OK. If I got $100K and I put $50K in cash, like cold cash. And $50K in some gold instrument (not leveraged). Would that effectively make me neutral towards dollar vs. gold movement? Would that make me neutral towards inflation? How can I put together a very simple portfolio that would make me neutral against dollar declines vs. gold, inflation and other currencies? OK, you can take thease one at a time.
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stupid question
- Thread starter sunnyskies
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Quote from sunnyskies:
OK. If I got $100K and I put $50K in cash, like cold cash. And $50K in some gold instrument (not leveraged). Would that effectively make me neutral towards dollar vs. gold movement? Would that make me neutral towards inflation? How can I put together a very simple portfolio that would make me neutral against dollar declines vs. gold, inflation and other currencies? OK, you can take thease one at a time.
Not stupid. Hard, i'm talking years at business school hard. here's a try.
1) The rate of change of dollar vs everything else is not 1:1. So going 50k to 50k will not hedge you because the ratios do not work out that way.
for illustration's sake, assume inflation is 3%, to hedge yourself using gold, you'd need to know how gold compares with inflation. If gold is 1:1 with inflation (meaning if inflation is 3%, gold will go up 3%) we're good to go.
here's the problem, the ratio is not 1:1 so your asset mix cannot be 50k to 50k
If you were using options on the dollar and gold I would've answered that you'd go with a delta neutral strategy.
Even then, gold is a traded commodity with speculation, hedging and many many of its own nuances.
A simple action would be to use inflation adjusted bonds, but thats no answer to your question. And it doesn't do anything about the dollar vs other currencies.
no simple answers.
The truth is that GOLD is not a perfect inflation hedge. Because much of the movement of gold is based on non inflationary issues... such as speculation and demand for metals.
A better hedge on inflation are TIPS.. which are inflation protected bonds.. I believe they give u 100 basis points plus inflation.
IMHO if u wanna hedge against inflation there are much safer ways than gold.
--MIKE
A better hedge on inflation are TIPS.. which are inflation protected bonds.. I believe they give u 100 basis points plus inflation.
IMHO if u wanna hedge against inflation there are much safer ways than gold.
--MIKE
OK, let's see here. We have US dollar cash - say $100K. We're trying to merely preserve this chunk of cash by protecting it from certain pressures, correct?
The major pressures that I see are: inflation and foreign exchange rates. Anyone see any other "pressures"?
So we need to protect against those two pressures. We can protect against inflation by generating an interest rate which consistently beats inflations (for example someone suggested TIPs bonds). And perhaps we can somehow protect against FOREX pressures by hedging with the US Dollar Index (which values USD vs. a basket of other currencies I believe).
I will appreciate any feedback.
The major pressures that I see are: inflation and foreign exchange rates. Anyone see any other "pressures"?
So we need to protect against those two pressures. We can protect against inflation by generating an interest rate which consistently beats inflations (for example someone suggested TIPs bonds). And perhaps we can somehow protect against FOREX pressures by hedging with the US Dollar Index (which values USD vs. a basket of other currencies I believe).
I will appreciate any feedback.
Basically, you have to talk in real rates of change.
If you want to put 50% of 100K in a money market in dollars; you have to:
1) Take the nominal interest rate you receive on that money market, substract the YoY CPI, this will give you your real rate of return on that particular leg of the hedge.
2) Decide how correlated inflation is to gold. I would say it is a very tough deal, because gold can move enormously Yoy, over 20% sometimes (take 2000 / 2001 for example). I would say you need at least 40 years of data to figure out how much unit of gold per real term basis point you need to hedge yourself in a 90% confidence interval.
The foreign exchange element is irrelevant as Gold is priced in dollars.
If you want to put 50% of 100K in a money market in dollars; you have to:
1) Take the nominal interest rate you receive on that money market, substract the YoY CPI, this will give you your real rate of return on that particular leg of the hedge.
2) Decide how correlated inflation is to gold. I would say it is a very tough deal, because gold can move enormously Yoy, over 20% sometimes (take 2000 / 2001 for example). I would say you need at least 40 years of data to figure out how much unit of gold per real term basis point you need to hedge yourself in a 90% confidence interval.
The foreign exchange element is irrelevant as Gold is priced in dollars.
Quote from sunnyskies:
OK, let's see here. We have US dollar cash - say $100K. We're trying to merely preserve this chunk of cash by protecting it from certain pressures, correct?
The major pressures that I see are: inflation and foreign exchange rates. Anyone see any other "pressures"?
So we need to protect against those two pressures. We can protect against inflation by generating an interest rate which consistently beats inflations (for example someone suggested TIPs bonds). And perhaps we can somehow protect against FOREX pressures by hedging with the US Dollar Index (which values USD vs. a basket of other currencies I believe).
I will appreciate any feedback.
If you're in the US and plan to remain in the US then you don't need to worry about hedging exchange rates. Just beat the inflation rate and you will be fine.
Quote from Trend Fader:
The truth is that GOLD is not a perfect inflation hedge. Because much of the movement of gold is based on non inflationary issues... such as speculation and demand for metals.
A better hedge on inflation are TIPS.. which are inflation protected bonds.. I believe they give u 100 basis points plus inflation.
IMHO if u wanna hedge against inflation there are much safer ways than gold.
--MIKE
Does TIPS real value suffer from a change in interest rates like any other bond or not ? If the answer is yes, liquidity would be compromised. Is available on the market any form of possible hedge opportunity regarding such fluctuations ?
Here is the link to the government web site for tips: http://www.publicdebt.treas.gov/sec/seciis.htm
Check out the tax implications at the bottom of the page..they don't sound very appealing.
It seems there are also inflation adjusted savings bonds.
Check out the tax implications at the bottom of the page..they don't sound very appealing.
It seems there are also inflation adjusted savings bonds.
So you think that if the dollar takes a 30% hit against other currencies but I live in US and earn rates that beat inflation.... that shouldnt bother me? Hmm, interesting viewpoint.
Quote from sunnyskies:
So you think that if the dollar takes a 30% hit against other currencies but I live in US and earn rates that beat inflation.... that shouldnt bother me? Hmm, interesting viewpoint.
Yes, if you live in a USD universe and everything that you are ever going to spend money on is priced in US Dollars then you do not have to hedge against dollar depreciation.