Bogleheads

[daniel]

I am considering more and more to go towards a permanent portfolio but the one item that still bugs me is gold.

In particular, how should one invest in gold. I see two possibilities:

1) buy gold coins or bullion. This is recommended by HB but it seems very involved. Moreover, where do you store it? for how much? And when you sell it, do you need to pay the 28% collectables tax?

2) buy GLD or IAU etf (any preference?). But now, we need to trust Statestreet or iShares that they really hold the gold, and that in periods of real economic or political distress that the etf shares maintain their value. Secondly, it seems that to pay off the 0.4 % fee the etf's sell part of their gold which means that the shares slowly get dilluted (i.e. without new shares, 1 share is first 0.1 ounce of gold, but after 10 years only 0.095 ounces). Moreover, I guess one needs to pay the 28% collectibles tax on any gain (and fee) -- how would that work in a 401k account?

All in all, it still seems much harder to invest in gold than in other assets; Perhaps others have suggestions for reasonable replacements, like a precious metal fund, or gold mining ETF, perhaps commodity futures?

Thanks for any feedback!

[daniel]

A second problem that prevents me from investing in a permanent portfolio now is that it seems to me that long term bonds and gold had quite a run up recently (while stock is beaten down).

I currently only have mostly stocks and bonds and only a small percentage of long bonds. Should I really sell some of that to buy more gold and long bonds now? It seems like a bad time to do this and if anything I should be loading up on stocks.

I wonder what HB would recommend in the current market situation.
Any advice or insights are appreciated

[Swivelguy]

[Roy]

[Roy]

[Roy]

[MediumTex]

Gold would only be taxed when you sell (assuming you have a gain). There should be a portion of the gold in the PP that is never sold, since you should only be buying and selling gold to rebalance. Thus, in my view, gold is the best asset of the PP to have OUTSIDE the PP, based upon the idea above and the fact that gold throws off no income.

People say all kinds of crazy stuff about GLD and IAU, but both ETFs trade almost in lockstep, which tells me that the market has no preference for one over the other, which also suggests that it's a pretty honest game. I own some of both.

Physical gold is, of course, best for a core gold position that you don't believe you will ever need to sell to rebalance the portfolio. The short course in physical gold is this: South African krugerrands will give you the most gold for your dollar, American Eagle coins are probably the most popular in the U.S. (and if I could only have one coin it would probably be this one), but the premium is larger on those. In between are Canadian Maple Leafs, which are usually priced in between the two other coins. Owning gold coins is fun. If you choose to hold physical gold, some people like to own several different types of coins (or a little bullion for that matter).

You can hold U.S. coins (an Maple Leafs, since they are 24k gold) in an IRA, but the expenses and trustee requirements make it impractical, IMHO.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Wonk]

[daniel]

[daniel]

[MediumTex]

[daniel]

I have been playing a bit using Simba's backtesting spreadsheet. If I put in the PP numbers, I get indeed that from 1972-2008 the PP has a CAGR of 9.62% which is not bad at all ($10.000 became $298.840).

However, in the period 1985-2008 the results are much worse, namely a CAGR of 8.19% where $10.000 became $66.165.

Contrast this with a simple slice&dice: 10% TSM, 10% Large Value, 10% small value, 10% reit, 20% total. Intl., 20% ST bonds, 20% TIPS.
This has CAGR of 9.72% where $10.000 became $92.577
This portfolio also seemed to have weathered the 2 bear markets quite well too without having to resort to gold

This is all in good spirit -- I can see the logic of the PP but I suspect it may well do quite a bit worse than the rest of the market, somewhere between bonds and stock probably. Looking back from 1972 to 2008 kind of favors the gold rush in the beginning of the 70's and the recent long bond increase.

[newbie001]

"This is all in good spirit -- I can see the logic of the PP but I suspect it may well do quite a bit worse than the rest of the market."

Might very well be true, that's the price to pay.

