable than some of the higher tax and denser populated areas of the World.

    regarding gold and holding for secure investment:

    Of far more value than gold might be in this order:
    supportive family and friends
    land and home (paid for)
    adequate income
    skills and hunting gear

    Gold isn’t even on my list. Just about any other metal has more value as far as I’m concerned. My neighbour looks at the gold prices several times per day and bitches about the ‘manipulators’. My buddy stews about his paper gold. I go for a walk.

    • HowNow says:


    • RD Blakeslee says:

      “Of course there are property holdings and there are worthwhile property holdings. Arable land, water access, treed property in a low-tax rule-of-law country might be a tad more valuable than some of the higher tax and denser populated areas of the World.”

      True of differences between states in the United States, too

    • MooMoo says:

      He’s gonna bitch even more soon (if his bitching output is related to price). The US Dollar, which everyone loves to bash, is getting ready for another run to the upside.

      Sure, one day we’ll get monetary reform, but the whole key is the timing… If you’re long dollars as global property crashes… well, that’s you trade.

      If you’re long US equities and denominated in dollars, well, you ready to hoover up Chinese equities on the cheap when the flip comes.

      …all in the timing

      (Dow is going to 30k)

    • safe as milk says:

      “Instead, how about: “Throw in a paid for house and some property, and everything else you might want to invest in doesn’t really matter, you are safe and able to survive.””

      that would be true except for one thing: taxes. state and local governments are insolvent. their best hope is increasing taxes on your real estate.

    • Cynic says:

      Very true.

      In fact, once fully paid-for real estate is in danger and insecure, the collapse of the rule of law will have been total….

    • sierra7 says:

      I have bleated repeatedly for decades:
      “In America if you are healthy you are already “rich!”

  13. Jeff says:

    I just started my 18th year owning a Coin & Jewelry store in Oregon.

    There are good ideas and discussion here about gold ownership. I will offer some insight from my perspective.

    Every person is different and their circumstances unique. Who you buy from and what products you buy will be different then someone else.

    Ask yourself why you want to own gold (also means silver in this comment). Don’t get hung up on those predicting the future, trying to understand big finance, or reading chicken entrails. The more basic point of gold ownership is to make you feel better and more secure about an unknown future. If owning gold makes you unhappy, uncomfortable, or causes you to worry you should not own it.

    The world will never be as good as you hope or as bad as you fear. If you are fortunate you save gold over a long lifetime and pass it to someone or something you cared about. You could be wrong about the reason you owned gold and still be happy to have owned it.

    As I may own gold my whole life, I feel ok about having a variety of different forms, sizes and designs. I get additional happiness from their feel and visual beauty. I feel that if I enjoyed them, the person I sell or pass them to may also enjoy them. I do not mean numismatic rarities.

    If you are purchasing gold and silver products you need a cash reserve to protect your metals from forced liquidation over the short term (5-10 years). Yes, the precious metals group is a long game.

    Think about how you might sell, gift, liquidate or barter your gold in the future. Who will buy it from you at $500, $5000, or $50,000 if those prices are ever achieved. Will you sell at all? If one of your reasons for having purchased gold is to make a profit, do not forget to sell half of it if your price doubles.

    If you cannot safely store precious metals, you should not own them. The only way to have their value go to zero is to lose them or have them taken from you.

    Peace to all.

    • MooMoo says:

      “The only way to have their value go to zero is to lose them or have them taken from you.”

      …yep. At the border, when you’re trying to escape the MadMax situation gold was going to save you from.

  14. Ted Freeman says:

    Or own an interest in a small, local business that you control. That is the ultimate in diversification and insulation from economic chaos, especially if it is something not tightly correlated to the business cycle and always in demand. A degree of self sufficiency is key.

    • Wolf Richter says:

      I totally agree. I’m living it. But watch out. If that business fails, and if it has debt (mine doesn’t, thank God), a business owner is in for some really hard times.

  15. Bet says:

    I figure buy precious metals not for
    Speculation but if it ever came to it
    What will buy a loaf of bread. Worthless
    Paper or a silver coin ?

