Jeffrey Dow Jones

Hedge fund analyst, newsletter provider, research analyst, portfolio strategy
Jeffrey Dow Jones
Hedge fund analyst, newsletter provider, research analyst, portfolio strategy
Contributor since: 2010
Company: Alpine Advisor
"Jeffrey, why don't you ask Janet Yellen why the Fed holds Gold Stock"
The Fed doesn't hold gold:
"It really doesn't matter what your opinion of gold is."
Most certainly not!
"It is an official store of value in every country in the world"
Totally agree.
"You obviously think everybody else on this message board is an idiot."
One of the most dangerous and destructive things we do on the internet is mistakenly assume that criticism of ideas equates to criticism of who we are as individuals. Just because I disagree with some of the theses that others propose and am comfortable with or successful at pushing back against them doesn't mean I think the people behind the theses are idiots. I haven't a clue what sort of value judgments are appropriate to make about the real people behind the faceless comments in places like this.
Doug -- all those events occurred during some form of a gold standard where the public couldn't really hold gold to hedge against it in the first place. I also don't understand how gold was uniquely beneficial in those scenarios or why people even needed a hedge for those in the first place.
I totally don't dispute the notion that gold will preserve its purchasing power. In fact, to the contrary, all the charts and data suggest it's really good at doing this over super long windows of time. The problem -- and you'd certainly agree with this -- is that at some points the price of gold gets too far above or below where it ought to be and then becomes a better or worse store of value than it otherwise would.
Right, like what's a catastrophe-style event that happened in U.S. history that gold served as a unique and effective hedge against?
Or really, what exactly is it that investors who own gold are trying to hedge against? And why is gold the best (or only) hedge for that.
I'm advocating both approaches. They're not mutually exclusive. The fair value model can help you buy when expensive and sell when cheap while the trend following model can help you trade it from year to year.
In fact, I even have one model that incorporates the two Eg. leverage up when the trend is bullish and gold is also significantly undervalued. It's averaged 12.2% per year since 1974 vs. 4.8%/year for gold. Annualized volatility is identical to gold at 19.9%/year.
I appreciate the idea of holding gold as a hedge. I'm just not sure what it is precisely people are trying to hedge out and whether or not gold will actually do it. There haven't really been any good examples in history.
1) It's different and a good diversification tool.
2) I didn't have a public platform back then, nor did I have these models. My bullishness was pure luck though. 2000 was when I started in the industry and back then gold was universally (read: UNIVERSALLY!!) hated. Because I'm an oddball, that made me interested in it.
"Do you believe the large variances in gold prices from the CPI figures over this time period is robust enough"
Honestly, I'm not totally convinced. There's enough correlation over hugely long windows to suggest that the two should be related. Plus, there's the concept underpinning it all, and that's that virtually everything denominated in Dollars will have a long-term correlation with the CPI once you make the required idiosyncratic adjustments (eg. supply & demand shifts, changes from increases productivity or technology).
But there are some really big swings here. You can get some counter-trend moves that last a long time and run very far in one direction.
I haven't a clue if there are any other variables that explain the short- or medium-term price action in gold. I don't think anyone has any good models for it, really. At least I've never seen any. This could be another reason why there are so many misconceptions about it and why financial media continually goes back to narratives that are not correct to explain gold's action. Eg. "it's a safe haven" or "it's an inflation hedge"
I know we've discussed this before, but inflation creates an incentive to invest and spend today rather than tomorrow. Theoretically, this is a good thing for economies. I think that's why every major economy on the planet tries to do it.
Under what conditions would you be bearish on gold?
"Think there is more to 2008 than meets the eye Jeffrey. Many had to sell what was profitable and since gold was doing so well, those positions were sold to raise cash."
That's exactly the point I'm trying to make. I have zero confidence relying on fear, or any other factor, really, as a driver for the gold price. Over the short run, I haven't a clue what makes gold do what it does. It might be the most insanely random market in the world.
Over very long windows of time I have much, much more confidence about what drives the gold price.
Totally agree.
My point is that if you value this "optionality" of gold, why not trend follow instead? The returns are sooo much higher and you still, most likely, will be able to reap the benefit of that catastrophe-hedge should it ever materialize. As risk of catastrophe rises -- the type where gold would benefit -- that would almost certainly put gold into an uptrend.
Gold nearly tripled between 2003 and 2008. That was a big move. Was that because fear was rising? Then it fell 20% between July and October 2008. Was that because fear disappeared?
I know I'm selecting very specific windows here, but the point I'm trying to make is that I'm super uncomfortable saying that fear is the primary driver of the gold price.
It's a semantic discussion. I guess that's why the concept is so misleading for so many people?
"Money" has a very precise definition in today's world. In this sense, something either is or is not money. Gold is not. It doesn't not satisfy the generally, universally accepted definition of money.
When we think about it abstractly, we can say all sorts of things about gold.
"What's wrong with that?"
The numbers you used were wrong. The 1974 date is fine, but the price isn't $35. Nobody could have bought gold for $35 in 1974. The best they could have done was $130. That's the starting point.
Because of unique supply & demand factors, no commodity should be constant relative to the CPI or any other commodity.
