Official Shiny Things thread—Part III

[fuddlebox]

The predicate is most unlikely, but the answer is no direct impact. Why should a quotation currency of a globally traded, non-currency asset matter as long as the currency is convertible? Do you (or does anyone else) have any problem buying and selling stocks and other assets that happen to be quoted in Hong Kong dollars, British pounds, euro, and Japanese yen?

Hi BBC, In relation to the USD devaluing, am wondering if in practical terms this simply means that if a stock (say IWDA) which is quoted at say USD 50. If the USD devalues by 10%, would this mean that the quoted price then becomes USD 55? This is a very simplistic example of course.

Asking cos there was previous mention of how when we purchase stocks we are buying the underlying asset which happens to be denominated in a certain currency. Thus, since the value of the asset doesn’t change, would any currency movement be automatically reflected in the price?

 

[sydznnl]

The fund managers simply buy more shares of stock with the net dividends, exactly what you would do presumably. Over time their additional share purchases should increase the value of each fund share, yes, although of course that’ll depend on the value of the increasing shareholdings themselves — which in turn depends in part on dividend distributions, also a variable.

Hi BBC/Others. Just to clarify, so we wont receive an additional/fractional unit of ETF over time?

 

[Shiny Things]

Hi BBC/Others. Just to clarify, so we wont receive an additional/fractional unit of ETF over time?

Correct. The value of the ETF units you already own goes up, instead.

Hi Shiny Things, I have finished reading the book Rich by Retirement. Any further book recommendations for someone who's interested in pursuing a career in the asset management industry?

Sent from Google PIXEL 3 XL using GAGT

Oh, good question—it depends which asset class you've got your eye on. The pre-reading for, say, equities, is going to be different from bonds, is going to be different from commodities...

Just a thought,what if people distrust USD and it stops becoming the reserve currency in future, how will this impact stock assets denominated in USD?

They'll go up. Weaker USD = assets denominated in USD will go up in USD terms.

Like BBCW, though, I think this is wildly unlikely. We've just had the biggest market standstill of the last ten years, and the USD has gone up because people literally cannot get enough of US dollars, despite the Fed running the printing presses and making all the financial Calvinists scream bloody murder.

 

[BBCWatcher]

Weaker USD = assets denominated in USD will go up in USD terms.

And consequently, second only to U.S. Treasury Inflation Protected Securities (TIPS), if you're worried about U.S. dollar inflation -- you shouldn't be, but if -- a well diversified, low cost stock index fund should be an excellent inflation hedge.

Like BBCW, though, I think this is wildly unlikely. We've just had the biggest market standstill of the last ten years, and the USD has gone up because people literally cannot get enough of US dollars, despite the Fed running the printing presses and making all the financial Calvinists scream bloody murder.

Fiscal policy is quite aggressive, too, although the U.S. federal government must now send lots of cash to states and municipalities since almost none of them can run budget deficits. One fairly straightforward way to do it is to match state and municipal tax revenues in some ratio, preferably with a bonus match if the tax meets a progressivity standard.

 

[kennycancan]

Oh, good question—it depends which asset class you've got your eye on. The pre-reading for, say, equities, is going to be different from bonds, is going to be different from commodities...

I am more inclined towards equities. But I'm open to any that is highly recommended!

 

[Shiny Things]

And consequently, second only to U.S. Treasury Inflation Protected Securities (TIPS), if you're worried about U.S. dollar inflation -- you shouldn't be, but if -- a well diversified, low cost stock index fund should be an excellent inflation hedge.

A good way I’ve found to distinguish people who are actually concerned about inflation from goldbug cranks is to suggest buying TIPS (note, this is not Singapore-specific—Singapore doesn’t have an inflation-linked bond market, and this has always bugged me a bit).

People who actually care about inflation will reply with “oh, an investment that tracks inflation? That’s exactly what I need”; and then you can dig into whether they really need an inflation-indexed investment or just a bigger equities allocation.

Cranks will come back with something along the lines of “BuT InFlAtIoN StAtIsTiCs ArE LiEs, TiPs ArE a ScAm, AlSo BuY gOlD”, and that’s when you know to start mashing the mute button.

 

[SpeedingBullet]

A good way I’ve found to distinguish people who are actually concerned about inflation from goldbug cranks is to suggest buying TIPS (note, this is not Singapore-specific—Singapore doesn’t have an inflation-linked bond market, and this has always bugged me a bit).

People who actually care about inflation will reply with “oh, an investment that tracks inflation? That’s exactly what I need”; and then you can dig into whether they really need an inflation-indexed investment or just a bigger equities allocation.

Cranks will come back with something along the lines of “BuT InFlAtIoN StAtIsTiCs ArE LiEs, TiPs ArE a ScAm, AlSo BuY gOlD”, and that’s when you know to start mashing the mute button.