  16. Nicko2 says:

    Gold is a very poor investment.

    • Duke DeGuise says:

      But is good insurance, as long as you’re not forced to liquidate into falling market.

    • Buckaroo Banzai says:

      A “good investment” is something that offers both return on investment, and return of investment. A gold coin in your hand offers 100% guaranteed return of investment. Surprisingly few investments offer that kind of security today. As far as return on investment goes, it’s your responsibility to buy low and sell high. The price of gold has risen from $22.67 to $1200 in the last 85 years so there has been sufficient price movement to the upside for buy-and-holders. And the price volatility over the years has assured intelligent traders substantial opportunities for trading returns.

      In short, anybody who claims gold is a “poor investment” is simply ignorant. The facts don’t support that argument.

  17. TWolfe says:

    As mentioned before GDXJ is very cheap and provides a non-decaying leveraged hedge to Gold price. In the January 2016 correction, the S&P fell %18 while GDXJ rose 300%.

    Oil & gas pipelines (those held by MLPA) also have not participated in the everything bubble and return excellent dividends. Many are at lows below their 2008 Financial Crisis bottom*. Fair warning though is that they’ve been a slow falling knife over the past year so best to Dollar cost average into only during significant market corrections to .

    *I suspect pipelines are at all-time lows due to historically low demand. Anyone looking at the following chart will realize we’ve been in a depression since 2008 and never recovered; otherwise how could sales by refiners broken well below a 30 year trend and remained there for a decade?

    • Paul C says:

      Eh? US Gasoline sales down 2/3rds?

      Surely everything would have ground to a halt. What am I missing?

      • Paul C says:

        Apparently the ‘Refiners’ have sold off a lot of retail so this graph is not ‘like for like’ and shouldn’t be taken in isolation.

      • Erle says:

        That chart is Sales By Refiners.
        Refiners sold off much of their retail gasoline stations and have been replaced by convenience stores and WALLYWORLD TYPES.

  18. bungee says:

    water is needed. But so what? how will you BUY it? We buy the things we need (water) with the things we don’t need (money). That we need water is why it is not a trade-able savings. It is best for drinking. Oil is best for burning. Wheat is best for baking. Gold is best for saving and then selling for money so we can buy water, gasoline and bread.

    why did the author of the Wolfstreet article, “the experience of actually buying physical gold” choose physical? (I asked him in the comments and he evaded the question). But it is the question that must be answered. If the red line goes down and the yellow line goes up in Wolf’s chart, why did he buy coins? As investors, when we buy oil we leave it on paper. If it ‘goes up’ we sell the paper. When we buy soybeans, same thing. Why, when we buy gold, do we buy bullion?

    Traders like TWolfe at least have a consistent worldview; they are trying to play with price volatility and make money. The gold “investors” are schizoid. It would be like if France in 1970, being worried about an over-printed dollar had cashed in for gold at $35 and then sold the gold on the street in Europe for $38 to make the spread (in dollars!). They didn’t do that of course. They called the bluff and took their gold and that particular era of ‘paper gold’ came to a screeching halt. An era of paper gold came to a screeching halt in 1933 too. This current era of paper gold will stop on a dime in 20??

    Each time is different; different rules, different technologies, but this is why we buy physical gold. For the transition times. The interesting points on the long term gold charts are where it GAPS up and stays up.
    That yellow line in the chart above is XAU/USD. Not physical gold. IMO we are like France was in 1970. We can buy physical gold for an artificially low price that we know is an illusion. The price on the chart will give no indication of anything wrong. the price at the coin shop on the other hand…

    The charts will never make sense to a gold investor. Please do not become one. They are doomed to worry over the ‘Indian wedding season’ and ‘honest money.’
    note: I made up $38 as an illustration, I do not know what the premium was at that time.