I've noticed the same thing before about the lower returns the of last 15 years or so compared to the 15 before that. But if you're of a pessimistic frame of mind, and would rather get a reasonable rate of return with a high measure of safety, the PP can still be for you. I know it is for me, I plan to make it 50% of my overall portfolio. If I earn a 5% real return on my investments over my life, I'll be happy. 8.2% gives me a shot at that without taking the chance of huge losses.

[daniel]

[captain3d]

Great thread. I have read about a 1/3 of it and I am left wondering where investment property would fall in the four categories if you had to force it somewhere.

I guess generally to the inflation side especially if you hold a mortgage. Gold is there for extreme situations so I guess again it would be more like a stock than anything else. Tends to go up in value when stocks go up?

Thoughts?

cheers ...phil

[Swivelguy]

As far as owning physical gold goes, as insurance against social/political apocalypse, there's been about 5 billion ounces of gold mined in the history of the world. So, if you own just 1 ounce in your physical possession, when civilization collapses, you'll at least be wealthier than the average human!

[Roy]

[Wonk]

[MediumTex]

[Lbill]

MediumTex - Yes, I agree. I remember having dinner conversation two or three years back with a learned gentleman who assured me that the Fed had solved the problems of monetary management and was firmly in charge and capable of handling any financial troubles that might come our way. No need to own gold. I was amazed that anybody could have such naive faith in the establishment. Never talked to that gentleman again, but I reckon he'd be willing to take those words back - if he even remembers having said them. Stupid is as stupid does. . .
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[stratton]

[MediumTex]

Here is another suggestion for people who are scared to jump into the pool with the PP because you think one of the asset classes can't possibly go any higher (LT treasuries right now).

As suggested earlier, it makes sense to start small with the PP concept, just to make sure you are comfortable with it. You MUST be comfortable with it. I like it, craig likes it, other posters here like it, HB liked it, but please...don't believe us or anyone else. Make sure YOU understand it.

So let's say you have a $100k portfolio and want to set up a PP but are certain that LT treasuries have nowhere to go but down. You've already decided to put $40 of your portfolio in the PP allocation, but the LT treasury piece just bugs you.

Consider this approach: Take the $40k you have marked for the PP, and rather than buying $10k in all four asset classes at once, buy $2500 in each aset class today, then in a month take another $10k and divide it among the asset classes in the amounts necessary to restore the 25% x 4 allocation. Do the same for the following months until you have placed the entire $40k into the PP.

By doing this, you're not timing anything, because you are simply rebalancing the portfolio monthly with new contributions over a 3-4 month period.

I believe that HB would say just buy all four asset classes at once and be done with it, but I think that this approach also works, and doesn't really involve market timing.

What I am saying is really just a different take on the starting small concept, but thought it might be helpful.

Yet another way of saying it is to ask yourself the maximum amount you could buy today of the asset class you like least. For most right now it would be LT treasuries. Whatever this amount is, multiply it by 4 and that would be the amount you would put in each asset class of your "starter PP."

The analogy that works for me is to treat the PP like a garden. My job is to plant the plants (put in the money), pull the weeds (rebalance when needed), and WAIT. However much I may want to dig up the plants and see if they are growing okay without my supervision, I can't do that and get the expected results.

In my opinion, it's WAY better to do a small PP and do it according to the 25% x 4 plan than to come up with your own custom PP that relies upon some prediction regarding what the market is likely to do in the future.

Here is a secret about the PP: since it is so simple and can be done using index funds it would be virtually impossible to make any money selling it. I believe that this is one of the reasons that more "experts" don't talk about it. Cuggino is the exception (i.e., he is making money with a variant of the PP concept), and we have already noted how he doesn't actually talk about the PP concept at all when he is on tv. I believe that a lot of PRPFX investors probably don't even know about the PP concept. They were likely led to the fund because of its outstanding returns in recent years and its low volatility.

As always, though, do what is comfortable and makes sense to you.