Have there been goldtards in here before? Haven't really seen one

 

[Johnpierpontmorgan]

Just a thought,what if people distrust USD and it stops becoming the reserve currency in future, how will this impact stock assets denominated in USD?

Nominal value will help to offset against some stagflation
But real value of owning equities is detrimental during such episodes
Best timeframe to reference is the 70s period, the only reason why fed can hold interest rates so low is because the economy is deleveraging while Fed is printing to offset that deflation, hence inflation is mild at best
According to the quoted description, should that occur, There will be a return of stagflation should countries gradually move away from dollar, central bankers have to raise interest like volcker did, rates play a function in all asset prices from stocks to properties.
The market is complex and so it should never be viewed so one dimensional like this bbc guy (lol) if usd fall 10%, obviously overnight won’t affect the etf prices with the same magnitude but what are the other repercussions in the medium term. how does one event reverberate across different asset classes and fed policy actions next.

TLDR version: it will hurt your portfolio in real terms, nominal terms u may do just fine but still negative depending on your entry price. Stocks is a better hedge than cash in such scenario, so tread safely and react accordingly to major shifts in policies and markets. For beginners, the traditional way ST advice still works in conventional times for the past 50 years till today

 

[cassowary18]

A good way I’ve found to distinguish people who are actually concerned about inflation from goldbug cranks is to suggest buying TIPS (note, this is not Singapore-specific—Singapore doesn’t have an inflation-linked bond market, and this has always bugged me a bit).

People who actually care about inflation will reply with “oh, an investment that tracks inflation? That’s exactly what I need”; and then you can dig into whether they really need an inflation-indexed investment or just a bigger equities allocation.

Cranks will come back with something along the lines of “BuT InFlAtIoN StAtIsTiCs ArE LiEs, TiPs ArE a ScAm, AlSo BuY gOlD”, and that’s when you know to start mashing the mute button.

Genuine question: is there a place for gold in a well-diversified portfolio? Ray Dalio's All-Weather Portfolio has a small gold component in it.

 

[BBCWatcher]

Genuine question: is there a place for gold in a well-diversified portfolio?

Sure, there's a place. If you're holding any well-diversified, low cost stock index fund such as IWDA or VWRA then a tiny sliver of that fund includes gold mining stocks. As I write this, 0.13% of IWDA is invested in Newmont. There's another 0.11% in Barrick Gold, 0.03% in Freeport McMoRan, 0.03% in Agnico Eagle Mines, 0.03% in Kirkland Lake Gold, and 0.02% in Kinross Gold.

 

[kram62]

Sure, there's a place. If you're holding any well-diversified, low cost stock index fund such as IWDA or VWRA then a tiny sliver of that fund includes gold mining stocks. As I write this, 0.13% of IWDA is invested in Newmont. There's another 0.11% in Barrick Gold, 0.03% in Freeport McMoRan, 0.03% in Agnico Eagle Mines, 0.03% in Kirkland Lake Gold, and 0.02% in Kinross Gold.

Are you implying that holding gold companies equity is equivalent to holding gold commodity itself?

(genuine question, I don't own any gold and am still trying to understand each other's argument in favour or against holding a small gold portion, since there's a lot of different opinions on the topic)

 

[Wishdom]

Are you implying that holding gold companies equity is equivalent to holding gold commodity itself?

(genuine question, I don't own any gold and am still trying to understand each other's argument in favour or against holding a small gold portion, since there's a lot of different opinions on the topic)

Of course they are not equivalent. Their values are highly correlated though.

So when gold price rises, these companies' share prices should typically rise.

Sent from Ilovennp using GAGT

 

[cassowary18]

Sure, there's a place. If you're holding any well-diversified, low cost stock index fund such as IWDA or VWRA then a tiny sliver of that fund includes gold mining stocks. As I write this, 0.13% of IWDA is invested in Newmont. There's another 0.11% in Barrick Gold, 0.03% in Freeport McMoRan, 0.03% in Agnico Eagle Mines, 0.03% in Kirkland Lake Gold, and 0.02% in Kinross Gold.

That's not what I meant lol. I meant having physical gold (gold bars or bullion coins) or gold ETFs (GLD, IAU etc).

 

[BBCWatcher]

I meant having physical gold (gold bars or bullion coins) or gold ETFs (GLD, IAU etc).

First of all, those are the wrong ETFs for non-U.S. persons, at least those who care about U.S. estate tax. IGLN, listed/traded in London, is available....

....But dumb. As an inflation hedge you can do far better with IGIL or even VWRA or IWDA. As a hedge against a zombie apocalypse only something physical in your possession that you can defend works. That's certainly not a fund, and it probably isn't golden anything. Freeze dried food would be much more valuable.