    • robt says:

      The schadenfreude of France’s (and other countries’) gold play was that they cashed in their excess dollars for gold at 35 dollars fixed price from the USA, ended up with a pile of gold, then lost a lot or most of it when the student and general riots happened and they had to settle balance of payment deficits. France did not flog it on the street.
      1: In international transactions, gold is the settlement of last resort.
      2: Inevitably, a fixed price is the wrong price. It’s either too high, inviting too many sellers until you run out of money (or print more, thus debasing your currency more), or too low, inviting too many buyers and you run out of gold. Thus the closing of the international gold ‘window’, else the US would have been completely drained.

      • bungee says:

        Exactly right about the fixed price. However the price we have now is a commodity price based off of futures/FOREX/paper. It allows the appearance of a floating physical gold price. This is the bluff that will be called. This is why the chart doesn’t matter.

        What if someone said to France back then:
        “No cause for concern. the price has been stable all this time. just look at the chart!”

        And France would say, “the chart is meaningless.”
        the chart of course would be a flat line.
        Today it’s not a flat line but it is just as meaningless.

        • Erle says:

          You are correct on the paper gold.
          COMEX has a few 100 Toz bars at 99.5% which is not a standard in size or purity. It is a paper market only as the costs of getting their physical is prohibitive anyway.
          A little story;
          I teamed up with a friend of mine to buy five One kilo bars through the Chicago Board of Trade kilo contracts. The broker was a friend in Chicago the was apprised that we would take delivery.
          Delivery day came around and all hell broke loose. We did not get delivery in the contract period, which was subject to treble damages, but they finally came through.
          The funny part is that the paperwork came through with a vault withdrawal from HSBC New York on New Years Day.
          The guy that sold the CBOT contracts really took it up the rear for having to get HSBC to open the vault on a holiday.
          That little fiasco caused CBOT to have a special meeting very soon after to make those contracts cash only-no more delivery.

  19. Sadie says:

    Wolf, Bridgewater (Ray Dalio’s hedge fund) and John Paulsen’s hedge fund both have anywhere from 5% to 10% of their portfolios invested in GLD and gold mining stocks. This information is based on recent SEC 13D filings 45 day delayed release requirements.

    • Wolf Richter says:

      Yes, almost everyone says that to put 5% in gold is good. But here’s the thing: as a household (not a hedge fund), most of our assets are directly or indirectly in real estate, stocks, and bonds (well, and some cash in the bank). If those represent 95% of your assets, and gold is 5%, and the Everything Bubble starts to deflate, with stocks, bonds, and real estate heading south together, and gold stays flat or rises some, you’re still getting clobbered. It’s like having 20 stocks in your portfolio, with 19 taking a big hit, and one rising.

      • Crysangle says:

        The normal aim of investors is to come out closest to the top as possible. “The top” is relative on an individual basis and so risk reward ratios are used at own discretion. In an everything bubble deflation, the position people come out at relative to others, that is to say who owns the worth afterwards or who comes out closest to the top, is in principle going to remain unchanged, similar to reducing the value of everyone’s accounts simultaneously. Obviously in practice there will be investments in that circumstance that fare better than others. Individual investors are not going to shape US economic or monetary policy though, and so they will be at the mercy of its direction. Debt is not a good option unless you are sure it will be bailed out or inflation will be allowed to run, there is no way to be sure of that though. The committed speculators will be pushing debt usage to maximum leverage betting that they can exit before it turns against them, they syphon of profits to hedge against if it does.

        Gold is different, it should not be seen to be invested in to get closest to the top, instead it is a way to make sure you don’t end up at the bottom. These two views to investing are contrary to each other, and so cannot be reconciled together. and that means you must be able and willing to hold two opposing views at the same time – reaching for the top and avoiding the bottom. You can combine them in practice, but they will look as different to our understanding as anything viewed at night then at day – you cannot view night and day at the same time in the same picture.

      • Sadie says:

        Wolf, what’s your position if the US falls back into deflation? Do you think that commodity prices will inflate while the everything else bubble busts?

