Gold, History and Diversification

Discussion of the Gold portion of the Permanent Portfolio

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craigr
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Re: Gold, History and Diversification

Post by craigr » Thu May 06, 2010 10:10 pm

Pkg Man wrote: Thanks for the advice.  My reasons for holding the stock are that it is expected for management folks to hold a certain amount of company stock, based on your level and salary.  I did not purchase the stock, it was given as part of my compensation over the years in annual awards.  While technically I am allowed to sell, it can in some cases be a career limiting move.  I am hoping for a promotion soon so I don't want to do anything that might lessen that possibility at this time.
Understood. Companies like having employees with skin in the game. One place I worked for would fire you if it was discovered you shorted the company stock for instance.

Yet, a company can go south for many reasons not related to a specific employee. Yet the employee gets punished by the fall in price and maybe getting laid off at the same time after the fallout.

I'm assuming these are stock options and not actual stock shares. If it's actual exercised shares you could theoretically build a collar to insure against losses if you wanted to take on the added expense. But many company option plans specifically prohibit promising shares in this way so it may not be a real possibility unless you actually do hold shares of stock.
It seems your advice is to underweight stocks, but I am thinking that I should keep the PP "pure" and not consider the company stock as a part of that?  I guess if nothing else I should reduce my other stock holdings in the VP, which I have already done to some extent, and put that to work in the PP.
The advice really is if you are running a VP and consider your company stock part of it I would not go out and specifically overweight gold over anything else. I'd just keep funding the PP and if I want to add more to the VP, I'd be more inclined to buy the three other non-stock assets for the allocation. I wouldn't go out specifically looking to boost my stock holdings. You have a lot tied up in stock as it is.
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Re: Gold, History and Diversification

Post by Roy » Sun May 30, 2010 11:03 am

craigr wrote: I generally advise people not doing the PP to have at least 10% of their portfolio in gold. Take it from the stocks if they over-represent the allocation. Take it from the bonds if they over-represent the allocation. But 10% is the minimum for insurance purposes. Anything less and it won't do much good when needed. IMO.
Hi, Craigr,

Understood and makes sense. 

If someone already using a conventional portfolio wanted to go that 10%, would you advise they go all-in, or pay any mind to valuations near historical highs, as they are now, and enter incrementally over time?  (Most folks in this category have stocks and intermediate bonds, I suppose.)  Talking tactics here, not emotions and am aware there is no right answer.  Of course, with Gold, not sure how to assess properly its valuations anyway.  But HB himself seemed mindful of Gold valuations in some of his comments that advised when to sell, so just asking...

Roy
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Re: Gold, History and Diversification

Post by craigr » Sun May 30, 2010 11:38 am

This is an age old question as you know. Certainly at some level valuations matter. But I have just seen through the years that nobody can really call valuations right.

I could say that gold is too high right now, but if the Euro keeps having problems then it could go much higher. Or if the spending the US Govt. is doing catches up with it that could cause it to go higher. It's hard to say. We just can't predict these things and gold is going to be worth what people think it's worth so there is no formula that can be applied to it.

Now we do know the high of gold in the early 1980s was around $800 an ounce which adjusted for inflation is over $2000 today. So there is an argument that could be made that it's still undervalued. I don't know if I personally believe this, it's just another perspective you hear from people.

Overall though investors need to do what they feel comfortable with. I'm personally an all-in kind of guy because dollar cost averaging can hurt as much as it could help. But if someone isn't comfortable with the prices of gold but wants to own some I can't fault them for buying in over time as long as they aren't doing it for market timing reasons.

Meaning that I think they should tell themselves "I'm going to by X$ a month/quarter/whatever no matter what until I hit my allocation."

But I've seen that this is hard for many people to really do. Reason being is that each time they are supposed to buy it gives them another chance to second guess their decision.
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Re: Gold, History and Diversification

Post by Roy » Sun May 30, 2010 1:02 pm

craigr wrote: Overall though investors need to do what they feel comfortable with. I'm personally an all-in kind of guy because dollar cost averaging can hurt as much as it could help. But if someone isn't comfortable with the prices of gold but wants to own some I can't fault them for buying in over time as long as they aren't doing it for market timing reasons.
Ha!, this time the question is exclusively for market timing reasons!  And, of course, there is no answer, as the crystal is always cloudy, or rather, multiple answers that may also conflict—like the Magic 8 Ball (my favorite source of divination), being a child of the 60s. 

