GOLD in Mutual Funds, mainstream portfolios, asset-allocation, etc.

I appreciate the research linked here and actually find the debate secondary! :hail:

 

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I hope you are not making investment decisions based on it. Anyone can google up web links to say anything. I consider a post full of web links with no commentary except "this is good" to be pretty much a waste of time.

On the other hand, ask them to explain how a certain decision to buy an investment fits in with your goals and what you will get is a picture of a duck and/or crickets.

It's your money, my advice is to do your own research. Ask questions of those who can answer your questions.

 

I also read the newspaper for perspective, NOT for unbiased truth.

“Experience taught me a few things,” says Trump. “One is to listen to your gut, no matter how good something sounds on paper.”

 

"a picture of a duck"? LOL ... always wrong, in that exquisitely American fashion.

You can leave my OPs alone from now on, fatima - since you obviously have nothing positive to contribute. Thanks.

 

I just bought a 20 gauge to hunt ducks; does that count?

I also just decided NOT to have a gold coin graded, instead using the cash to buy a commem Pilgrim...does that count?

I enjoy your stuff, Juan, and I won't sue you if I base any future decisions on them

 

What?! You mean my calculated and brazen attempt to frog-march CT readers into 22nd Century rhodium widgets has failed?!
Drat... Foiled again!!!

A loon cries somewhere, at the indignity of it all.

 

I would like to see a frog march personally.

 

Regardless of whether gold is more than 1% of global financial assets, it is less than 1% of global financial investments.

This highlights that we are nowhere near the mania phase.

 

I agree. I hope there is a mania phase someday, and I hope I'm smart enough to get off the train when it happens. Good selling is mostly psychology.

 

InfleXion-
The source for that percentage (which may be ~1% now: data was from 2010) is a critically important study by the Erste Group, the first savings bank in Austria (since 1819) with about 17 million customers in the EU. Their report has been updated several times already. As Tyler Durden of ZeroHedge says it's "120 pages of fundamental information which are a must read for anyone interested in the yellow metal."
http://www.zerohedge.com/news/gold-...mmary-gold-space-and-where-yellow-metal-going

Ronald-Peter Stöferle is young, but he's already got a relatively high profile/cedibility among better informed so-called 'Gold-Bugs':
http://www.bloomberg.com/video/71857922-gold-price-to-increase-to-2300-says-stoeferle.html

I am curious exactly what (you think) will foretell and confirm "the mania phase." Can you identify some real metrics? Look at other asset classes' 'Bubble allocations,' for example. (That is the point of this OP: "Where are we now w/ Gold allocations?" A baseline is necessary, as is historical perspective.)

For prior allocation peaks, Stöferle's historical analysis indicates Gold was >~20% btw. At 1% allocation, we have a loooooong way to go before the Investor Death Spike occurs in a "Gold Bubble." Yet Paper-Bugs already declared that, years ago:

1) when infomercial advertising for Gold expanded across US cable channels at 2am (circa 2004)
2) when a Gold ETP appeared in the USA and vanguard retail investors began talking about/utilizing that option (circa 2006)
3) when the random American schlub ("shoeshine boy") became aware of and started "talking about" Gold (circa 2007)
4) when HUGE battles appeared & antigold tirades in many mainstream online investment forums & financial industry propaganda (circa 2009)
5) when Gold became an asset-class that normal/typical investors began requesting of brokers (circa 2010)

We can quibble about dates above, but this is what I've witnessed from the inside: Gold (the beaten up red-headed stepchild) as an asset-class, is grudgingly accepted by more and more professionals. Hardcore Paper-Bugs still rail against it, but THEY look like goofy cranks, now: missed the boat, talking nonsense, the dying wail of wrong-way charleys. And Gold-advocates still include fringe-y nutters in their ranks... but legitimacy is slowly arriving with the mainstream investors (in PM ETFs.) A trend is evident - Buffett & mf cos have to talk down Gold 'the competition' Horrors! When will "everyone" finally sell their Gold, already: your stock broker desperately needs those nickels LOL

I'm not firm in this conviction (the data's yet scant) but today's US households now have less than 4% of assets (and maybe as little as 1%) allocated to Gold. Again, only 3.5 million US households (3.05% of the US total) own ETFs. Nearly one-third (31%) of those folks owned investment real estate, btw: that Bubble still popping?

I've no data to suggest PM ETF exposure of current ETF Householders is greater than 7% (~250,000 US Households) and PM exposure might easily be less than 3.5% (~120k), close to the McKinsey & Co. #. "Where are we now w/ Gold allocations?" gets that current baseline, IMO and subject-to-change.

By the numbers, we are very very far from a Bubble.

 

Inflexion said that in two sentences. Your post is a tome. There is wisdom in simplicity.