        • Wolf Richter says:

          I’m not worried about a little deflation (USD gains purchasing power) to slow down by a tiny bit many decades of inflation. But this isn’t going to happen. Inflation is heating up.

          Some commodity prices, such as oil have been rising though oil is still way down from its peak. We know that at a certain level, high oil prices can bog down the consumer economy in the US. But we’re still a good distance away from that point.

          The Everything Bubble has already started to deflate in some corners: investment grade corporate bonds, Treasuries, EM bonds and equities (as sold to US investors), and so on. But it still looks very strong in most other corners. I think this is how the Everything Bubble will end: gradually, asset class by asset class, first here then there….

          I don’t think that there will be the big-bang event that many people expect. Sure it could be, but if it happens, the Fed will step in. But if it deflates asset class by asset class, “gradually,” over time, the Fed will likely let it go.

      • bungee says:

        remember your ‘cash in the bank’. In your example it does fantastic…although ‘cash in the bag at the back of the freezer’ is probably more reassuring in such a situation.

      • TXRancher says:

        Agreed Wolf.
        If you have $1 million in investments and 10% of that is in gold then when the market craters for your 90% investments what does that leave you? $100k in gold. How long does that last? Two years of living expenses maybe.
        Seems like if you think gold is the best hedge you would invest more like 50% in gold. Whose gonna do that?

  20. raxadian says:

    Modern cheap smartphones don’t use gold but the others do. Thing is the smartphone market is already saturated. And even Apple is using cheaper components (like glue). So the hope of gold rising due to it’s use on phones is a bust.

    Of course Gold goes up when bubbles crash, in those places more affected by the crash.

    If you live in Spain, Italy or Mexico, get some gold.

    Spain and Italy banks are being hold from crashing by glitter and state manipulation., but that won’t last forever And Mexico peso always end losing value.

    • Erle says:

      Industrial use is trivial.
      Gold has the largest overhang of supply versus demand of any commodity by an enormous amount. There is at least a thirty year supply at present buying rates out there and little of this is for industrial use anyway. MOST GOES INTO GOVERNMENT AND PRIVATE PURCHASES for “later”. (fat finger)
      This overhang is why gold can be a currency with freely traded coinages. It has a huge supply that can be converted to freely circulating MONEY. (unlike any other commodity)

  21. Alistair says:

    When all assets classes seem to be overvalued, then the “Denominated Currency” must devaluate to restore equilibrium,
    I think “US-Dollar-Index” is heading for a long overdue haircut, or a significant rise in the long-term US interest rate, there is already major gaps between the Canadian 10 years Bond, US 10 years Bond, and German 10 years Bond, the US rate are twice as high as Canadian, and six times higher then German 10 years Bond, so, should the US rate keep stay low then US dollar will have to give and fall, which will make all assets classes more affordable for Foreigner investors, but unaffordable for the Americans who are living inside of the USA; they will have then to invest in “Small-Business-Ventures” which are certainly under valued at this time; investing in small business operations not only yield higher returns but also create more employment in the local economy.

  22. Wendy says:

    Wall St. journal today show production costs of gold ranges from $426-697 per oz according to Barrick-Randgold merger story. Perhaps Jim Rogers is right when he says he will increase his gold holdings when it goes to less than $1000/oz but he is not buying now.

    I remember gold bugs saying recently that gold can’t go below production cost, which may be true, but they were quoting production costs of $1200 which is clearly bunk.

    Forget all the noise about paper gold. If production in a Nevada (Cortez mine) is $426, this is probably the floor if the bear market in gold continues.

    Once gold gets low enough that mines are closing, then this will be the genesis of the next bull market.

    Dollar cost average in if you must, but hold some cash in reserve if prices crater.

    Maybe gold is in an everything bubble, but clearly there is room for this bubble to deflate.

    • bungee says:

      miners that are deep in debt may ramp up production as the price falls just to service their debt. in other words, might go lower than we think possible

    • Ambrose Bierce says:

      and if gold were to drop below $1000 why would you sell it? If I had a gold mine I would just close it down and wait for better times.

