E.D. Hart

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

Mr. Faber
I will check WorldBeta, thanks of the quick reply.
looking for those elusive numbers....


On Jul 23 02:27 PM WorldBeta wrote:

> Both a strategic (buy and hold) and tactical (using the timing model)
> allocation justifies up to a 20% allocation to gold.
>
> Thanks for the read! And PS, SA only pulls some of my posts, you
> can find them all on my blog World Beta.

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

Mr. Faber,
Great stuff, your posts are one reason I read Seeking Alpha.

It seems that we have experienced a tectonic shift--earthquakes happen not often--but when the do, they are the result of many years of seismic forces building up in the tectonic plate. In a matter of minutes the landscape is changed, something I believe happened in fall 2008.

I was a financial earthquake and the landscape is completely different. People are asking, when will things return to normal? It depends on what you mean by normal. We have seen the results of the seismic shift, but the shift itself is invisible, unlike an earthquake. (My answer is that they will never return to normal--the financial landscape is permanently altered.)

Going forward I expect, significantly lower equity returns, significantly higher inflation, and the gradual erosion of the US Dollar hegemony resulting in re-rating of US Government debt, and much higher interest rates. The economic locus of power will shift to Asia, etc, etc. Nothing that about 10,000 other people haven't already predicted before me.

This begs the question, which asset class can be expected to perform best in such an environment?

One answer I suggest is gold. From a low of $252 on July 20, 1999, to a price of $950, on July, 20 2009--this is a greater than 14% CAGR.


I have pilfered, plagiarized and otherwise stole the following from a Lee Rogers editorial to make my point below:

Lee Rogers
From 1982 to 2000, the Dow Jones Industrial Average went from a bottom of 776.92 to a peak of 11722.98. This represents an annual compound return of 16.8% over the course of 17 years and 5 months. Ironically this rate of return is almost identical to the annual rate of return gold is delivering in its current bull market run. If we say for argument sake that the gold bull market lasts the same amount of time as the previous run in the DJIA from 1982 to 2000, we can project a gold price of $3,736.13 per ounce of gold by 2016.

Gold bottomed at $252.80 on July 20, 1999. 6.81 years later on May 12, 2006 gold peaked at $725 per ounce. This represents an annual rate of return of 16.7% which is only .1% off from what we determined the DJIA’s annual rate of return during its bull run from 1982 to 2000. Based upon the 16.7% annual rate of return this is how we came up with the $3,736.13 per ounce figure by 2016.

Please consider running your numbers with gold broken out as a separate asset class, if nothing else, for curiosity sake. What would a 20% allocation to gold do to a portfolio returns/volatility/Sharpe ratio in sample periods you've already considered?

Thanks for all of your work.