Gold's a little different though given the strange nature of its market and its lack of industrial utility. The supply doesn't ever really go away.
And when we say "constant" that only means in a very broad, general sense. You'll notice that the gold price only intersects with its inflationary trendline a handful of times in history. There are many large sub-cycles with gold.
Every investment decision is, by definition, a bet on a future outcome. We are all technically soothsayers. I think the best we can do is try to at least come up with logical reasons for our decisions.
"In my biased observation, they tend to be not very smart and/or not very logical."
When emotion gets involved, all that stuff goes out the window. I've seen really smart people completely undone in the markets because they couldn't properly manage their emotions.
Gold is an emotional thing. It's linked to other emotional things too, like politics or religion, and it has a deeper tie to our sense of self-worth than do other investments.
I really think this explains a lot of the dialog surrounding it.
No, the further gold is below its inflationary trend line, the greater the outperformance becomes over which every forward window you want to use. If you go all the way back to 1900 when the price was formalized under the Gold Standard Act at $20.67, the outperformance from then until today isn't as dramatic. It's about 50% above trend ($1,200 vs. the $800 fair value I suggested).
Since you're cherry picking dates, the date you really want to use is 1970. That was the moment of maximum artificial suppression and undervaluation. The price was still $35, same as it was almost four decades earlier when the peg was reset to counter the deflation in the early years of the Great Depression. The price should have been around $100/oz.
1970 was right before the price started floating in certain private markets and 4 years before a fully floating gold price.
Actually here's what you should use as a basis for calculating forward gold returns relative to other assets:
1900 - $20.67
1934 - $35
1974 - ~$130
This may be true. (Or it may not be true.)
Either way, it's not exactly a robust case for investing in gold. :-)
Well, I'm debunking the worldview that some irrational gold investors have. :-) That explains the hostility. But yes, you are absolutely correct here. It's a general model that's part of a bigger set of models that simply govern which assets investors should overweight and which they should underweight.
It's tough to measure this optionality. I guess one way we can look at is that in the last 40 years, it's never really happened, right? The end of the world gold option has never really been exercised. In that sense, can we even say what such a scenario, the one that we're trying to hedge against with gold, actually looks like?
$35 is the wrong price to use. That was artificially cheap after 40 years of suppressing. So you have to either use $35 and change your date to 1934 or you can leave your date as 12/31/1974 and change your price to $193. (Or choose some sort of trailing average in the 1973-1975 years)
That's when the free market finally had full control over setting the price.
I referenced this in the original article. Disagreeing with inflation is totally cool, and it's a logically sound way to go about pushing against my thesis. It's probably the BEST way, and it's the way I pushed back against my own thesis here.
The problem is that you need to come up with a better alternate measure of systemic inflation. 4 articles and 1,500 comments later and still no one really wants to (or can?) do this.
" I think the article totally missed the Asian equation and mass psychology influence (especially when a black swan event happens - and one will)."
These are definitely factors that can influence the price of gold over the short-run. The problem is that I don't understand them and can't even come close to modeling them. I also can't even say for sure if they matter and how much.
The other thing is that I'm not saying everything or even some things are going down in price. The CPI is up 50% since the mid 90's! Everything has gone UP in price. It's that this idea that systemic inflation is out of control when it isn't that I want to push back against.
"Much like the markets, there is manipulation that does not reflect the "real" value of inflation, equities, gold, etc."
You can't say something like this unless you provide evidence to support your claim. You need to provide a better alternate metric for measuring systemic inflation than what the BLS provides.
I hope you're not serious! :-)
The data on this is about as incontrovertible as it gets. Pull up a long-term chart of Barrick or Newmont or somebody alongside a chart for gold.
People subscribe to newsletters like these to have their feelings validated, and also to gain a better vocabulary on how to articulate them and defend those feelings when required to do so.
Shadow Stats Guy does this with the gold crowd. It's misleading and wrong. But everybody in the dynamic is getting what they want. Power to 'em.
I appreciate the perspective, but if the "global bankruptcy" / "fiat papering" argument is sound, then why should only gold benefit? What's so special about gold? It's just another asset denominated in Dollars. Wouldn't everything denominated in Dollars go up in that scenario?
Money is a medium of exchange that's recognized by a sovereign entity and can be easily exchanged for goods and services. It also has to act as a unit of account and be a reliable store of short-term value.
Period. End of discussion. That is what money is. Things that don't satisfy those criteria aren't money.
What should we be using to measure systemic inflation if not the CPI?
The interesting thing about gold is that it can act as a "negative investment" over short windows of time i.e. it can perform well when other asset classes aren't.
Gold might rally if the market collapses. Or it might not. I don't know.
Yup. Investors in gold should be ignoring what inflation is doing over the short run. The two have nothing to do with each other. Gold's movement over short windows of time is as unpredictable and random as any asset class.
Long term investors should concern themselves with where gold is at relative to the long term trend.
...or if you pick 2011, it's under-performed inflation
...or if you pick 1980, it's under-performed inflation, etc.
Look at the charts I prepared on this. They do a really good job tracking how gold performs against inflation over various windows.
Also, gold was in a "negative" bubble in 2000/2001. It was irrationally cheap. These models were suggesting gold was a screaming buy at that point.