      • wendy says:

        There are very large costs associated with closing down then re-opening a mine. It is not like you standing in your yard with pick an shovel and throwing down you tools, and announcing the mine is closed until next year.

        If gold goes under $1000, YOU might not sell it, but a mining company like Barrick-Randgold that can take it out the ground for $500 certainly will, and to avoid the expense of closing the mine, they may continue to sell it even if it temporarily dips BELOW their production cost.

    • Tinky says:

      Those numbers are deeply misleading. Break-even is in the range of $1200-1300/oz

      • wendy says:

        If Barrick understates their extraction cost, by supplying a “deeply misleading” number, they have to pay more tax on sales of the finished product. If they say their extraction cost is $1200, then they are basically having to pay no tax.

        If you were to write a letter to the editor of the WSJ to refute the published extraction cost, what supporting evidence would you use?

        • Erle says:

          Because the idiots at WSJ came up with production costs on the biggest miners. The didn’t add in cost to buy the property and the usual things that cost billions to get the mine built.
          This is easy without figuring in one’s capital costs.
          What a bunch of rubes.

        • Tinky says:

          I didn’t have access to the article, but know that the numbers were bogus without having to read it!

          Thanks to erle for filling us in on the nonsense.

        • Wendy says:

          Thanks Erle and Tinky. I did not know that the biggest miners don’t factor in their entire costs when supplying extraction costs, that the WSJ reporters were rubes, and that Tinky doesn’t need to even read the article to comment on its veracity.

          I am learning a lot here.

        • Tinky says:

          It obviously wasn’t necessary to read the article in order to discern that the number was grossly misrepresented.

          As for the WSJ reporters being rubes, I take a more cynical view. The WSJ is biased in favor of – wait for it – Wall Street, and therefore has incentive to produce news that helps to perpetuate Bull markets.

          Gold is the canary in the economic coal mine, and it benefits the WSj interests to downplay its attractiveness as an alternative investment.

          Hope you learned something.

        • wendy says:

          The article in the WSJ outlined how “Barrick Strikes Gold-Mines Deal” with Rangold Resources in a $6B deal that resulting in a 6% and 5.4% increase in the price of Barrick and Rangold stock prices in one day. There was no mention of gold as an investment or any comments regarding the future of gold prices, so I guess that the WSJ, for this time only, missed its opportunity to downplay its attractiveness as alternative investment.

          Now that you have convinced me that the WSJ is only there to perpetuate bull markets, and be the lapdog of the financial industry, would you care to share some of your data on the true production costs of gold? Barrick, Newmont, Goldcorp, Newcrest, and Agnico would all be interested to hear as well since if production costs are closer to $1200, and the spot price is $1200, then their tax bills could be slashed considerably. Barrick alone had a profit of $876M last year, so they would be very interested in your insight.

          For me, and the other readers, we may want to short Barrick based on your insight. Please enlighten us.

        • Tinky says:

          Setting aside your straw men, and apparent belief that the WSJ is an object source of economic news relating to Wall Street, let’s focus on the disputed issue.

          The original numbers that you pulled from the article are, as I have stated all along, deeply misleading, as they do not reflect close to the full costs involved. This can be confirmed easily, so I won’t waste time parsing it out.

          Had the WSJ and/or the mining companies chosen to use a number that would have been remotely useful to readers, allowing them to make a quick comparison to current gold spot prices, they would have used “AISC” (i.e. all-in sustaining costs) numbers.

          Barrick’s reported first quarter 2018 AISC for gold was $804 per ounce, far higher than the misleading numbers you initially quoted, but also well lower than those that I used.

          The problem with AISC numbers is that they are not a GAAP or IFRS measure, but instead a number used by the World Gold Council, which is funded by 23 gold mining companies around the world.

          Does that raise any flags for you?

          If not, here’s a link to an article that delves deeply into why AISC numbers should not be taken at face value:

          Here’s another post that reveals some of the deceptions made possible through the use of AISC numbers. The author, Steve Rocco, also points to Free Cash Flow as a more accurate guide to the money made by miners.

