2012/2013 Fiscal Cliff

[dontgopoor]

Have been reading and posting for a few weeks and there seem to be some pretty good and experienced minds here. Here's a question that seems to be danced around a bit lately in the media:

"If you want to protect yourself from a potential late 2012 or 2013 recession and/or other serious financial collapse, including a potential devaluation of the US dollar, in what investments would you place your assets?"

What are your thoughts?

[bjl584]

When the market crashed in 2008 I stayed the course. I dollar cost averaged into my various investments as I always have. Buying in low allowed me to take advantage of the recovery and put me in a better position financially than I've ever been.

So, I would say don't panic. As long as time is on your side just keep at it. When everyone else is selling is when you should be buying.

If you are looking for insight into stocks or sectors, then there are certain ones that do well in recessions. Look at the run up in discount retailers and dollar stores since 2008. Utilities are a good place to be too. Also, infrastructure related stocks (i.e. government public works projects.) I made a huge return on CAT since 2008. And one of my favorites, dividend yielding stocks, especially the higher yielders that have a good track record.

[elessar78]

Have been reading and posting for a few weeks and there seem to be some pretty good and experienced minds here. Here's a question that seems to be danced around a bit lately in the media:

"If you want to protect yourself from a potential late 2012 or 2013 recession and/or other serious financial collapse, including a potential devaluation of the US dollar, in what investments would you place your assets?"

What are your thoughts?

I keep 'em what I always have them in: some form of equity-bond mix appropriate to my age and risk tolerance and objectives.

Can't protect yourself against recessions. Instead of fearing them, prepare and look at them as a time when stocks go on sale.

Do yourself a favor and don't listen to the media for financial advice.

[97guns]

Have been reading and posting for a few weeks and there seem to be some pretty good and experienced minds here. Here's a question that seems to be danced around a bit lately in the media:

"If you want to protect yourself from a potential late 2012 or 2013 recession and/or other serious financial collapse, including a potential devaluation of the US dollar, in what investments would you place your assets?"

What are your thoughts?

my THOUGHTS are that the U.S. banking system is very fragile and ready to crumble, bonds are in a bubble and when it pops all paper assets will go down with it.

FACTS: greece and the union of PIGS is on the verge of collapse and chaos, inflation is on the rise eating away at your dollars. 0% interest rates CAN NOT move higher or the 16 trillion in US debt can not be serviced, the only solution for the FED is to inject more money into the system via quantative easing/QEIII devaluing your dollars even more.

imo we will see QE4, 5, 6, 7, 8 what will your dollars be worth then?


All debt-data is January 1st and gold-price data is based on the monthly average for the month of January:

•2005 US Debt = 7.6T, Gold = $430/oz.
•2006 US Debt = 8.1T, Gold = $520/oz.
•2007 US Debt = 8.7T, Gold = $635/oz.
•2008 US Debt = 10.7T, Gold = $875/oz.
•2009 US Debt = 10.6T, Gold = $855/oz.
•2010 US Debt = 12.3T, Gold = $1,100/oz.
•January 2011 US Debt = 14T, Gold = $1,360/oz.
•June 2011 US Debt = 14.3T, Gold = $1500/oz.
•May 2012 US Debt = 15.6T, Gold = $1650/oz.

See a pattern? got gold?

[elessar78]

Tell me, when the US financial system "crumbles" who exactly will buy this gold that you hoard for $2,000/oz? On what internet based system will you trade this gold? Do you think people with food, fuel, guns, water, etc. sell to you because you have shiny bits of metal?

[97guns]

i knew the slams were coming, wasnt even gonna post the gold info but its just too evidential to ignore

[dczech09]

All debt-data is January 1st and gold-price data is based on the monthly average for the month of January:

•2005 US Debt = 7.6T, Gold = $430/oz.
•2006 US Debt = 8.1T, Gold = $520/oz.
•2007 US Debt = 8.7T, Gold = $635/oz.
•2008 US Debt = 10.7T, Gold = $875/oz.
•2009 US Debt = 10.6T, Gold = $855/oz.
•2010 US Debt = 12.3T, Gold = $1,100/oz.
•January 2011 US Debt = 14T, Gold = $1,360/oz.
•June 2011 US Debt = 14.3T, Gold = $1500/oz.
•May 2012 US Debt = 15.6T, Gold = $1650/oz.

