Gyroscopic Investing

Could you let me know if the following statement is accurate:

statement:  For non-US PP folk, gold acts as an alternative currency. If your own currency (say the canadian dollar) is suffering from inflation, then gold will be doing very well (gold now being worth way more canadian dollars than before). Even if gold goes down or stays flat (as measured in US dollars), it will still be worth more canadian dollars.

What's making me nervous is that I recently read an article in the National Post (Canadian national newspaper) that indicated that China and India alone own 40% of the world's gold. I'm worried that if China and India pull out of gold (at the same time as the Canadian dollar inflates) that gold will no longer be a reliable inflation hedge for me.

Are these worries founded? Unfounded?


edited for grammar.

HB was claiming that gold is the second most popular money after USD. He claimed that in the time of the crisis everyone runs to USD, and only when there is trouble with USD then they run to gold. For example, it can happen that while the currency of a small country X is having problems, the world is still doing fine, with stocks doing good, USD solid, and gold going down. So country X's economy and currency might suffer, but at the same time due to the US economic strength gold can be going down thus not giving you the needed upside. This is one of the reasons why I stick to the US PP despite not being USian. Note, Canadian dollar was strengthening when gold was going up.

christina wrote: Could you let me know if the following statement is accurate:

statement:  For non-US PP folk, gold acts as an alternative currency. If your own currency (say the canadian dollar) is suffering from inflation, then gold will be doing very well (gold now being worth way more canadian dollars than before). Even if gold goes down or stays flat (as measured in US dollars), it will still be worth more canadian dollars.

Christina, it sounds like you have it.  EDIT:  After rereading this I just want to clarify a few things.  If there is inflation in Canada then the only way gold will respond is if the Canadian dollar falls in value...the price of gold in USD probably wouldn't move as along as the rest of the world is stable.  Also the Bank of Canada would be raising interest rates along with inflation since they don't want to be paying too much of a negative real interest rate, or else the Canadian dollar would fall significantly in value.  This means it is important to keep STTs in Canadian dollars, since it is tied to our economy and cost of living.

For smaller countries I think it is important to have exposure to larger currencies.  That is why I advocate the following for a non-US PP:

20% Global Stocks (unhedged)
10% Domestic Stocks
20% Gold (unhedged)
25% Domestic LTT
25% Domestic STT

Gold doesn't care about the Canadian economy, but it does care about the global economy, which is why I have balanced gold and global stocks.  If the Canadian dollar falls then both gold and foreign currencies will rise to offset the fall.

christina wrote: What's making me nervous is that I recently read an article in the National Post (Canadian national newspaper) that indicated that China and India alone own 40% of the world's gold. I'm worried that if China and India pull out of gold (at the same time as the Canadian dollar inflates) that gold will no longer be a reliable inflation hedge for me.

Are these worries founded? Unfounded?

Is this the article you were referring to: http://business.financialpost.com/2012/ ... he-market/

It seems they are focused mainly on supply and demand.  Gold isn't affected by this as much as other commodities since there is a large stockpile of gold already available.  This is what makes it attractive as a currency and store of value.  However, if China and India decide to stop buying gold because it has become too expensive then this will likely hurt gold prices, at least temporarily.  Although, after a while they would likely get used to the higher prices and continue to buy it (kinda like how we have gotten used to high gas prices).  From what I have read, gold is extremely important in these cultures, and I doubt they are going to give it up.

Gosso wrote: For smaller countries I think it is important to have exposure to larger currencies.  That is why I advocate the following for a non-US PP:

20% Global Stocks (unhedged)
10% Domestic Stocks
20% Gold (unhedged)
25% Domestic LTT
25% Domestic STT

The thing is that in small countries is difficult to find real long-term bonds or indexes that measure their economy in particular.

LazyInvestor wrote: For example, it can happen that while the currency of a small country X is having problems, the world is still doing fine, with stocks doing good, USD solid, and gold going down. So country X's economy and currency might suffer, but at the same time due to the US economic strength gold can be going down thus not giving you the needed upside. This is one of the reasons why I stick to the US PP despite not being USian.

But then, you're not protected against a deflation of your own money if the dollar doesn't deflate at the same time.

escafandro wrote:

Gosso wrote: For smaller countries I think it is important to have exposure to larger currencies.  That is why I advocate the following for a non-US PP:

20% Global Stocks (unhedged)
10% Domestic Stocks
20% Gold (unhedged)
25% Domestic LTT
25% Domestic STT

The thing is that in small countries is difficult to find real long-term bonds or indexes that measure their economy in particular.