        • wendy says:

          Tinky. Thanks, now I am learning something.

  23. safew as milk says:

    excellent article, wolf. you put into words what i’ve been thinking much more clearly than i’ve been thinking it!

  24. Ambrose Bierce says:

    Central bankers will use the 2008 reflation policy to counter falling markets, they can reflate the stock market to even higher levels in a short time, everyone is keen to this. The reflation trade in gold was based on the CBs ability to keep the EU together and the global currency markets functioning in 2008. There is more confidence next time around that they can blow the next bubble in paper assets. The case against gold is a good one.

  25. Maximus Minimus says:

    “What do you do when nearly all asset classes are overvalued?”
    A different view on the same topic would be: “What do you do when the assets you rely on for long term financial security got eaten away by inflation.

  26. Phoenix_Ikki says:

    Wolf, what do you think of hedging the current crazy everything is a bubble market with reverse ETF funds? (Ex: SQQQ, SDS..etc). Since timing is something no one can predict accurately, straight up shorting is a dangerous proposition. Since these ETF don’t have call to cover requirement, do you think it make sense to buy some as a hedge?

    • Wolf Richter says:

      It doesn’t make sense for my situation because I’m not a hedge fund. If I don’t like a particular market, I get out (rather than hedge). Short-term money now has returns above zero, LOL, and two-year money has returns above the rate of inflation. This is a better option for me if I want to wait until the dust settles and have liquidity to jump into the market when there is an opportunity.

      But if you want to bet on a sharp decline, understand that the returns of the products you mentioned are totally atrocious over the longer term. Check out a long-term chart. If you hold them for a few years, you will be totally wiped out simply by the way these products are structured. They’re for day-trading purposes only.

    • Ambrose Bierce says:

      Some of these inverse bear funds could produce 1000X returns, although on the way down they reverse split them a lot. Most of these ETFs were opened at the bottom of the 2008 crisis so its been straight down.
      A lot of money will be made if these bear funds ever find their market. The nature of large and mostly mercenary investors allows for the possibility that money will go short in concert and tear the market down, despite the governments best efforts.
      A short is a third party wager, otherwise money in a bear market simply disappears. Government might try to shut these funds down but the level of sophistication often goes beyond options. If your funds using swaps they may not have a case, and if you are short something you always want to consider the other guys ability to actually pay off. Might take years with no help from regulators. There will a be a complete change of the power in Washington. It will be great time to be a millionaire.

  27. SquarePeg says:

    Central banks own gold because it is an asset with no counterparty risk. No bank or government failure can wipe out its value. In fact the opposite is likely to happen in response to such an event.
    I am my own central bank.
    You can be too. Got gold?

    • Chris says:

      Central Banks own gold. Goldman owns the Central Bank. Indirectly Goldman owns gold.

  28. Ted Freeman says:

    I believe the majority of the assets you own should produce an income stream. Owner-occupied real estate and gold don’t pay you to own them. Stocks and bonds might, but you have to be very careful that you don’t pay too much for them and also the state of the company behind that stock or bond.

    And a large part of your savings should be liquid and not locked up in tax deferred retirement accounts. You want immediate access to your money without taxes and penalties.

  29. rj says:

    Judging from the chart provided, right now would appear to be an ideal point to sell some stocks and buy some US Mint Buffalo gold coins.

  30. L Lavery says:

    I’d rather hodl than godl.

  31. william says:

    I knew buying gold was a good idea when everyone laughed at me in 2004. Now? I would by gold unless it’s valued to the point of 8 or more ounces of gold for a 100 barrels of oil.

    • Erle says:

      Ha ha, I was there before you!
      I bought 2000 1/10 Eagles somewhat after the WhyTooKay non-event for slightly under spot inclusive of shipping.
      The buggers had a premium over spot when sold to the previous owners of about 14%-18% over spot.
      I did recoup the premium and the price when unloaded during the big runup.
      Actually Rhodium was the big spec 18 months ago when at 645. It is now 2425.