I am just happy that there is at least one place on the internet that HB's ideas are being discussed and disseminated. He really was a remarkable fellow.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Wonk]

Gotta say I'm not too hip as to how the PP would fare in a Japan-like scenario. Gut instinct tells me LT bonds would do the heavy lifting and cash respectable as CPI numbers would be negative. But it would be tough to figure out if the PP would still be able to pull 5% real returns.

Anyone care to weigh in on their opinion here? Would there be any way to set up a "Japan-centric" PP from 1989-present to see what would happen if an HB die-hard set up his portfolio in Tokyo back then?

What I haven't heard anyone point out yet is the possbility that LT bonds have only temporarily pulled back on an extended bull-market journey north....that would be crazy--but possible. They could continue to make new highs for the next 5-10 years for all we know.

[Roy]

[MediumTex]

[Lbill]

Interesting Article on gold and inflation. The author argues that gold performs well in anticipation of inflation, but does not perform as well during actual inflation - particularly gold stocks. During actual inflation, commodities perform best. Does this suggest it might be a good idea to hold some commodities either as part of PP or as a separate holding to "hedge" inflation?
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[MediumTex]

[daniel]

[Roy]

[Quasimodo]

"I wanted to just mention I found another interesting alternative, the CEF etf where the gold is held segragated and marked in a Canadian bank vault that seems to be much better accounted than GLD or IAU (which have no accountancy at all). One problem seems that it often trades at a premium (currently 17% !!):
http://www.silveranalysis.com/cef-premium/

btw. CEF holds both gold and silver. There is also the GTU fund that just holds gold but it has a 25% !! premium at the moment:
http://www.etfconnect.com/sele....FID=169250

Does anyone have an opinion about CEF and/or GTU ?"

Here's a link to the CEF website: http://www.centralfund.com/

I have CEF along with VT , TST and a MMF in my IRA to approximate a Permanent Portfolio allocation. I like that CEF holds gold and silver, and that they have been around since 1961. I'm interested in anything those more knowledgable than me (which is everybody) have to say about CEF.

John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.

Hafez, poet (1315-1390)

[Rose21]

I'm a believer in CEF. It behaves a little oddly sometimes, failing to track anything I can point to, but over time I've come to live with its little surprises. They cut both ways.

One important difference about CEF is that it probably falls within the definition of a passive foreign investment company (PFIC). There are others on this board that will have more information than I do about PFICs, but I believe the bottom line to be that it qualifies for favorable capital gains treatment whereas GLD and SLV do not. The paperwork for making the election looks hairy, but because I have always traded it within a retirement account, I have not had to deal with that issue.

[Rose21]

Speaking of toilet trips, how about long-term treasuries today? One wild ride.

It's the treasury bonds that scare me--they're entirely outside of anything I recognize as a free market.

[Chastemp]

[Roy]

[Wonk]

[Chastemp]

[MediumTex]

Some of the posts above point out why HB said you can't break the PP apart. The volatility in each asset class, and the non-correlated nature of each asset class, is what makes the whole package safe and stable.

On the subject of the precious metals ETFs other than GLD and IAU, I am surprised that they would command such a premium over the spot price. They are charging more than it would cost to just buy and store your own coins and bullion.

That's strange. If someone can help me understand that I would appreciate it.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

[daniel]

[matt]

Anyone know if Harry Browne consider FDIC-insured brokered CDs to be comparable to U.S. Treasuries? Since there is a secondary market for brokered CDs, they can be sold for rebalancing and prices respond to interest rate changes.

[Swivelguy]

In my (albeit small) PP, I'm using a ladder of 3-year brokered CDs to hold most of the cash portion. A little bit sitting in money market, plus the third of the CDs maturing that year, plus new contributions, ought to be enough to rebalance in all but the most extreme of circumstances. If those extreme circumstances present themselves, you still have that secondary market option.

I think the purpose of the cash portion of the PP is to NOT respond to interest rate changes, but rather to simply sit and earn the short-term interest rate and be available for rebalancing. That's the motivation to keep the duration short and/or to hold to maturity.