I think, as discussed recently on Bogleheads, that the PP is a better bet (better than conventional ports) for not regretting if you lump the four asset classes simultaneously.  The reason is that three of its asset classes are high-velocity capable, and rarely do they decline together for extended periods—and just once on a yearly basis in 4 decades.

The emotional management issue is separate and needs be adjudicated on an individual basis.  Just wondered if you thought the circumstance of already being fully invested in a conventional port. warranted any different approach.  And thought through, I guess the answer must be no.

Am going to a Memorial Day party tonight so I'll need answers better than "Reply hazy, try again"!

Roy
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Re: Gold, History and Diversification

Post by Quasimodo » Sun May 30, 2010 4:01 pm

Here's a post I made on the Bogleheads forum:

"In 1970 there was a book called "How You Can Profit from the Coming Devaluation" by Harry Browne, which suggested buying gold and silver coins, Swiss francs and South African gold mining stocks. After reading that book I followed the suggestions from the book for the decade of the 1970s and those investments did pretty well for most of the decade, with one major sinking spell in 1975/76 when the stock market came roaring back from a big decline in 74. The Permanent Portfolio mutual fund is modeled on the suggestions in that book.

During 1979 gold really spiked upward, and when it hit $400 an ounce I thought "Holy Cow, this is crazy" so I sold my Krugerrands. The price of gold doubled after that within about six months.

Maybe a rule of thumb about gold prices is "Cyclical peak price of gold = Holy Cow x 2". That sure resonates for me. "

Some additional comments I would make are that "... The Coming Devaluation" book was focused on self defense against bad inflation, and PRPFX is I believe based on one of Harry's later books that I didn't read that has a more complete iteration of the PP concept which includes stocks and fixed income.

Whenever I have tried to time gold purchases, it has almost always turned out badly for me because I lose heart and sell at a bad time. Casino Mentality Regret might be a term for it.

Reading the Hussman Funds weekly commentary, I'm inclined to agree with his view that '70s-style inflation is some years down the road and gold will probably undergo a steep price correction before we see anything like the late '70s price action again.

My history of being drastically wrong and mistaken has never stopped me from having an opinion.

The great thing about the Permanent Portfolio idea is that you don't have to predict or have an opinion about the direction of this or that market.

John

edited to include last sentence...
Last edited by Quasimodo on Sun May 30, 2010 6:16 pm, edited 1 time in total.
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Re: Gold, History and Diversification

Post by Roy » Mon May 31, 2010 8:09 am

Quasimodo wrote: Maybe a rule of thumb about gold prices is "Cyclical peak price of gold = Holy Cow x 2". That sure resonates for me. "
Hi, John,

See, that is what I was asking for.  Finally a predictive model that can rival PE/10!  As it turned out, they were too drunk at the party last night to discuss portfolio nuances (adding Gold to conventional ports.), hence this gift went wasted.
Quasimodo wrote: Reading the Hussman Funds weekly commentary, I'm inclined to agree with his view that '70s-style inflation is some years down the road and gold will probably undergo a steep price correction before we see anything like the late '70s price action again.
I greatly enjoy reading Hussman's commentaries and understand most of his rationale, though never act on any of his views.  I think he is a better investor on the fixed income side—his HSTRX (his take on different vehicles, valuations, and shifting maturities are much like Swedroe's)—but he too mistimes guesses with PMs (Swedroes prefers CCFs and dislikes Gold) and likely incurs too many transactions costs which contribute to the high expense ratio of his fund (.75 or so).  His scholarship and overall knowledge of economic history are impressive, and though he speaks rarely (I mean, they would not want him on CNBC!), is a good speaker.

Gold will correct, I suppose, and before inflation becomes a problem, I suppose.  But this depends on the endurance of some global problems, and new ones, that might keep the "holy cow" variable from weakening too much.  Another possibility, rarely mentioned, is that Gold remains in a tighter trading range for much longer than expected.

Roy
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