GeoffF100 wrote:I am sceptical about gold. It has not been a global currency for a long time, and has little intrinsic value. Warren Buffet is credited with saying that gold is pulled out of one hole in the ground at great cost so that you can pay someone to guard it in another hole in the ground.
As might a farm be bought and left idle. The land value might broadly rise with inflation over time. Work the farm however and it produces dividends. Money was pegged to gold, could be converted at a fixed price, so convert to money and lend that money to the state in return for interest, and later swap back to gold again and the capital+interest bought more ounces of gold than held before. Some countries have much less faith in money that can be deflated away such as printing more to buy up the states bonds to push prices higher/lower interest rates. Or otherwise partially default via one means or another. In India for instance those wishing to hold gold as part of their asset allocation may do so via lending cash in exchange for gold deposited as collateral, typically 75% of spot gold loan value, 0.75%/month, 10%/year loan rate. Whilst on their books that might be counted as gold holdings, when the loan is repaid and the gold returned then they might buy some gold of their own to maintain their overall target gold exposure level. In that context gold earns a 7.5%/year dividend assuming continually rolled. Yet others might borrow gold, as a means to short it (hedge funds/whatever), sell borrowed gold with the intent to buy back and return gold at a later date, in exchange for paying interest on that borrowed gold and where if the short pays off then they pocket the difference.
Most forms of gains, price appreciation, income, volatility capture, can be transposed. Zero coupon bonds swap income over to price appreciation. As can gold-loan type interest be swapped over to volatility capture, where the 'trading method' used can be as simple as periodically realigning (rebalancing) back to target weightings. Selling some ounces of gold to add more stock shares when the Dow/Gold was down at 1 ounce of gold to buy the Dow in 1980, selling some shares to buy more ounces of gold when the Dow/Gold ratio was up at 40 (40 ounces to buy the Dow) and volatility capture gains were massive if timed to perfection, but in practice that timing isn't a reality however partial trading (rebalancing to target weightings) can capture some of those benefits.
50/50 US stock/gold yearly rebalanced since 1972 when the US$ ended its coupling to gold, has yielded near-as the same reward (annualised gain) as 100% stock.
What about art for instance. Keynes' art collection was found (Cambridge university study) to have yielded near the same as stock total returns with dividends reinvested up to 2019, around 6% annualised real. Some 'old money' is content with asset diversification of land, art and gold.
If you don't work money/assets then yes they can equally be fallow. Buy just land and leave it idle for instance might be no different to just buying gold and burying it, or a single piece of art that is never sold, just hung on a wall or rolled up into a tube to be stored in a safe.
I meant interest rates could rise without a rise in inflation, but the converse is also true. The article that I linked is a good one, but US based. In the UK, the stock market fell by about 75% in the high inflation of the 1970s. After inflation dividends were trashed too. Taxes also rose.
Standard practice. Claim a states bonds never default, but that do partially default. Print money to buy bonds and that drives higher prices, lower yields. Control the yield curve to keep yields down at 2%/whatever and the extra money around will likely drive inflation to higher levels than the interest rate ... negative real yields ... a partial 'default'. More so when taxes are also typically increased. But fairly at other times real yields are positive. When positive, cash, bonds, stocks all tend to do well. When negative gold tends to do well. 50/50 cash (deposited earning interest) and gold will tend to have one or the other doing OK no matter if real yields are positive or negative. In effect a barbell. But a better partner to volatile gold prices is volatile stock prices.
What is a good balance? Well you might consider 50/50 stock/gold barbell to be a currency unhedged global bond. 50/50 stock/bonds is widely accepted as being 'neutral' likely to do as equally well across periods of economic expansion and contraction, which if the bonds are a stock/gold barbell = 75/25 stock/gold. That will tend to lag during 'good' times, but decline less during 'bad' times. If stocks (bonds/cash) are all deflated away by negative real yields perhaps seeing half of the inflation adjusted value wiped out then gold will tend to do well, perhaps rising 2.5 times. 75 stock loses half to 37.5, 25 gold rises 2.5 times to 62.5, combined 100 ... no loss, and where that portfolio value is 100% higher than a all-stock portfolio ... in effect having been compensated by a 'insurance' payout (gold) after perhaps many years of paying a premium in the way of lower returns from holding just 75% stock instead of 100% stock. As per 1972 to recent seeing both 75/25 and 100/0 stock/gold having rewarded the same, that all tends to broadly wash, but where the 75/25 tends to have the lower volatility, which equates to a better risk adjusted reward.