  32. Tyson Bryan says:

    Consider fundamental values. Just as the USD is an oil energy analog, gold is, for several thousand years, a sexual energy analog.

  33. Bill says:

    In the rare case where stocks, bonds, real estate, and commodities including gold all appear to be going down together, it’s likely the unit you’re measuring them in is going up.

  34. Jeremias says:

    If someday gold or silver could compete with the dollar in main street I bet USA Government would declare it illegal AGAIN as it did with the Executive Order 6102 signed on 5 april 1933.

    • bungee says:

      Back then the dollar was backed by gold. The US couldn’t allow gold to compete. But today? We are finally ready to just let it go.

  35. Charles says:

    Gold is more linked to gold holding countries like China and Russia. Look at what happens to gold when the Chinese currency and stock market takes a dive. It dives along with them. It bottomed in 2008 along with Chinese stocks. I think it’s quite probable Chinese stocks haven’t bottomed which means gold hasn’t bottomed.

  36. Unamused says:

    ->What do you do when nearly all asset classes are overvalued?


  37. F6 says:

    One thing being discounted entirely in this discussion is that in a financial crisis, gold prices rise. We don’t have a generation or two of prosperity ahead, but may see another round of cascading failures. It’s too late for the asset bubble, and too soon for gold.

    How interest rates perform vs. inflation is the indicator to watch.

  38. Mean Chicken says:

    China and Russia have been loading the truck, that’s why the price has fallen (what’s good is bad).

  39. Hunter says:

    Add into all of this the problem of market-manipulation which prevents the markets from functioning to find the true value of an asset. Unfortunately, gold is one of those markets. For one thing, there is “paper gold”. There is more gold for trade in the world than actual gold. Which of course means that those who can create paper gold can manipulate the market. Big Central banks are also powerful enough players in the market to manipulate the price. After the peak in 2011, there was evidence that they were artificially keeping the price of gold down by the way they conducted their trades. Someone who worries about the value of their investments doesn’t dump a large amount on the market at the ideal time to move the price downwards.

    Its like betting at a crooked horse track. How do you know what’s really going on? At some point, all of the theories about how to read the numbers or the racing form go out the window as they are all fiction. What you really need is the inside source who can tell you how the next race is being rigged?

  40. Crysangle says:

    As there is much cynicism or misunderstanding about owning gold that exists, I figured it would be good to offer my own experience at a practical level. This is even then only a reduced perspective, but it does explain some of the reasoning, and it can apply to any kind of investor. The first example used to discredit gold is the Mad Max scenario, as well as the doom and gloom attitude of people – this is a prepared contradictory position, and a lot of scenarios can exist between everyday perfect harmony and living in an a barricaded oil rig. I don’t count myself as a goldbug just simply realist, not pesimist.

    So let’s start with a Mad Max scenario in a foreign country. This is own experience and of friends. A invading army sweeps in with little notice, many well informed people get caught out, others flee. In the case of not escaping you are in a foreign country, you will not lose your home country assets and accounts, but you are in Mad Max land. As the whole country is being looted, people are being shot and tortured in the street, your own nationality a liability, you go into hiding. Few, if any, will help you – the country is heavily patrolled and you want one thing, to leave. Gold is NOT really going to help you, unless you know a fisherman and he will accept a bar of gold for a two hour journey, well worth it for you, usually not for him, because he will get shot. Any working currency would do, but for some reason gold is understood in circumstance like this. Long story short you end up captured, a hostage, eventually released (hopefully). It messes up people going through this, but one thing no one does is to just give up and say “It is not worth being in this circumstance” . You have no choice, and it amazing how your view changes when you are in it – you look for solutions.

    A lesser version of this is being abroad in similar but not directly targeted, some kind of local structure still at work. Gold/cash might or might not help. Usually it will be a benefit as long as you don’t fully think you can buy your way out, you have to assess the whole.

