Gold and Silver Predictions for 2014

[helmuth_hubener]

The flaw in that idea is that statistically just because something goes down doesn't mean it's going back up. And just because it goes up doesn't mean it's coming down. It seems to me you'll get hammered in a prolonged high inflation environment. You'll be constantly selling your hard assets (as their dollar value is inflated higher), and loading up on dollars. You'll end up with one gold flake and a bunch of worthless pieces of paper.

There was a prolonged high inflationary environment in the 1970s. The Permanent Portfolio was perhaps the only broad portfolio strategy that didn't get hammered. Instead, it performed quite nicely, exactly as designed.

So, while your theory sounds nice, actual real-life experience has already proved it to be wrong. Let's examine why that is.

Let's say there is a prolonged high inflationary period. The dollar is sinking, let's say 10% per year. In that case, gold will be going up dramatically, far faster than the dollar is sinking. Gold might go up 20%, 50%, or even more. There are very good reasons for this which I won't get into now. So every year, you open up your portfolio and see what happened. "Hmm," you say the first year, "Looks like I got a good return overall: +12.5%. Also looks like gold has increased from 25% to 37.5% of my portfolio due to its 50% price increase this year. So I'll need to re-balance." You sell it until it makes up only 25% of your portfolio again and you take the proceeds and buy the assets that have fallen to be less than 15%. Now everything is balanced again. Your purchasing power has grown by whatever the overall return was that year -- in this case, 12.5% -- minus whatever inflation was -- in this case, 10%. So you had a real return of 2.5%. Terrific!

What happens the next year? You go in, say "Hmm" again, sell off some gold again, and once again have a 2.5% increase in real purchasing power. This can continue indefinitely. At the end of ten years, what do you have? More real wealth than you had at the beginning. That's all that matters. If you could have bought one farm before, now maybe you can buy one-and-a-half farms. You've gained half a farm (or whatever the increase is).

You are concerned you'd be buying worthless dollars. No, when you sell off the gold, you are almost certainly not using it to buy cash (T-Bills). The cash portion is very stable. Your cash is in T-Bills and is probably more or less tracking inflation. In the 1970s, for example, cash did fine -- no big losses. Instead, you will be buying more stocks and more bonds. Stocks may or may not be doing poorly -- it depends on how many counteracting good factors are cancelling the inflation hurt for businesses. Bonds almost certainly will be doing poorly. So you'll likely be trading small bits of gold for large chunks of bonds, and maybe some stocks, too. Then, when the high inflationary period ends, all the bonds you shoveled up at rock-bottom prices will rocket up to the high heavens.

just because something goes down doesn't mean it's going back up.

You are absolutely right, and I myself have tried to explain this multiple times, for instance to Gaddafi Duck. In this case, it is hard for me to imagine a high inflationary period going on and on for decades with no change. I don't see that happening. But... you just never know! If the high inflation does keep chugging steadily along from now 'til 2525 (which again, I would find bizarre), what will happen to a Permanent Portfolio user? They will just keep on increasing their wealth, year after year, just as they did the first two years.

 

[Madison320]

Your cash is in T-Bills and is probably more or less tracking inflation.

So if we get really high inflation, like 20-30%, we can buy US T-Bills with a 20-30% yield?

 

[Zippyjuan]

Not so fast.

When the Federal Reserve sets interest rates (which effects stocks, futures, forex etc), they make this decision in private before they release it to the public.

Who's to say they're not tipping off the banks ahead of time? And the banks are reaping billions of dollars via inside information?

With central banking, market certainties are very much possible...

They do make their decisions in private, but they announce any policy changes or rate changes long in advance of when they actually occur. That is to allow markets to make adjustments to the anticipated changes without causing any shocks. There is no "insider advantage" to that.

 

[Zippyjuan]

So if we get really high inflation, like 20-30%, we can buy US T-Bills with a 20-30% yield?

Yes. When inflation topped ten percent in the late 1970's/ early 80's, Treasury bill rates were also over ten percent. (if they ever do- stock up and lock in the high returns). Investors include an expected rate of inflation in what they demand in interest rates and Tbill rates are based on auctions- what buyers are willing to pay.