 

[cassowary18]

First of all, those are the wrong ETFs for non-U.S. persons, at least those who care about U.S. estate tax. IGLN, listed/traded in London, is available....

....But dumb. As an inflation hedge you can do far better with IGIL or even VWRA or IWDA. As a hedge against a zombie apocalypse only something physical in your possession that you can defend works. That's certainly not a fund, and it probably isn't golden anything. Freeze dried food would be much more valuable.

If the past 4 months has taught us anything, it's that in an apocalypse it's toilet paper that will be the most valuable possession. But ok...

What happens in the case of "stagflation" then (low growth but high inflation)?

 

[coralsg]

First of all, those are the wrong ETFs for non-U.S. persons, at least those who care about U.S. estate tax. IGLN, listed/traded in London, is available....

....But dumb. As an inflation hedge you can do far better with IGIL or even VWRA or IWDA. As a hedge against a zombie apocalypse only something physical in your possession that you can defend works. That's certainly not a fund, and it probably isn't golden anything. Freeze dried food would be much more valuable.

If I want to buy IGIL, how would one calibrate how much to buy, assuming I also have IWDA, Cash and long dated Bonds.

IGIL : iShares Global Inflation Linked Govt Bond UCITS ETF (London Listing, in USD)
The Fund seeks to track the performance of an index composed of investment grade developed world inflation-linked government bonds issued in local currency.
Total expense ratio : 0.25%
Use of income : Accumulating

Benchmark of IGIL :
The Bloomberg Barclays World Government Inflation-Linked Bond (WGILB) Index measures the performance of investment grade, government inflation-linked debt from 12 different developed market countries.

https://www.blackrock.com/americas-...al-inflation-linked-government-bond-ucits-etf

 

[Shiny Things]

Have there been goldtards in here before? Haven't really seen one

Eh, we get the occasional low-grade goldbuggery, but usually they stay in their thread.

Genuine question: is there a place for gold in a well-diversified portfolio? Ray Dalio's All-Weather Portfolio has a small gold component in it.

I personally don’t think so. Gold’s a pretty terrible investment, modulo the period from about 2001 to 2011. Unless there are people actively buying it, it literally just sits there and costs you money. You’d rather own cash, or short-term bonds.

Are you implying that holding gold companies equity is equivalent to holding gold commodity itself?

This is a fair question, and the answer is that owning gold-mining companies might be the only thing worse than owning gold itself.

Let me give you a little bit of an inside scoop. A big part of gold miners’ business model is hedging their output - locking in the price they receive for their gold, so that they have a guaranteed cash flow whether the gold price is low or high.

And the inside scoop is that gold miners are absolutely ATROCIOUS at hedging. They invariably sell low (when gold prices are low, they sell their forecast production years in advance, at the low prices that prevail at the time) and buy high (when gold prices are high, they unwind their hedges, which involves buying back gold to repay those forward sales and paying sky-high prices for it).

I’ve seen this happen—I’ve been on the other side of it! (ANZ, my first bank I worked at, was a big banker to the gold-mining industry in Australia back in the 2000s). I’ve quoted prices for hilarious five- and ten-year gold structures back in the early 2000s when gold was sub-$400, and I saw those same companies capitulate and buy it all back in the early 2010s when gold was headed to $2,000.

The reason is not because they’re bad traders—it’s because of shareholder pressure. When gold prices are high, shareholders in gold companies want exposure to the gold price. Gold is rocking and rolling, and they want to be part of it; they don’t want their gold stonks to immunize themselves against moves in the gold price, because the shiny yellow rock only goes up, right? So they force the companies to unwind the hedges, buying back all the gold they’ve sold in advance and paying through the nose.

But when gold prices are low, gold investors don’t want their companies to speculate on the gold price. They want them to act like boring utilities—dig the stuff up for $200 an ounce, sell it for $400, lather rinse repeat—so if the company can guarantee that “dig at $200, sell at $400” for ten years into the future, investors will gladly take that, because they’re more concerned about gold dropping further and the company running out of cash. So when prices are low, mining companies are motivated to aggressively hedge, and sell gold in advance of production as much as they can.

This tripped up Anglogold Ashanti bigtime back in the 2000s. Ashanti hedged a huge amount of its forecast production back in 2004, when gold was in the $400s; after they merged with Anglogold a few years later, the combined company unwound nearly the entire hedge book in 2009 and 2010 nearly a thousand bucks an ounce higher.

They’d hedged over two million ounces worth of production.

You do the math.

 

[Shiny Things]

If I want to buy IGIL, how would one calibrate how much to buy, assuming I also have IWDA, Cash and long dated Bonds.

