On Au
I recall Greg made ii basic mistakes inwards analysis.
First, he assumed that returns (gold, bonds, stocks) are independent over time, thence that one-period mean-variance analysis is the appropriate way to human face at investments. Such analysis already makes it difficult to empathise why people concord thence many long-term bonds. They don't earn much to a greater extent than than brusk term bonds, together with receive got a lot to a greater extent than variance. But long-term bonds receive got a magic property: When the toll goes downward -- bad furnish today -- the yield goes upwards -- amend returns tomorrow. Thus, because of their dynamic belongings (negative autocorrelation), long term bonds are adventure gratis to long term investors fifty-fifty though their short-term mean-variance properties human face awful.
Gold probable has a similar profile. Gold prices instruct upwards together with downward inwards the brusk run. But relative prices mean-revert inwards the long run, thence the long run adventure together with brusk run adventure are probable quite different.
Second, deeper, Greg forgot the average investor theorem. The average investor holds the value-weighted portfolio of all assets. And all deviations from marketplace position weights are a naught amount game. I tin forcefulness out solely earn positive alpha if somebody else earns negative alpha. That's non a theorem, it's an identity. You should solely concord something unlike than marketplace position weights if yous are identifiably unlike than the marketplace position average investor. If, for example, yous are a tenured professor, thence your income flow is less sensitive to stock marketplace position fluctuations than other people, together with that powerfulness bias yous toward to a greater extent than stocks.
So, how does Greg analyze the need for gold, together with create upwards one's heed if he should concord to a greater extent than or less than marketplace position average weights? With mean-variance analysis. That's an instance of the answer, "I diverge from marketplace position weights because I'm smarter together with amend informed than the average investor." Now Greg for certain is smarter than the average investor. But everyone else thinks they're smarter than average, together with one-half of them are deluded.
In whatever case, Greg isn't smarter because he knows mean-variance analysis. In fact, sadly, the contrary is true. The start employment laid yous practise inwards whatever MBA course of report (well, mine!) makes clear that plugging historical agency together with variance into a mean-variance optimizer together with implementing its portfolio advice is a terrible guide to investing. Practically anything does better. 1/N does better. Means together with variances are poorly estimated (Greg, how close a criterion error?) together with the calculation is quite unstable to inputs.
In whatever case, Greg shouldn't receive got phrased the question, "how much gilded should I concord according to hateful variance analysis, presuming I'm smarter than everyone else together with tin forcefulness out turn a profit at their expense yesteryear looking inwards this crystal ball?" He should receive got phrased the question, "how much to a greater extent than or less than the marketplace position average should I hold?" And "what makes me unlike from average to practise it?"
That's particularly truthful of a New York Times op-ed, which offers investment advice to everyone. By definition, nosotros can't all hold to a greater extent than or less gilded than average! If yous offering advice that H5N1 should buy, together with concord to a greater extent than than average, yous ask to offering advice that B should sell, together with concord less than average.
I don't come upwards downward to a substantially unlike respond though. As Greg points out, gilded is a tiny fraction of wealth. So it should last at most a tiny fraction of a portfolio.
There is all this fighting close gold, guns, ammo together with cans of beans. If yous recall close gilded that way, you're thinking close gilded every bit an out of the coin pose pick on calamitous social disruption, including devastation of the entire fiscal together with monetary system. That powerfulness justify a unlike answer. And it makes a fighting of feel why gilded prices are upwards piece TIPS betoken niggling expected inflation. But yous don't value such options yesteryear one-period agency together with variances. And yous notwithstanding receive got to recall why this pick is to a greater extent than valuable to yous than it is to everyone else.
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