Maybe I shouldn't say "smaller countries" but rather "mid-size countries with their own printing press and not overly corrupt government".  I realize that is a short list of countries (Canada, Australia, Japan, UK, South Korea, Germany, France, Switzerland, and maybe a few more).  As for the other smaller countries, that is more difficult, not entirely sure what I'd do.  STT/LTT are always the most tricky, maybe divide the STT/LTT into half US intermediate bonds and half local intermediate bonds.  This way you have added protection from a local currency crisis/devaluation (which seems common in smaller countries), while still having exposure to your local interest rates which should reflect local inflation.

k9 wrote: But then, you're not protected against a deflation of your own money if the dollar doesn't deflate at the same time.

Overall US PP returns will take care of that. The returns might appear smaller in terms of the local currency, but over the long time I really doubt that any currency deflation will outperform the total returns of the US PP.

Gosso wrote:
Maybe I shouldn't say "smaller countries" but rather "mid-size countries with their own printing press and not overly corrupt government".  I realize that is a short list of countries (Canada, Australia, Japan, UK, South Korea, Germany, France, Switzerland, and maybe a few more).

Actually France & Germany have no direct access to the printing press. If the EU central bank doesn't want to print euros, it doesn't print euros. So, technically these countries can default on their own debt (very unlikely, especially for Germany, though).

Gosso wrote: STT/LTT are always the most tricky, maybe divide the STT/LTT into half US intermediate bonds and half local intermediate bonds.  This way you have added protection from a local currency crisis/devaluation (which seems common in smaller countries), while still having exposure to your local interest rates which should reflect local inflation.

Tricky indeed. Actually the main problem that I have for the past two years is struggling with a local dollar devaluation in combination with local inflation above the return that PP gives me. That is a big problem on both ends.
So I'm thinking of two solutions in the cash side that I suggested here in the forum: hedge with forex or pass the full cash into local currency adjusted for inflation.
Could this work?

Gosso wrote:

Is this the article you were referring to: http://business.financialpost.com/2012/ ... he-market/

It seems they are focused mainly on supply and demand.  Gold isn't affected by this as much as other commodities since there is a large stockpile of gold already available.  This is what makes it attractive as a currency and store of value.  However, if China and India decide to stop buying gold because it has become too expensive then this will likely hurt gold prices, at least temporarily.  Although, after a while they would likely get used to the higher prices and continue to buy it (kinda like how we have gotten used to high gas prices).  From what I have read, gold is extremely important in these cultures, and I doubt they are going to give it up.

yes, that's the article.
thanks, Gosso, and others, for your responses.

k9 wrote:

Gosso wrote:
Maybe I shouldn't say "smaller countries" but rather "mid-size countries with their own printing press and not overly corrupt government".  I realize that is a short list of countries (Canada, Australia, Japan, UK, South Korea, Germany, France, Switzerland, and maybe a few more).

Actually France & Germany have no direct access to the printing press. If the EU central bank doesn't want to print euros, it doesn't print euros. So, technically these countries can default on their own debt (very unlikely, especially for Germany, though).

Right. I'm assuming that Germany and France have pseudo control.  If I lived in those countries I wouldn't worry about their bonds too much.

escafandro wrote:

Gosso wrote: STT/LTT are always the most tricky, maybe divide the STT/LTT into half US intermediate bonds and half local intermediate bonds.  This way you have added protection from a local currency crisis/devaluation (which seems common in smaller countries), while still having exposure to your local interest rates which should reflect local inflation.

Tricky indeed. Actually the main problem that I have for the past two years is struggling with a local dollar devaluation in combination with local inflation above the return that PP gives me. That is a big problem on both ends.
So I'm thinking of two solutions in the cash side that I suggested here in the forum: hedge with forex or pass the full cash into local currency adjusted for inflation.
Could this work?

I don't like the idea of buying a hedged US bond ETF, since that means you'll be receiving ~0.5% in your local currency while inflation is at 8%.  That is a -7.5% real return...not good.  The hedging only protects from your currency appreciating, which may happen during a bubble, but I wouldn't count on it lasting...unless Uruguay can become an economic powerhouse...

For your STT/LTT, i think you need to split it up between the Uruguay Peso and the USD (unhedged).  The USD is safer and could significantly appreciate in value if your currency falls, while the Peso provides some inflation protection but is at risk of devaluation.

It might even make some sense to place all your STT/LTT in the Uruguay Peso, since it should pace inflation.  If there is a currency crisis then at least you have 50% of your assets in gold and foreign stocks.  Also, collecting those higher interest payments for all those years will help reduce the damage from a currency depreciation.

Some food for thought...