 

Best data confirms, shows the real deal. By converting ICI households to individuals, retail 'Paper' PM allocators in the USA include
~75,000 "Physical PM" custodial IRAs
~200,000 PM ETF holding households

>> ~475,000 individuals

Of all Americans, only 0.15% own Paper PMs ; or, of all US retail investors, just ~0.53%.

That's an awfully small number of shoeshine boys, I think, or as I say "almost no Americans" ...
YET.

 

Some of the charts on the first link use logarithmic scales which I like to add grains of salt with, but I like this one as a pretty good gold indicator. The Y axis (height) does vary between variables, but the ratio between these axes is static (2.5:1) as opposed to expanding such as with logarithmics. So the correlation is acceptable to me.

Cloudsweeper said it perfectly on another thread as to what denotes the mania phase.

As far as metrics I always defer to real interest rates (inflation rate minus interest rate). Everything else is just measuring things against each other. Possible to do, but more complex to get a signal out of. Of course there is actual inflation (old way of measuring) vs. reported inflation, I think ~9% as opposed to the 2% the Fed is (was) targeting. So determining precisely when real interest rates go positive again requires accurate inflation numbers. I would consider rounding out some of my position in the middle of those two numbers if cash is king+stable. As in interest rates would need to reach something like 5 or 6% by today's numbers.

Ultimately I don't think it matters how many people are holding gold. When it returns to money among central banks we will all just be along for the ride as the balance beams adjust. This is probably more of a gauge of how many people are prepared for the wealth transfer.

 

I've seen these excuses before (w/ variation), many many times. I don't entirely disagree with the gist but each fails on closer scrutiny... 'make-believe'

1) "Widespread public participation" This is often claimed but rarely proven ...and often FALSE. Manias don't need lots of participants, in fact.

Take for example the famous (and VERY poorly understood) 'Tulipmania.' Do you know how many additional bankruptcies were ascribed to Mr. Buffett's spec asset-class "Tulips" ? ~135. Also there was no certain correlation between those particular bankruptcies and the Tulip trade specifically. At the same time, a plague was decimating the population ... hello, maybe that was a bigger factor in business decline? This puts Doug French much-quoted and hysterical "bankruptcies in Amsterdam doubled with Tulipmania!" in perspective, no?

Other articles falsely claim "By 1636, tulips were trading on the Amsterdam Stock Exchange as well as on exchanges in Rotterdam, Harlem, Levytown, Horne and many others in other nearby European countries." FALSE: tulips were NOT traded on major mkts (& had actually been BANNED FROM major Dutch exchanges.) Futures contracts 'traded' in local taverns and affiliated tulip colleges - basically, OTB operations. In fact, tulips were a rare luxe good gambled upon by a very tight social network. There's no concrete evidence of 'widespread public participation' in Tulip spec, period. See http://www.maurits.net/Research/TulipMania.pdf

"the total number of active participants in the tulip market appears to have been comparatively small, ranging from several dozen in the smaller towns such as Enkhuizen or Hoorn to several hundred in Haarlem.(62) More than one merchant appears just once in the archival record, purchasing or selling just a single bulb from or for his garden, so the number of regular traders was smaller still. {...} A few of the poorer tulip speculators may have faced economic ruin, but most of the active bulbtraders remained quite prosperous in the late 1630s, despite losing all of their paper profits from the bubble. (67)"

On closer scrutiny, 'Tulipmania' looks more like the absurd 'Gerhard Richter art-market' than any asset-class Bubble. And which is Powerball, a mania or Bubble?

2) Buying on Margin: Markets (great & small alike) can rise & fall WITHOUT margin, so this criteria is 'made-to-fit' what someone wants to see as a mania. Buying on credit is idiotic, likewise: aren't people doing that for those cult sneakers? And with houses, still. I'd cite this as a contextual market inefficiency common to e-z credit cycles, rather than 'mania' per se.

3; 5) Buying for no 'good' reasons: One word for that... COINS! LOL Srsly though, tons of 'inessential demand falls' before this highly subjective criteria. If US bonds are doomed, buying US Bonds is INSANE. Who knows? I agree: weird spec is weird but you wouldn't argue a Billion Dollar market-fad like Beanie Babies "distorted economic activity" in the late 1990s would you? The idea that plushies have 'investment value' sure looks idiotic ...when they didn't, anymore. (That's what Greenspan meant: you can only confirm a Bubble in hindsight.) I won't mention numismatic investment value here, either: people WILL believe what they want to believe.

4) Parabolic price increases. NO not always, but yes sometimes. Other peculiar aspects of Supply/Demand - and more importantly A DOOMED CURRENCY - can also illustrate this pattern. It depends, but this one fascinates me to no end. "Can Money itself be a Bubble?" That gets terribly philosophical, I suppose. Treatise for other day.