    Now let’s turn this into trouble of this sort in your home country, whether civil war or invasion . This gives you two choices, stay and survive or try to leave. SHTF preppers blog gives a good real account of barter economy under occupation. Gold is not top of the list for surviving, skills and organization are. Owning physical gold can be useful there though for both staying or leaving, gold assets abroad in vault are somewhere to go to when everything else you own is worth zero. Sure, you might get ripped off in comparative terms to previously, but this is emergency spending to actually survive, you do not complain, you have room to maneuver that others don’t. This is an extreme circumstance, but I describe it because it gives the essence to those who think their deposit guarantee, or own military who are busy fighting each other to save the country, are going to save them. So there, holding some physical gold, and also in vault abroad, are a wise choice for those who like to own precaution. Look at migration during war, refugee circumstance, historical and current, to get an idea. Again, just saying you don’t want it like that is irrelevant under the circumstance. Just saying our country will not be like this when it actually is does not work.

    Next down (or up) the scale is trouble when there is still some civil order. This might be anything from cleptomania of authorities, to political targeting, to social unrest, to economic or financial meltdown, to temporary or permanent national structural failure. That is a lot of contingent and I not going to even try to pan out on it. The point is that at some point you find “you are on your own”, that what is offerred by government/society is not acceptable, that you cannot in practice work with the values, whether finanancial or political or moral. At worst you find yourself picked on and oppressed by the people, the country, you have always contributed to and considered your own. This is very hard to deal with, takes a long time to figure and is hard if not impossible to fully accept. I and many others have had this experience to a greater or lesser degree. In this circumstance, and depending on how fast it plays out, you start preparing other avenues to fall back on. If you are cautious by nature then you prepare some in advance because you have realised this is always a possibility. Everyone thinks that if injustice comes their way, they will stand up and fight it, people will gather to their aid, justice will intervene, they will win the good fight. Good, and I always at least leave my say in confrontation, but realise that in reality drawing people into conflict is part of the method used, that in reality you are often completely outgunned and made to know that. Other structural failures may not have the same level of direct confrontation, but the effect is similar – you are starting some or all of your plans from scratch. People prepare for this in various ways. The most common that just about everyone follows is to secure a roof, income, investment and savings, to form a local society. This all takes place in what is actually a hostile environment, one that is tempered by nation but not infallible. So others do some prepping, or allocate their investment to cover for the possible direction the whole may take, including failure of nation or structural calamity. This is where owning gold comes in, it is the same as the extreme examples given for own nation, only with more foresight in circumstance that is not yet so desperate. When bought beforehand it is one of various (practical) securities against getting wiped out somehow, and it puts your stance viz any confrontation on a stronger footing because you know the person or event ( e.g. economic, structural) you are bargaining with does not somehow have outright leverage over you unless they are actually going to use physical force ( or when an event causes outright denial of use of your own force) …at which point, if you consider you are just, you must either fight or flee and fight. You cannot allow yourself to be completely trapped though. If you do not permit the option to flee and fight, you are not being at all clever in my opinion, because though alpha tendency is to confront directly, circumstance may not allow that (force of nature) , and people who have set out to capture your circumstance will be better organised and stronger, as well as manipulative and clever.

    So this is a main real reason I recommend owning some gold, as any person reasons fit. It is not to set panic or impulse buying, quite the opposite, it is so that people consider and accept this side of the equation, that it is a reality in the world we live in, so as to then be able to reason out a balanced position and so not buy on impulse or out of fear but only in a considered manner. To claim exception in practical terms, as opposed to counting on outside provenance, means being able to personally guarantee own exception by, if not making contingency, at least being aware of what owning contingency means so that if at some point you feel it is nescessary to set up, you will have a basic idea of how to go about it. The idea is that it never need be used, that its mere ownership gives you confidence to continue in the current circumstance more effectively.

    I overdid my 5% on this post Wolf, but I think I have said all that I have to say so you will hear the sound of me zipping up. I hope it serves as some kind of reference in the all from a perspective few are much acquainted with, or are happier choosing to avoid. Thanks.

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