Replies to post #31745 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Here's a inflation adjusted gold price graph I made some time back, so a bit out of date now, but not excessively so



On that basis gold might not be that expensive nor that cheap.

As the Dow measured in the price of gold is way down, then maybe there is still some considerable Bull potential left

Around 70% of the UK FT100's index earnings arise from overseas. With the real value of currency relative to a gold standard way down, if in gold terms the pound/dollar is worth half of what it used to then potentially earnings might be double what they used to be in domestic currency terms.

Im largely OUT currently and I've been thinking that the present time could be a good time to get into LT's (Long dated treasuries or Gilts as we call them in the UK). WHAT! I hear you say - I know, at 0.5% base rates might sound a bit mad with only one way to go etc., but that's not entirely true. Our LT's currently are paying around 4.5% yield, Japan's pay around half that so LT's could still double in price. And if you blend LT's with Cash you're more deflation/inflation neutral.

Say I invest $50 in each of cash and LT's. Combined income is 2.25%, better than nothing (literally) that cash earns.

For example sake I might buy a 4.5% coupon 30 year gilt at $1. Investing $50 in each of cash and gilts. If interest rates rise and bond yields rise to an exceptionally high 18% then the $50 originally invested in gilt might see capital value decline down to $12.50, whilst the cash side stays at $50. Rebalancing that total $62.50 back to equal long/cash amounts has me buying $18.75 more LT's when the yield is 18%. So overall income levels rise some.

18% yields don't hang around too long unless conditions are exceptionally bad, so a rebound back down to 9% yields might not be too long in the making. So the $31.25 invested in each of LT's and Cash see's the LT's rise to $61.50 whilst the cash stays at £31.25 for a combined total of $93. With the income likely no loss would be apparent relative to the original investment amount even though LT yields are twice the level they were at the time of starting.

Should we not see such high inflation/rising interest rates, but instead deflation and a Japan like condition of 2% LT yields, then not only might the LT's double in price, but a higher 4.5% LT yield would have been locked in at. Alternatively sell out at around a 50% overall capital gain.

If nothing much happens other than sideways range over a period of time, then at least there's around a 2.5% income coming in.

Rather than a two way split however, a three way to include some growth potential and income (stocks) would make a nice overall blend at around the current time IMO.

[lifo]

Hi karw, ... Not sure why you would say that Gold is cheap?

I am sorry, that chart didn't post the way it looked in the preview. With Zig-Zag shown, the relative value of gold to oil would have been more compelling.

The first drop is the oil spike, was that GS or Lehman pushing that oil price so high?

That's an interesting thought. Of course, there is no market manipulation :)

I don't own oil or energy right now; however, I do own a couple of gold stocks.

Best regards,

Jack