6) Media coverage: The silliest excuse yet. Ya, Scott Brown was a Bubble on my computer ... 'til he popped! LOL Media = advertising = propaganda. Do people buy it? If it fails to sell to the masses, must it crash then? Honestly, this is pure "make-believe." I can't see the US Bond Bubble is hyped (but 99 out of 100 financial advisors would TOTALLY DENY my opinion it could be a Bubble, now.) And yet it grows. A bubble doesn't always need hucksters - maybe a mania does? There were manias before mass-media, too. Etc.

I DO certainly believe manias/Bubbles occur, but those glib, common reasons listed above either fail the sniff-test or obviously need greater refinement/parameters for a start.
Everything's relative, after all.

 

Here's a top ranked mm (Barron's #10 of Top 100 Advisors) recommended allocation; check his past perf, no guarantee of future return:
"His typical account {Retail, HNW = $5.5 Mln} is 50% stocks, 25% opportunistic income, 20% bonds, 4% hard assets, and 1% cash."
http://online.barrons.com/article/SB50001424052748703628504578093162049542932.html#

NYT 11/14/2012 How About a Fort Knox of Your Own? :"More traditional advisers see a place for gold in some portfolios, though they put it in the same group as other alternative assets. They also advise keeping the allocation relatively low, 3 to 5 percent of a total portfolio. {...} Then there is Ray Dalio, who runs Bridgewater Associates, the world's largest hedge fund, who has put 10 percent of his firm’s money into gold. "

Some stats on GLD: http://www.nasdaq.com/symbol/gld/institutional-holdings

On 9/30/2012: 974 Institutional Holder claim 47.15% (211,400,522 Shares Held) of 449,000,000 of Total Shares Outstanding. It follows that
Retail Holders claim 52.92% (237,600,000 Shares Held) valued at $39,085,111,700. ... at $164.50 per share, an averge account balance of $195,426.

 

Juan,
I'll stick by the bubble symptoms I posted since they are the generally accepted ones.

1. This isn't the 17th century
2. Buying on credit may be idiotic, but so is participating in bubbles so it fits.
3&5. I didn't say "buying for no good reason;" it was buying for non-economic reasons, e.g., because it is going up, or get rich quick. And money going into the bubble is, by definition, misallocated.
4. I don't know if there is an exception to parabolic price increases, but bubbles generally conform to the list.
6. I can't think of a bubble that did not get widespread attention while it was in progress.

You are free to come up with your own criteria if the very good ones I posted don't suit your needs.

Edit: Here is an even better list... http://dealbook.nytimes.com/2010/01/27/schillers-list-how-to-diagnose-the-next-bubble/

 

As I said, I look to real interest rates above all else for metals. The rest are just indicators to watch for and take into consideration, and are more geared for in general. I agree that the 'poor reasoning' is mostly subject to perspective and opinion, and margin behavior could at some point be trumped by the physical market and potentially be a false indicator. I do think mainstream media coverage has some merit, because the media outlets are either benefiting from dollar dominance or else being influenced by those who are. Metals are notoriously ignored on the way up and given front page news on the way down. If the media starts telling everybody to buy then I would definitely think twice, but I wouldn't use that as a sole indicator to base my decisions on.

 

Cloudsweeper99-
They are the "accepted ones," you're absolutely right there. It's not even conventional thinking: it's Paper-Bug BELIEF!

Explanations in the NYT, MSNBC and other mainstream media outlets are too often make-it-fit or 'make-believe.' Gold has already been declared a Bubble countless times since 2004... despite almost none of those criteria being met. But it doesn't matter: Gold MUST be a Bubble, because Wall Street really, really hates it. And the compliant whorish mainstream media runs 'Gold Bubble' label, accordingly.

Their credibility to 'call Bubbles' (after missing the RE bubble in 2005, and tech stock Bubble in 1999, etc.) is shot to {heck} really. So how many in the MSM are calling US Treasuries the biggest Bubble in history? Or, why not? Shot to {heck} again.

And thank you InfleXion; I tend to agree with your opinion and rationale, also.

 

I agree real interest rates are a very important explanation of what is going on with all hard assets right now.

The danger in my eyes is IF these higher PM prices encourage additional production, (just postulating), then when the cheap money ends and investors can get better real returns in other areas, what will happen? Not only will the "cheap money demand" go away, but the market will ALSO have to deal with additional supply.

That is my worry. A lot of the other hard assets will be affected as well, but they aren't making more farmland or Picassos so I am not sure as severely.

Just my opinion. If someone wished to argue industrial demand is going up and will use up this surplus, or mining operations are going down so supply is dwindling, either of those could be a counter-argument to this view.

 

I agree with this possible concern for silver, medoraman. The supply/demand/production situation with silver looks good to me, but it is vulnerable. I don't think gold is though. Gold for the most part is measuring the value of currency independently of these factors. If supply mattered to gold then it should be a lot cheaper IMO.

The bigger concern for me is if scientists are able to harness the power of nuclear fusion to create new supply. They are certainly trying, but I also doubt we'd hear about it if they are successful.