Permanent Portfolio w/ Gold Miners (?)

[steve r]

I have a 403b account with Fidelity that I am trying to replicate the Permanent Portfolio with as best I can. I know it is impossible to do this exactly.

Fidelity has a gold miner sector fund (FSAGX). Miner’s is not gold – and are much more volatile. Peak to trough miners lost twice as much as gold in 2008-9. Gold was up in 2008, but fell sharply in early 2009. Miners act like a cross between stocks and a levered gold play.

To reduce this volatility - my thought is to increase other assets and reduce gold … a 30/30/30/10 split stock / long treas. / 2 year / miners

Using Simba’s data, back to 1985 (& Vanguards Precious Metal Fund) & having some international stocks as done in my PP Roth (LCB & Tot. Dev. Int.) I found:

........................CAGR / SHARPE / SORTINO / down 2008
4X25 w/GLD........ 8.49 / .66 / 1.48 / -1.3
30/30/30/10........ 9.60 / .67 / 1.46 / -8.6
30*/30/30/10........ 9.48 / .74 / 1.65 / -6.4


*stock portion in FFNOX (a 4 in one index of LCB(500), extended market, int., bonds). FFNOX has bonds, being 30% in FFNOX only increases direct stock holdings to 25.5%. I think this is important because miners are stocks. It will also be slightly easier to manage. It is my favorite option.

Similar results are found if I use total international w/ emerging markets and TSM (not LCB) but w/ higher returns.

Thoughts

One side thought related to another thread – Bernstein’s comment that the correlation between stocks and gold will approach one because gold is now tradable is not borne out by the annual correlation between stocks and miner stocks (that have always been tradable) that sits at around .24 since 1985. Thus I think miners are as much a levered gold play as anything else (stocks and gold same period is -.17 annual correlation) …

I am not a big fan of holding the hard asset outside the 403b as rebalancing is complex. My 403b account is frozen to new investments (my school switched to new plan sponser) and cannot be rolled out except to the new plan sponser.


THANKS.

[craigr]

I'm sorry but mining stocks do not serve the same purpose as gold bullion in the Permanent Portfolio. The gold bullion acts a a currency diversifier against the cash and bond components. Also it acts as an insurance element against other problems that can roil markets. Miners do not do this. Also, gold is one of the last assets you want to put in tax-deferred because it is not paying interest or dividends so it has no income to shelter. Finally, as an emergency asset, you want to be able to access gold quickly if needed and having it inside a tax-deferred vehicle normally makes that impossible.

Best thing would be to access and hold the gold outside of your tax-deferred savings if you are able and hold the other components inside the tax-deferred with the best funds you have access to.

[nisiprius]

Expressing no opinion here myself on a) gold, or b) precious metals equity, I just want to call attention to an essay by William J. Bernstein, written in 2005, about precious metal equity, entitled The Longest Discipline. I won't try to summarize, it's a short article.

[steve r]

I'm sorry but mining stocks do not serve the same purpose as gold bullion in the Permanent Portfolio. The gold bullion acts a a currency diversifier against the cash and bond components. Also it acts as an insurance element against other problems that can roil markets. Miners do not do this. Also, gold is one of the last assets you want to put in tax-deferred because it is not paying interest or dividends so it has no income to shelter. Finally, as an emergency asset, you want to be able to access gold quickly if needed and having it inside a tax-deferred vehicle normally makes that impossible.

Best thing would be to access and hold the gold outside of your tax-deferred savings if you are able and hold the other components inside the tax-deferred with the best funds you have access to.

Thanks Craig - I read many of you other postings . Many miners have large gold price exposures in a variety of currencies. I think economics justifies some correlation between expected gold prices and miners performance. The correlation may not always hold though ... thus I view your comments on the insurance/emergency aspect of having the real hard stuff as my real problem - I cannot get around this with my existing Fidelity money.

[rmelvey]

Buying gold miners as a replacement for gold in the PP won't do the job. Gold mining is extremely capital intensive and the industry needs healthy capital markets to function, whereas gold thrives off of imbalances in the capital markets.

Don't put cheese on your broccoli. Just eat the broccoli

[craigr]

Thanks Craig - I read many of you other postings . Many miners have large gold price exposures in a variety of currencies. I think economics justifies some correlation between expected gold prices and miners performance. The correlation may not always hold though ... thus I view your comments on the insurance/emergency aspect of having the real hard stuff as my real problem - I cannot get around this with my existing Fidelity money.

The problem is that the miners can do things like sell gold forward, etc. So they really are not a substitution for gold bullion in the portfolio (or as a hard asset in general) as they may not really benefit from a sharp rise in gold prices for instance. Mining stocks also are stocks, and are affected by the same problems that can swamp the overall market.

So really precious metals equity is just not the same as gold bullion...

[steve r]

Thanks all.

The longest discipline article was particularly eye-opening. Using miners with this knowledge makes me have a very weak hand - unlikely to stay the course. Best to stay away.

On a personal level - I will be sticking with the PP in my Roth (about 1/2 my investable wealth) and a variable (more traditional) portfolio elsewhere. In time, I expect to be able to rollover (out) some wealth so I can add to my PP portion.