Gyroscopic Investing

I was disappointed with every historical gold price chart I saw, so I made one for my own and everyone else's benefit. Gold prices from National Mining Association, CPI-U data from the US Bureau of Labor Statistics.

I divided the gold price by the CPI, to adjust it for inflation. Then I took the base-10 logarithm to rescale the vertical axis of the plot. Google Sheets does not have log axes yet. Then I shot a linear fit through the data, the red line. The fit is mediocre, R2=0.359.

But it's interesting to consider if the gold price is trying to revert to the red line. The gold price for the far right value of the red line would be... $686. It's worse for a potential buyer or present owner of gold if you consider that the price always overshoots the regression line, either to the downside or the upside, it's worse if you think the price is trying to revert back to Gold/CPI-U = 2, or on the graph 0.30, which would be $476 2015 US Dollars. It would be pretty earth-shaking for some if gold were to lose 70% of its 2011 value, and it would be a great opportunity for others.

If you think these reversion lines are relevant, we could be years out from a "fair" price for gold (2020?), and even further out from a "bargain" price for gold (2025 or later? My retirement year is 2026). That's why I keep saying the PP will be a great retirement portfolio for me, because I see this kind of data, and it seems we're far away from a fair price for gold. Of course... the reversion lines could be B.S. No one can predict the future.

I'm really getting the sense that the best use for gold is as an inter-generational wealth transfer mechanism. Your family will last longer than any currency.

Starting before the failure of Bretton Woods is meaningless, as the gold price was pinned (= the $ was legally defined as a weight of gold) before that point.

Try starting after the failure of Bretton Woods and see what you get.

The data series starts a generation before Bretton Woods.

ochotona wrote: The data series starts a generation before Bretton Woods.

Doesn't that just mean it's extra useless?

ochotona wrote: The data series starts a generation before Bretton Woods.

The data before Bretton Woods collapsed cannot be compared meaningfully to the data after that point, because the meaning of the word "dollar" is not the same in those two eras. Previous to that time, it was a weight of gold; now it is a name for a piece of paper.

So such a comparison would be like comparing a "gay divorcee" 100 years ago to a "gay divorcee" today.
Hope that helps.

Libertarian666 wrote:

ochotona wrote: The data series starts a generation before Bretton Woods.

The data before Bretton Woods collapsed cannot be compared meaningfully to the data after that point, because the meaning of the word "dollar" is not the same in those two eras. Previous to that time, it was a weight of gold; now it is a name for a piece of paper.

So such a comparison would be like comparing a "gay divorcee" 100 years ago to a "gay divorcee" today.
Hope that helps.

I'm not buying that one. CPI is computed by looking at how much baskets of goods and services cost in the currency of the moment. If the data series is discontinuous, and the before and after currencies cannot be compared... so what? Meatloaf pre-transition and meatloaf post-transition is the bridge between the two.

You guys who bought gold after 2006, you paid too much for it. I'll buy your gold from you in 5-10 years when you sell it in disgust.

Desert wrote: It's an interesting chart.  You can see how gold was bid up into a massive bubble ending in 1980, never to see that inflation-adjusted high again (so far).  And it shows graphically why backtesting gold-heavy portfolios starting in 1972 (the bubble launch point) is problematic.

I did it starting in 1985 and gold still helps the portfolio lot.  People seem to always forget that both T-Bonds and the gold are HEDGES for the equity.  It's one or the other or sometimes both.

ochotona wrote: You guys who bought gold after 2006, you paid too much for it. I'll buy your gold from you in 5-10 years when you sell it in disgust.

Don't overlook that dip circa 1975...

ochotona wrote:

Libertarian666 wrote:

ochotona wrote: The data series starts a generation before Bretton Woods.

The data before Bretton Woods collapsed cannot be compared meaningfully to the data after that point, because the meaning of the word "dollar" is not the same in those two eras. Previous to that time, it was a weight of gold; now it is a name for a piece of paper.

So such a comparison would be like comparing a "gay divorcee" 100 years ago to a "gay divorcee" today.
Hope that helps.

I'm not buying that one. CPI is computed by looking at how much baskets of goods and services cost in the currency of the moment. If the data series is discontinuous, and the before and after currencies cannot be compared... so what? Meatloaf pre-transition and meatloaf post-transition is the bridge between the two.

You guys who bought gold after 2006, you paid too much for it. I'll buy your gold from you in 5-10 years when you sell it in disgust.

Not from me, other than when I need cash to live on.
But I have been holding a considerable amount since the 1970's, so am still way ahead.

Libertarian666 wrote: Not from me, other than when I need cash to live on.
But I have been holding a considerable amount since the 1970's, so am still way ahead.

That's a long time, what is your CAGR on the position?

MachineGhost wrote:

Libertarian666 wrote: Not from me, other than when I need cash to live on.
But I have been holding a considerable amount since the 1970's, so am still way ahead.

That's a long time, what is your CAGR on the position?

At a very rough guess, my average cost for that very old part was about $250/oz. However, I have bought and sold quite a bit over the years, including a big purchase in 1998-1999 at around $300.

If you bought the gold in 1975 at 175 an ounce you saw a 4.50% average return as of today.

S&p averaged 13.64%

Libertarian666 wrote: At a very rough guess, my average cost for that very old part was about $250/oz. However, I have bought and sold quite a bit over the years, including a big purchase in 1998-1999 at around $300.

You made out very well. Someone coming in during the last decade has not done so very well. Timing matters, no matter what a book says.

Silver and other white metals have mean-line reverted faster than gold has. It may be a more timely thing to buy than gold, but I think it's an ETF trade, because it's so bulky, and you may need to sell it fast. I think $11 is a good price.