rebalancing physical

Discussion of the Gold portion of the Permanent Portfolio

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sk55
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rebalancing physical

Post by sk55 » Mon Jun 04, 2012 6:43 pm

hi guys,

just wondering if i have all my gold in physical.  what happens if gold goes to $3000.00 and i have to sell some gold to re balance?

whats the best way to do this?  can i just short GLD for the equal value?  its kind of hassle to goto the vault,  sell the physical and then pay another transaction fee to buy it again.

or is it better to split the gold holding to half etf and half physical? to make it easier to do the re-balancing?


whats your thoughts on this?
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Pointedstick
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Re: rebalancing physical

Post by Pointedstick » Mon Jun 04, 2012 8:39 pm

Shorting GLD sounds like a very very risky plan. Personally I'd split the gold between physical bullion, and a rebalance-friendly ETF. But even if you were all physical, you would want to just sell some gold.
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Greg
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Re: rebalancing physical

Post by Greg » Mon Jun 04, 2012 9:34 pm

I would think that having a half ETF/ half bullion supply would be reasonably useful for both rebalancing purposes and from an expense standpoint.

Rebalancing ETFs I would think would be much easier than physical bullion and would have slimmer bid/ask spreads so you'd lose less in the transactions.

In the short term, I would think also ETFs would be cheaper than purchases a corresponding amount in bullion (at least for smaller investors).

If let's say you were purchases $5000 at a time for gold. You might have 3% premium spread between buy and sell for physical plus if you pay for storage costs. IAU as an ETF for instance is only 0.25% so purchasing $5000 would only be about $12.50 loss per year.

Long term I would think physical bullion would become cheaper.

As a side note, by having physical bullion that you rarely trade and only trade your ETFs for the most part, as gold keeps rising in value, you'd hold onto the big taxable gains of the physical and keep only rebalancing with ETFs which you'd be paying less capital gains on.

Just a thought.
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Re: rebalancing physical

Post by jco » Tue Jun 05, 2012 2:50 pm

If you're early in the accumulation phase I'd just add more to everything else.

Otherwise I always thought 50% ETF was too much and used 30% as an ETF target... In all the back testing I did, I never had to sell off large amounts of physical.
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Re: rebalancing physical

Post by murphy_p_t » Tue Jun 05, 2012 6:18 pm

By virtue of having a significant ETF proxy for gold suggests to me that you see little value in maximizing assets outside of the financial system (within the bounds of the PP). As I recall, having assets outside the financial system was a major reason that HB included physical metal in the PP. Physical metal, under your control, has no counter-party risk.

You can think of the ETF ticker showing up on a brokerage statement as being equivalent to physical metal...until it isn't.

The virtues/drawbacks of gold vs ETFs has been discussed elsewhere on these boards.
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Re: rebalancing physical

Post by BearBones » Tue Jun 05, 2012 8:10 pm

I use GTU for this purpose. Probably safer than GLD, and has tax advantages, as discussed elsewhere (since gold often held in taxable accounts).
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Greg
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Re: rebalancing physical

Post by Greg » Tue Jun 05, 2012 9:04 pm

I would agree that 50% is probably too much in an ETF if you have a sizable portion in gold already. I'm still very much in early accumulation of gold and having ETFs works as a reasonable dollar-cost-averaging method to raise my stake in gold and then buying lumps of physical when I can get enough money to eliminate shipping and handling charges to lower my transaction costs overall.

For those in the more mature stages of the PP, gold having only a small portion in ETFs would probably suffice to still have the liquidity of the ETFs for rebalancing with the safety of physical bullion if things go poorly very quickly.
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