[MediumTex]

HB did not advocate CDs.

He believed that in a large scale crisis, treasuries would be given priority over FDIC insured bank deposits. He felt that this would likely take the form of potentially long delays in being paid for FDIC insured losses, where treasuries would likely be repaid on schedule no matter what.

That was his thinking on the matter, and I understand the logic. That said, if CDs are paying higher rates than treasuries I also understand using them as part of the cash holdings. Spreading the CDs across several banks might make sense as well.

Consider Series EE savings bonds as well. Similar rates to CDs, but tax deferral on the earnings until redemption.

***

You know, while we've been sitting around here jabbering the PP has had a couple of really outstanding days.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

I just finished running an analysis of the PP for the period of 1980-2008. Critics of gold are fond of pointing out that it peaked in 1980 and has not yet gotten back to it's inflation-adjusted high, and that it has also lagged the CPI during that time. So I was curious how things would have turned out if you had started your PP in 1980 when gold topped out and became a dog for the next two decades. Here's what I found:

---------TSM-----ST Bond-----LT Bond-----Gold--__---PP-----50%TSM/50%ST
CAGR...9.4%.......7.1%.........10.8%......(-3.5%)......7.6%.........8.8%
SD......17.8%.......4.8%.........12.3%......15.9%........6.9%........9.4%

It does make a difference what time period you examine. At Craigr's website, the returns for PP for the period 1972-2008 compare favorably to 100% TSM, but that includes two bull markets for gold in the 1970s and again since 2002. Looking at PP since 1980 shows it to be barely ahead of ST Treasuries over that period with a Sharpe ratio of 1.1 vs 1.5. So, for the last 28 years, you would have been a lot safer in ST Treasuries with almost as much gain. If you had invested 50% in TSM and 50% in ST Treasuries, you would have a CAGR of 8.8% with an SD of 9.4% which would have been quite tolerable. Hopefully others have had a chance to run these data and can cross-check my results.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[Swivelguy]

[MediumTex]

[newbie001]

The lesson that history teaches (or teaches me anyway) is that the Mad Max apocalypse almost never comes globally, but regional apocalyptic events occur pretty often and economies just fall apart more than one would think. In the last 20 years or so, think about all of the wealth that has been destroyed as a result of economic crises in:

Russia
Mexico
Korea
Japan
Iceland
Argentina
Venezuela
South Africa
Zimbabwe
Iraq
Pakistan

I could add more, but the point is that crazy things happen in the world, and the fact that they haven't happened in the U.S. in a long time doesn't mean that these risks shouldn't be on one's radar. An FDIC sticker on the window of a bank may provide a greater sense of security than is warranted.

The history or wealth is that when political and economic instability begin to be dominant themes in one area of the world, capital flees to safer locales (to the extent that it can be transported). How does it flee? Historically, it has been in the form of gold.



Couldn't agree more with the above points. There are a lot of signs, and there have been for a while, that the U.S. may be in irreversible decline. Gold is good insurance if that decline accelerates.

[MediumTex]

[craigr]

I don't think I can add any more to MediumTex's reply except to say that in 1980 you could have bought 100% LT Bonds and earned 10% CAGR through 2008 (almost identical with 100% TSM) with about 40% less volatility than TSM. Yet in the context of history we know that in 1980 the prime rate was up to 20% and inflation was raging out of control. The chances of anyone wanting to load up on bonds under that environment would be pretty slim. Yet, that would have been a very good thing to have done in hindsight.

It all gets back down to I can pick any date to make or break a case for an investment. Since there are no guarantees with investing, you just have to pick a strategy that you think is reasonable for what your goals are.

Perhaps 2009 is the 1980 from long ago and is a good time for stocks. Or perhaps it's the 1971 and a good time for gold. Or maybe it's 1930 and a good time for bonds. We don't know what is going to happen so that's why one diversifies.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

[Roy]

[stratton]