Potential Benefits of a Precious Metals Allocation

General Discussion on the Permanent Portfolio Strategy

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Vil
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Potential Benefits of a Precious Metals Allocation

Post by Vil » Tue Jan 21, 2020 4:00 pm

Even though nothing extremely new around, still decent information exposed, so decided to share :

https://www.aberdeenstandard.com/docs?e ... 1b3d1eb173
boglerdude
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Re: Potential Benefits of a Precious Metals Allocation

Post by boglerdude » Wed Jan 22, 2020 11:31 pm

Errors in table 3. Looks like they suggest 10% gold.

Gold got a big backtesting boost from the unpeg. Any of you around then, why'd stocks tank?
https://awealthofcommonsense.com/2015/02/1970s/
D1984
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Re: Potential Benefits of a Precious Metals Allocation

Post by D1984 » Thu Jan 23, 2020 3:32 am

boglerdude wrote:
Wed Jan 22, 2020 11:31 pm
Errors in table 3. Looks like they suggest 10% gold.

Gold got a big backtesting boost from the unpeg. Any of you around then, why'd stocks tank?
https://awealthofcommonsense.com/2015/02/1970s/

I wasn't around then but the major reasons stocks tanked in 1973 and 1974 from a combination of:

1. The effects of the 1973 oil embargo; America's (and for that matter...most of the rest of the world's as well) economy back then was not ran on a particularly fuel-efficient/energy-efficient basis. Oil prices more than tripling means that more money had to be spent on oil (and a good deal of this money went to the Mideast since the US was no longer the swing producer after 1969 or 1970) and less was available to be spent on other goods/services; oil and oil services stocks (and other energy equities) did just fine from roughly 1973-1980; most other stocks didn't.

2. Prices overall in the entire US economy as a whole going up almost 20% over those two years (it was even worse in some other countries...the UK, for example). At their core, stocks represent the potential to receive a series of future cashflows. When the real (inflation-adjusted) value of those future cashflows is sharply discounted due to unexpected inflation the value (the price) of the stocks themselves will fall as well to reflect this.

3. A recession caused (to a large extent) by the oil embargo and price increases mentioned above; this recession was (at the time) the worst one since the Great Depression. In a recession, stock prices typically fall to reflect poorer economic conditions and thus lower earnings per share for the businesses underlying the stocks.

4. Rising rates as an indirect (investors demanding higher rates to compensate them for the lower real value in the future of the cashflows they would get) and direct (central banks raising rates) effect of the inflation in #2 above; the opportunity cost of owning stocks is not owning bonds or cash (since you used the money to buy stocks instead) and vice versa; if bonds/bills become more attractive due to paying higher rates, come investors may sell stocks to buy bonds or T-bills and if aenough of them start trying to sell at once ti will drive the price down; furthermore, rising rates make it more expensive for companies and consumers to borrow which also tends to cool the economy which can further feed into the recessionary effects as in # 3 above.

5. This may be only true of United States stocks (I don't know enough about other countries' markets at the time to comment) but if you look at a cap-weighted index like the S&P 500 or a price-weighted on like the DJIA they were made up in a good part (by total market cap rather than by number of companies) of the so-called "Nifty-Fifty" blue-chip stocks. These stocks were in a giant bubble and when the value of the Nifty Fifty plunged it took much of the market with it since the cap-weighted stock indexes were so heavily weighted in these stocks; an equal-weighted index would've done badly over 1973-74 but not quite as badly as a cap-weighted one.

There were some other factors as well (at least for the US) like Nixon and the uncertainty around impeachment, etc, but those five were the main ones.

You should also be aware that the fall in stock prices in 1973-74 was far beyond any actual fall in the economic value of the underlying businesses and once investors finally capitulated and "threw in the towel" in late 1974, stocks rocketed upwards through most of 1975 (in the US but even more so in places like Hong Kong, the UK, and Germany....heck, if I recall correctly British stocks nearly doubled in 1975! )
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