The question is “how aggressively do you want to bet on inflation skyrocketing, and how willing are you to take losses while you wait for your bet to pay off?”. Linker yields are godawful right now; IGIL has a yield-to-maturity of about half a percent, no dividend, and a real yield of minus 0.6 percent—so buying IGIL means you won’t keep up with inflation, you’ll actually trail inflation by about two-thirds of a percent.

Also I’d ask “do you know what you’re buying?”. IGIL is like three-quarters composed of US and UK linkers, so you’re betting on inflation specifically in the US and UK; if inflation in Singapore takes off, IGIL won’t help you much.

 

[BBCWatcher]

If the past 4 months has taught us anything, it's that in an apocalypse it's toilet paper that will be the most valuable possession.

Some "preppers" we are. It turns out there's an ample supply of commercial toilet paper.

What happens in the case of "stagflation" then (low growth but high inflation)?

There needs to be a supply shock of some kind to cause stagflation -- a necessary but not sufficient condition. The classic supply shock was an oil price shock, but obviously that's not happening right now. Even with COVID-19, which has certain supply shock aspects, we're really not seeing that since it's much more a demand shock.

The question is “how aggressively do you want to bet on inflation skyrocketing, and how willing are you to take losses while you wait for your bet to pay off?”.

Yes, the cost of this most effective inflation hedge seems quite high right now.

Also I’d ask “do you know what you’re buying?”. IGIL is like three-quarters composed of US and UK linkers, so you’re betting on inflation specifically in the US and UK; if inflation in Singapore takes off, IGIL won’t help you much.

No, it'll still help quite a lot. Singapore is a small, open economy heavily reliant on imports, and with a currency well managed as a loose peg to a trade-weighted basket of currencies. Unfortunately the Monetary Authority of Singapore doesn't issue any real return bonds, so the best available, non-exotic, real return bond instrument is probably IGIL (or a U.S. domiciled counterpart for U.S. persons). No, the currency basket isn't exactly the same, but it's the best we've got.

I don't think anyone should run out and buy IGIL since most investors will hedge against inflation on a long-term basis perfectly well with the typical, low cost, global stock index funds. But if you really want to hedge against inflation, and if you're willing to pay for the hedge (since it's not terrifically priced right now -- evidently there are lots of people and organizations that fear everything), then IGIL is the best vehicle available.

 

[highsulphur]

Eh, we get the occasional low-grade goldbuggery, but usually they stay in their thread.

I personally don’t think so. Gold’s a pretty terrible investment, modulo the period from about 2001 to 2011. Unless there are people actively buying it, it literally just sits there and costs you money. You’d rather own cash, or short-term bonds.

This is a fair question, and the answer is that owning gold-mining companies might be the only thing worse than owning gold itself.

Let me give you a little bit of an inside scoop. A big part of gold miners’ business model is hedging their output - locking in the price they receive for their gold, so that they have a guaranteed cash flow whether the gold price is low or high.

And the inside scoop is that gold miners are absolutely ATROCIOUS at hedging. They invariably sell low (when gold prices are low, they sell their forecast production years in advance, at the low prices that prevail at the time) and buy high (when gold prices are high, they unwind their hedges, which involves buying back gold to repay those forward sales and paying sky-high prices for it).

I’ve seen this happen—I’ve been on the other side of it! (ANZ, my first bank I worked at, was a big banker to the gold-mining industry in Australia back in the 2000s). I’ve quoted prices for hilarious five- and ten-year gold structures back in the early 2000s when gold was sub-$400, and I saw those same companies capitulate and buy it all back in the early 2010s when gold was headed to $2,000.

The reason is not because they’re bad traders—it’s because of shareholder pressure. When gold prices are high, shareholders in gold companies want exposure to the gold price. Gold is rocking and rolling, and they want to be part of it; they don’t want their gold stonks to immunize themselves against moves in the gold price, because the shiny yellow rock only goes up, right? So they force the companies to unwind the hedges, buying back all the gold they’ve sold in advance and paying through the nose.

But when gold prices arelow, gold investors don’t want their companies to speculate on the gold price. They want them to act like boring utilities—dig the stuff up for $200 an ounce, sell it for $400, lather rinse repeat—so if the company can guarantee that “dig at $200, sell at $400” for ten years into the future, investors will gladly take that, because they’re more concerned about gold dropping further and the company running out of cash. So when prices are low, mining companies are motivated to aggressively hedge, and sell gold in advance of production as much as they can.

This tripped up Anglogold Ashanti bigtime back in the 2000s. Ashanti hedged a huge amount of its forecast production back in 2004, when gold was in the $400s; after they merged with Anglogold a few years later, the combined company unwound nearly the entire hedge book in 2009 and 2010 nearly a thousand bucks an ounce higher.

They’d hedged over two million ounces worth of production.

You do the math.

Sounds like oil producers and refiners