See a pattern? got gold?

You call this a pattern? I like how you are using 7 years of data to make a point. Why not use 40 years of data? I have done research on gold vs stock market values and the stock market utterly OBLITERATES gold in the longer term. Your 7 year analysis is faulty on a time bias.

The more debt our government incurs, the more advertisements regarding gold is released. Thus we get an increase in white noise surrounding investing in gold and a bunch of people invest.

Gold prices rise, but then they stagnate after a momentary increase.

Gold's value is only what someone else is willing to pay for it. And when we have this constant advertising where uneducated people are told that gold is awesome, they are willing to accept a higher price. Gold prices rising through the past few years is nothing more than a self-fulfilling prophecy.

The idea of investing in gold because our "economy is going bad" is a crock. Yes, the economy certainly has challenges. But there is no science or rule that says gold does good in a bad economy or as inflation increases.

People want solutions for investing, and gold speculation is not the answer.

If you are going to support gold, at least show something more than a 7 year technical analysis based on "trends."

[elessar78]

Invest in precious metals: lead

But seriously, if you have no confidence in the free market economy then there's no point in investing. We invest because we believe in a future where the economy, for most years, is expanding.

Also, for argument's sake, does it make sense to buy any investment at historic highs? Buy low, sell high?

[dontgopoor]

Thanks to all who posted. The comments about gold are fairly classic and the same thoughts that have been discussed throughout history. Gold's intrinsic value is very low, I will argue. But history shows a run to gold when economic times are rough so if you think you can buy low enough and then time the sale/exit, it seems a decent market play. What's interesting is that the average retail investor likely does not buy with a large enough safety margin. The "we buy gold" folks are buying, based on a very few data points that I've seen, at 25% of the market price. At that margin of safety, the intrinsic value is not a significant concern.

And the comments about dollar cost averaging are solid when looking at very long terms. But dollar cost averaging won't help with a devaluation. Sure, the nominal cost average will look fine on paper but the adjusted real value will be fairly poor if/when the printing presses crank up.

There are some fairly heavy users of this site who have not commented so let's see if they chime in.

No one has yet commented on foreign currency plays by holding emerging market equities denominated in their local currencies.

[elessar78]

Just to be clear, I'm in the boat of dollar-cost averaging AND active rebalancing.

As far as emerging market securities, in this global economy so much is interrelated that I don't know if anything would truly be insulated from a downturn particularly if both America and Europe are down.

Investing in emerging markets should always be part of one's portfolio on the equities side. Personally I break it down 70% Equities, 30% Fixed-Income/Bonds. The equities side breaks down into US, Foreign (Euro-Pacific), and emerging markets, albeit not equally.

The problem with emerging markets is that there are factors beyond business that affect stock performance, government stability and currency stability being among them. I'd have them as part of the portfolio but I would NOT give them significant weight regardless of economic climate.

[kv968]

Gold's intrinsic value is very low, I will argue.

Ok, please argue...why is the intrinsic value of gold very low?

I've never been able to put an accurate intrinsic value on it since I've never been able to get a hold of any financial reports on it. I guess you could argue it's low compared to past inflation, dollar valuation, the Dow Jones, etc...but do those types of comparisons have (or should have?) any true correlation between one another?

I'm not saying holding some gold or other precious metals in portfolio is a bad thing. I actually think you should hold some as a part of diversification. I just can't see how you come up with even really and estimate of gold's intrinsic value when it doesn't produce anything. I know this is an age-old argument but when it comes down to it it rings true...gold is only worth what others are willing to pay for it.

[dczech09]

Ok, please argue...why is the intrinsic value of gold very low?

I've never been able to put an accurate intrinsic value on it since I've never been able to get a hold of any financial reports on it. I guess you could argue it's low compared to past inflation, dollar valuation, the Dow Jones, etc...but do those types of comparisons have (or should have?) any true correlation between one another?

I'm not saying holding some gold or other precious metals in portfolio is a bad thing. I actually think you should hold some as a part of diversification. I just can't see how you come up with even really and estimate of gold's intrinsic value when it doesn't produce anything. I know this is an age-old argument but when it comes down to it it rings true...gold is only worth what others are willing to pay for it.

I think what dontgopoor is saying is that gold's value is similar to that of anything else. On its own, it really does not have a high value. Its value is completely dependent on what others are willing to pay for it.

