Gold Daily Declines of 2.5% or More

Gold’s near 4% decline today should serve as a reminder to investors that although gold may help defend a portfolio against a weakening currency, that certainly doesn’t mean it can’t trade with significant volatility.  Below is a chart showing the days since 2009 that Gold has declined by 2.5% or more.  There have been 18 such days over that timeframe.

Gold Daily Declines

To the extent that investing is about matching one’s future stream of liabilities (i.e. purchasing needs), Gold investors should be aware that they are actually taking a huge risk relative to their liabilities stream.  That’s because aside from the bitcoiners out there who are planning to make all their future purchases in Satoshies, the rest of Americans are likely to continue making future purchases in dollars.  It’s reasonable to take the view that these dollars will lose value over time (they always have) but owning gold is a highly concentrated bet on this idea.

When you invest in Gold you effectively disconnect yourself completely from the value of the dollar, which means that if you’re pricing Gold in dollars ($1500 per ounce) the value of the asset as expressed in dollars is likely to be highly variable.  All asset prices consist of two core components: 1) its value in relation to the unit of measurement (currency) and 2) its intrinsic hedonic/economic value.  By owning gold or any foreign assets for that matter the investor is implicitly taking risk on both fronts.  So it would follow that the ride could be a bumpy one.

By contrast a difference between owning Gold and a share of equity is that as long as US companies still conduct business in US dollars, an investor is at least still invested in an asset generating value that is somewhat attached to the value of the dollar and therefore not straying too far from their liabilities stream.  The upside is that even in the worst case scenario that global fiat regimes totally fall apart, there is nothing to say that Walmart can’t start doing business in Satoshies, Globals, or whatever other currency takes its place.

Fixed Income ETF Growth Since 2000

Over the past decade there have been two major trends in the asset management industry:  the growth of ETFs and the shift in asset allocation away from Equities towards Fixed Income.  Below are some charts that use data from the Fed’s Flow of Funds report to look at both of those trends.

The first set of charts show the growth of ETFs relative to mutual funds.  In 2000 only 2% of equity assets in listed funds were in ETFs and Fixed Income ETFs didn’t even exist.  Today 17.7% of equity assets and 5.5% of Fixed income assets are in ETFs.  Combined ETFs hold 12.5% of assets in listed funds–$1.3T in ETFs vs. $9.2T in open end mutual funds (Note: I excluded closed end funds to make this easier on myself).

ETF Share of Equity


ETF Share of Fixed Income

Since I had the data from the first two charts, I figured it would be interesting to put together the chart below, which quantifies how much share Fixed Income has taken from Equities in the last decade.  In 2000 Fixed Income made up only 25% of the assets in listed funds.  Thanks to the financial crisis, that number has grown to 40% today overall (but only 17% of ETF assets are in Fixed Income).  It’s worth noting that a standard balanced portfolio is 60% Equities 40% Fixed Income, which means Fixed Income allocations may be reaching a tipping point.

FI Share of Listed Fund Assets