In 1981 (the highest rates), two year notes were paying 15.94%, five year notes 16.27% and ten years 15.84%. http://bonds.about.com/od/governmentandagencybonds/a/Historical-U-S-Treasury-Yield-Charts.htm

The rate of inflation peaked at 14.76% in April of 1980. http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

 

[Madison320]

Yes. When inflation topped ten percent in the late 1970's/ early 80's, Treasury bill rates were also over ten percent. (if they ever do- stock up and lock in the high returns). Investors include an expected rate of inflation in what they demand in interest rates and Tbill rates are based on auctions- what buyers are willing to pay.

In 1981 (the highest rates), two year notes were paying 15.94%, five year notes 16.27% and ten years 15.84%. http://bonds.about.com/od/governmentandagencybonds/a/Historical-U-S-Treasury-Yield-Charts.htm

The rate of inflation peaked at 14.76% in April of 1980. http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

Those 4 trillion a year interest payments on the debt are really going to suck!

Do you really think you can keep pace with inflation by loaning money to the same institution that is responsible for that inflation?

 

[oyarde]

If anybody knows for certain what the price of something will be at a specific point in the future, they could make billions. Obviously nobody does.

Yeah , I know , but I need you to work some magic , to be more forward thinking , Brats , Beers , Hebrew dogs on me if it is 2 K or better , I will pick you up @ the airport . Hoosier Hospitality

 

[oyarde]

Probably hit $1375 tonight ......

 

[helmuth_hubener]

So if we get really high inflation, like 20-30%, we can buy US T-Bills with a 20-30% yield?

Probably. One never knows, but based on the past: probably. Also, based on logic and reason making certain reasonable assumptions: probably. So in short: probably.

Consider this and see if you can come up with an answer for me: what happens if there is 20-30% inflation and the yields on T-Bills aren't 20-30%?

 

[Madison320]

Probably. One never knows, but based on the past: probably. Also, based on logic and reason making certain reasonable assumptions: probably. So in short: probably.

Consider this and see if you can come up with an answer for me: what happens if there is 20-30% inflation and the yields on T-Bills aren't 20-30%?

One option would be for the govt to report inflation to be be 5%.

If we do raise rates to 20% how will we pay the interest?

 

[helmuth_hubener]

Yes. When inflation topped ten percent in the late 1970's/ early 80's, Treasury bill rates were also over ten percent. (if they ever do- stock up and lock in the high returns). Investors include an expected rate of inflation in what they demand in interest rates and Tbill rates are based on auctions- what buyers are willing to pay.

In 1981 (the highest rates), two year notes were paying 15.94%, five year notes 16.27% and ten years 15.84%. http://bonds.about.com/od/governmentandagencybonds/a/Historical-U-S-Treasury-Yield-Charts.htm

The rate of inflation peaked at 14.76% in April of 1980. http://inflationdata.com/Inflation/Inflation_Rate/HistoricalInflation.aspx

Your post is correct except for the first parenthesis. One cannot "lock in" high returns with treasury bills. T-Bills are defined as all the treasury debt for durations under one year. So after that year (or 3 months, or 6 months), your bill is done, that is over, and if you want to continue you must buy a new one at whatever the new rate is. I suppose you could say you can "lock in" your rate for up to 12 months, but unless the inflation rate is being incredibly volatile, that will not be all that useful to you.

Now what does let you lock in high rates is 30-year bonds. And that is exactly what I recommended Madison buy in his hypothetical. That is exactly what you would be buying using the Permanent Portfolio strategy. Back in 1980 and 1981, Harry Browne was recommending people buy bonds. Who else was recommending that? No one, that's who. Everyone -- to a man! -- everyone knew that bonds were a horrible investment. A surefire loser. They knew it.

Funny what people know.

 

[helmuth_hubener]

One option would be for the govt to report inflation to be be 5%.

Think about it a little bit deeper than that. What would actually happen if inflation is 20-30% and T-Bill yield is 5%? The gov't can "report" whatever it wants. Ask yourself what would happen under this scenario, and then ask yourself whether official gov't reported numbers would fundamentally change a darn thing about what you figured out would happen.

If we do raise rates to 20% how will we pay the interest?

