2017-03-19, 04:30 PM
But as you mentioned, that psychological value (which is based on scarcity) has been in humans for about 5,000 years. The treatment of gold as a currency also continues today. Remember, central banks include gold in their currency stashes. It's not a speculative instrument for central banks: it's FX.
Originally Posted by mordko
Another thing you're glossing over is that stock valuation is also very much based on "psychological value". While it's true that there are fundamental earnings underlying them, stocks spend the majority of their time away from fair value. This is described quite well in this Grantham letter and review of Shiller's work. Buffett has also talked about this in his reports; the wild irrationality of stock valuation.
Stocks are notoriously volatile and performances are the product of psychology. Just look at the CAPE valuation history. Look at that multiple go down from 24x to 5x, then insanely shoot up to 44x, etc. It's an absolute roller coaster ride and highly disconnected from earnings.
Both gold & stocks move according to psychology. For example, if stock multiples decline from current 29x back down to 5x over the next 20 years, you're going to end up with horrible performance in the stock market -- despite the fact that corps keep steadily growing their earnings.
2017-03-19, 07:18 PM
It is true that the prices of gold, stocks and bonds have a psychological component. The difference is that for gold that's it. It adds no value over time. Yes, states and individuals will hoard and then sell gold and the value will go up and down. There is nothing else to it, no profit and no interest.
In fact, any commodity is similar to Gold in this respect. Wheat, oil, iron, platinum, silver... Owning them means real long term return of zero. Unlike gold these have intrinsic value though because they have uses. Their constant long term real value is assured by supply changes which respond to demand.
2017-03-19, 07:39 PM
My counter to that is that, since stocks can easily go 20 to 30 years with valuation that's disjointed from fundamentals, we can't pretend that stock fundamentals are of too much use to the average investor. For many investors, the psychological or irrational movements of stocks completely dominates the returns they get -- not economic or corporate fundamentals.
2017-03-19, 08:27 PM
Right. I have nothing against permanent portfolio, all weather portfolio, you name it. While the probability of getting a positive out of gold is lower, doesn't mean it won't beat stocks over 10 years. And there is real value in reducing volatility so gold can be helpful as an asset class which often has low correlation to stocks and bonds.