Here is a bit from my blog post on gold from a while back:

Historical Return

Gold is being regarded as an asset that holds its value. It is also being regarded as an asset with great return potential, low volatility, and a propensity to perform well when inflation is high.

From 1792 through 1833, the price of gold remained unchanged. It was pegged at $19.39 per ounce. After that, it fluctuated around $20 per ounce for a while. After Bretton Woods was signed, gold was pegged at approximately $35 per ounce. It was not until 1973 that gold closed the year with a price above $100 per ounce.

In fact, gold never rose above $500 until the high inflationary period of the 1970’s. In 1908, gold rose to over $800 per ounce for a short while. Afterwards it dropped back down and fluctuated around $200 per ounce. Then in 2005, gold closed the year at $500 per ounce.

Gold never reached $1,000 until the year 2009. In 2009, gold closed at $1,054.

And at the end of 2011, it closed above $1,500.

I ran some numbers. When the gold standard began in 1792, the price of gold was $19.39 per ounce. At the end of 2011, the price of gold was $1,531 per ounce. So, over a 219 year time frame, the price of gold multiplied by about 77 times. That is an average adjusted return of 2.0243% per year! That’s pitiful!

I found historical data at Onlygold.com and was able to calculate the annual adjusted standard deviation to be about 28.46% from 1972 through 2011. I found the S&P 500 stock market index to have a standard deviation of 16.49% for the same time frame.

What this tells me is that the price of gold not only rose at a pitiful rate, but there was a lot of volatility as well. Gold is NOT a safe investment for wealth preservation! Don’t be naïve.

So no gold fanatics! Gold is not a good investment. It is much more volatile than stocks and has a lousy investment track record! Yet the media would have us believe that stocks are bad and gold is good.

This drives me crazy! Gold has NEVER risen above $1,000 per ounce until 2009! In the grand scheme of things, that is recent. However the media has done a pretty good job making people think that this is a good investment? If you look at the historical data, you will see a different story.

I found this stuff interesting when I researched it. The historical data makes the indication that in the past, yes gold DID have an intrinsic value when it was used as a base and peg for currency. However, these days gold is just like many other goods whereas it is only worth what others will pay for it. Aside from that, it has virtually no value.

Stock has intrinsic value because it represents equity in a business and all of the stuff owned by the company. Corn has intrinsic value because it can be consumed. Gold all by itself is just a shiny rock.

[dontgopoor]

I think what dontgopoor is saying is that gold's value is similar to that of anything else. On its own, it really does not have a high value. Its value is completely dependent on what others are willing to pay for it.

.........

Stock has intrinsic value because it represents equity in a business and all of the stuff owned by the company. Corn has intrinsic value because it can be consumed. Gold all by itself is just a shiny rock.

Yes! Thank you. Very nice analysis of gold returns.

M-W: Definition of INTRINSIC

1 a : belonging to the essential nature or constitution of a thing <the intrinsic worth of a gem> <the intrinsic brightness of a star>

KV968 - I think we're saying similar things. I'm not a fan of gold but I do understand the argument that some investors make about getting in and out of gold if they think others will flock to gold when scared (in just before the trouble starts and out before the trouble ends). Though not an approach that I've ever used or would ever recommend. Thank you for your comments.

[dczech09]

KV968 - I think we're saying similar things. I'm not a fan of gold but I do understand the argument that some investors make about getting in and out of gold if they think others will flock to gold when scared (in just before the trouble starts and out before the trouble ends). Though not an approach that I've ever used or would ever recommend. Thank you for your comments.

I do agree here. Perhaps there can be money made in jumping in and out of gold in order to take advantage of market upswings and downswings. However I do want to point out that this is a dangerous game.

This is pure speculation and not real value investing. Its not even investing, which is what a lot of us on the forum advocate.

It is tough to time the stock market. The gold market may be a little easier especially these days when there is such a "herd" mentality.

[Carpenter]

Tell me, when the US financial system "crumbles" who exactly will buy this gold that you hoard for $2,000/oz? On what internet based system will you trade this gold? Do you think people with food, fuel, guns, water, etc. sell to you because you have shiny bits of metal?

People who continue to produce will need a medium of exchange, and a vehicle to store wealth.

Gold is well suited for that purpose, and for all, but 40 of the last 4000 years has done so.