Who is "we," Ke-mo sah-bee? I don't owe any interest to anyone, so I don't have to pay any at all. If the US federal government has to pay higher interest rates on its outstanding debt, well then that is a problem for them, isn't it? You ask me how they would deal with it? If I were to guess: create more money. That would be the path of least resistance. Of course, they could also do the opposite and tighten the money supply -- destroy money. Long-term, that would be the responsible thing to do -- it would lower the inflation and make the interest on the debt lower and more manageable. I wouldn't count on them making the responsible choice (needless to say!), but nevertheless that is the choice they made in the 1980s. So one just never knows. But probably they'd create more money and make it worse.

 

[KingNothing]

It is intersting that rising housing prices means a bubble and rising gold prices are simply "what must happen".

It's also interesting that people view gold as an investment. It isn't. It is, at best, a hedge or a store of value. It doesn't produce anything.

 

[oyarde]

It's also interesting that people view gold as an investment. It isn't. It is, at best, a hedge or a store of value. It doesn't produce anything.

In this environment , hedging and storing seem pretty reasonable .

 

[helmuth_hubener]

It doesn't produce anything.

Sometimes it produces something. A little something called: returns. Sometimes it produces returns when it's very hard to get returns from anything else.

See, for instance, umm, the entire decade from 2000-2010. Pretty hard to get any return whatsoever from the stock market that decade. The "Lost Decade" they call it. But pretty easy to get a nice juicy return from gold.

See for another instance the entire decade from 1970-1980. Again: stocks were kaput. No real returns. Bonds were awful. What to be done? Where could an investor turn? Nothing was working. Oh, but gold did a little bit well. Just a tad. From $35 to $800. But who would want that?

 

[KingNothing]

You're right it has nothing to with "world tension". Like you said there's always tension in the world. It has to due with simple econ 101. Supply and demand. As the supply of dollars goes up the price goes down.

Only if the demand remains equal. Any number of things can increase or decrease the demand for dollars. And counter to what many here would expect, when there is more uncertainty in the markets and the world, people have tended to run TOWARDS the dollar, not away from it.

For all our faults, we are still the strongest nation on Earth. We still have the largest economy. We still have the best central bank. And our currency still has the largest market penetration. We aren't a sure thing, but we're surer than everyone else.

 

[oyarde]

Sometimes it produces something. A little something called: returns. Sometimes it produces returns when it's very hard to get returns from anything else.

See, for instance, umm, the entire decade from 2000-2010. Pretty hard to get any return whatsoever from the stock market that decade. The "Lost Decade" they call it. But pretty easy to get a nice juicy return from gold.

See for another instance the entire decade from 1970-1980. Again: stocks were kaput. No real returns. Bonds were awful. What to be done? Where could an investor turn? Nothing was working. Oh, but gold did a little bit well. Just a tad. From $35 to $800. But who would want that?

Twenty yrs out of 40.Too significant to ignore .

 

[oyarde]

$1369.50

 

[KingNothing]

Twenty yrs out of 40.Too significant to ignore .

But, just picking a year here, if someone had $1000 to invest in 1990 and opted for a basket of S&P stocks, and continually re-invested dividends, they'd have a whole helluvalot more money now than someone who bought a couple ounces of gold. It wouldn't even be close.

I definitely think that a person should invest in some commodities and that gold is a valid choice, but to think it should be the foundation of any portfolio or that it is some secret to becoming Uncle Moneybags is foolish.

 

[oyarde]

But, just picking a year here, if someone had $1000 to invest in 1990 and opted for a basket of S&P stocks, and continually re-invested dividends, they'd have a whole helluvalot more money now than someone who bought a couple ounces of gold. It wouldn't even be close.

I definitely think that a person should invest in some commodities and that gold is a valid choice, but to think it should be the foundation of any portfolio or that it is some secret to becoming Uncle Moneybags is foolish.

I think you have to go both routes ( although I am not much of an s & p guy ). Most people are already putting money in the markets through a 401k I would imagine .That may be where all of many peoples savings are .

 

[helmuth_hubener]

Only if the demand remains equal.

Exactly!

Any number of things can increase or decrease the demand for dollars.

Exactly! Oh how many times I've tried to make this point. No one I've made the attempt with has ever seemed to get it.

And counter to what many here would expect, when there is more uncertainty in the markets and the world, people have tended to run TOWARDS the dollar, not away from it.

True, true, true!