o In a currency crisis, Gold skyrockets in value.
o No counter party risk.
Also, CAPM theory suggests one can reduce their risk/reward ratio by diversifying into different asset classes. By holding some of your liquid reserves in gold, you reduce fiat risk (risk that a currency based on faith only will lose value).
For those in HN interested in a straightforward way of owning and storing gold in Zurich/London/New York - I highly recommend bullionvault.com. It has a nice geeky multi-party audit system as well - so you know your Gold really is there.
In a currency crisis gold is naturally more valuable, since the problem is with gold's replacement (currency), so you're basically saying "the central bank system has screwed up let's go back to gold".
Holding currency has just as much counter party risk as holding gold. They're both currencies that themselves don't have counterparty risk. The institutions in which you keep gold or currency can be risky counterparties but that's the same in both cases. Your bullionvault example could just as well keep dollar bills in it's vaults.
As for your CAPM point I'm a little out of my depth but I don't think it holds. Gold isn't really an asset as it's mostly useless, it's really more of a currency, with which you can buy assets. And I don't see why you'd get any risk improvement by holding currencies that you won't get by holding diversified portfolios of the actual productive assets (real estate, stocks, bonds, etc) that those currencies can buy. That of course assumes rational investors, but then so does CAPM itself.
Currency has no counter party risk, but does have Fiat Risk.
Your thread on gold not being an asset doesn't make sense for any common definition of asset, so I can't really respond. Gold isn't a currency, it's a commodity.
Productive assets (Bonds) have counterparty risk, and stocks quite often have correlative performance to a currency crisis in the country that they exist. I.E. If the US Dollar crashes, odds are the various exchanges will take a beating.
Gold is a tool in your portfolio, nothing more. Use it where it makes sense for you.
>Currency has no counter party risk, but does have Fiat Risk.
Right, that was your first point about a currency crisis that I acknowledged.
>Your thread on gold not being an asset doesn't make sense for any common definition of asset, so I can't really respond. Gold isn't a currency, it's a commodity.
Gold is only a commodity when you're trading it to then use for industrial purposes. Most of the time gold is traded as a currency, as something to store value that you can later trade. The vault full of gold you mentioned is functionally equivalent to a server holding bank account records. No one is coming to the vault to pick up gold and make audio cables. When I said gold isn't an asset that's what I was referring to. Most of the time it's a currency, not a commodity. It doesn't gain value because people think gold-plated electronics are going to boom, it gains value because people think dollars have been inflated and thus the world ratio of kg of gold to dollars in circulation has shifted and thus the exchange ratio should as well.
>Productive assets (Bonds) have counterparty risk, and stocks quite often have correlative performance to a currency crisis in the country that they exist. I.E. If the US Dollar crashes, odds are the various exchanges will take a beating.
It's exactly the fact that stocks have correlated performance to the currency of their country that doesn't allow you to hold both and have that be differentiation. I was just arguing the same was the case for gold. Holding gold, since it's a currency not an asset doesn't get you any differentiation from the assets you could buy with it.
>Gold is a tool in your portfolio, nothing more. Use it where it makes sense for you.
This I can agree with. My argument would be that in rational world, CAPM would hold and Gold wouldn't be useful as a diversified asset. The real world is surely more complicated than that.
I've never heard anyone ever suggest gold was not a commodity. Indeed, many of the definitions of "commodity" use gold as an example.
You are in a pretty tiny minority, btw, if you don't believe that using gold as a hedge against currency inflation isn't a useful technique in managing your portfolio.
I agree that gold should be a commodity. We should stop hiding it away in vaults to never be used. And I know that gold is often grouped with other commodities like oil and other metals. I'm just saying that unlike those, gold's value is determined more by the fact that historically we've perceived it as currency and stored it, than by the fact that it is something that "satisfies a want or need", which is how wikipedia defines a commodity.
>You are in a pretty tiny minority, btw, if you don't believe that using gold as a hedge against currency inflation isn't a useful technique in managing your portfolio.
I'm not arguing about the practical applications of gold in a portfolio. It may very well be a practical way to get an inflation hedge. I just don't think under something like CAPM gold can add diversification when it's value doesn't come from something intrinsic to it like it does with other commodities.
Basically my intuition is that if you buy a perfectly diversified portfolio of assets that adequately represents the whole world economy, then you don't care about the nominal value of the economy, and inflation is not a problem. In that scenario you'd want to have some gold in the portfolio in case someone finds a fantastic new way to turn gold into free energy and it's price sky-rockets on its own merits. But if you're only buying it as an inflation hedge it doesn't really add any value as any inflation would just push the nominal values of all your investments up and leave you owning the same share of the total world economy.
It may very well be that buying a "perfectly diversified portfolio of assets that adequately represents the whole world economy" is not really feasible and gold is a decent approximation. Either way, buying something that by design will be stored in a vault never to be used seems like a random implementation quirk of our economical system that we'll eventually get around to fixing. So in the long run I'd rather be short gold.
It can be useful as a currency as I mentioned. My point is that it's mostly useless in itself (for actual uses of the metal) as can be seen by the fact that we're perfectly happy keeping a lot of it locked away.
For those in HN interested in a straightforward way of owning and storing gold in Zurich/London/New York - I highly recommend bullionvault.com. It has a nice geeky multi-party audit system as well - so you know your Gold really is there.