Gold is sinking. Don't look!

[buddtholomew]

That's remarkable volatility, both positive and negative in each of the individual assets. The max drawdown over the period was 35% and the investor recouped losses and had a 20% gain after bonds rose 300% in 2012. There are quite a few of Browne's philosophies bourne out in these returns - namely that an asset can have returns of 100,200 or even 300% to offset losses incurred in the other assets. The winners gain more than the decliners lose.

If you didn't rebalance into LTT at the end of 2011 to restore to 4x25, the PP value could have been significantly less. The question is whether one had the intestinal fortitude or means to rebalance into an asset that had already fallen 50 and 80% on consecutive calendar years.  Stocks were no bed of roses either. Cash steady at 5% throughout all this turmoil seems a little awkward.

[MachineGhost]

If you didn't rebalance into LTT at the end of 2011 to restore to 4x25, the PP value could have been significantly less. The question is whether one had the intestinal fortitude or means to rebalance into an asset that had already fallen 50 and 80% on consecutive calendar years.  Stocks were no bed of roses either. Cash steady at 5% throughout all this turmoil seems a little awkward.

I'm surprised gold didn't perform better.  Were there capital controls or other restrictions?  But we must keep in mind in a non-inflationary situation like Greece, the preferred currency to be held by the populace would have been the US dollar or German mark.  That has historically been the case in a crisis.  I feel gold is ultimately a hedge against the world's core economy (i.e. Rome) going belly up because there is simply no alternative.  No one on this planet has as liquid or as deep markets as the US for financial paper.

Still, I'd really hate to be in the situation after 2-years and being down 40% you realize you should have done it right from the outset.  If you cry Uncle and sell at the bottom you would not have benefitted from the recovery.

[kapoios]

As cash returns I used an approximate average of what you could get from 3month certificate of deposit at a bank. It fluctuated in the range of 4% - 6% depending on the amount you had available and how desperate was the bank for deposits at that precise time. Usually threatening to take the cash to another bank was sufficient to negotiate a good rate. Government 3month notes fluctuated in the range of 3% to 5% most of this period.

Government Bonds had a complicated default arrangement. Every old bond was replaced with several new government bonds with maturities from 2023 to 2042 plus some EFSF bonds (backed by the European Union) with one and two year maturities. Also at times those new government bonds had low transactions volume and wide bid – ask spread. Realistically I think it’s better to approximate the performance with no rebalancing. One euro at the start of 2008 was approximately 40 – 45 cents at the end of 2012 (market value plus coupons received).

Actual stock returns could be a little better than the index because first of the dividend yields and second of the high bank sector weighting of the index at the start of 2008. A more balanced stock portfolio would not drop 80% during this period. The banks where leveraged on government bonds, lost 95% - 99% and took the index down with them.

Gold returns was the typical denominated in euro returns. If Greece exited the euro after the default I suppose gold returns would be double that.

There were no capital controls etc. The only consequence is that now the state is informing everyone that exported large amounts of cash from Greek banks to foreign banks that according to some calculation algorithm of their incomes during the last ten years, the amount seem bizarre so they will tax it unless the taxpayer prove somehow with paper trails that he had sufficient income from the 80’s or the 90’s to justify the amount.

[Ariadne22]

There were no capital controls etc. The only consequence is that now the state is informing everyone that exported large amounts of cash from Greek banks to foreign banks that according to some calculation algorithm of their incomes during the last ten years, the amount seem bizarre so they will tax it unless the taxpayer prove somehow with paper trails that he had sufficient income from the 80’s or the 90’s to justify the amount.

Confiscation, clearly.

An interesting series of posts.  Thank you.

[portart]

It's pretty simple to figure out. We own 25% gold. When gold goes down, as it is now and no one knows how much, you can't make any money because it is so volitle. The equity side of things can't make up the difference and the rest (bonds and cash just crawl along). So you can't have it both ways, be safe and make money at the same time after a ten year run up in gold. Either take and wait (and it could be a long wait) for gold to recover significanty or move on.

[notsheigetz]

It's pretty simple to figure out. We own 25% gold. When gold goes down, as it is now and no one knows how much, you can't make any money because it is so volitle. The equity side of things can't make up the difference and the rest (bonds and cash just crawl along). So you can't have it both ways, be safe and make money at the same time after a ten year run up in gold. Either take and wait (and it could be a long wait) for gold to recover significanty or move on.

I've only been in the PP for a couple of years so it is a new experience to see the stock market making big gains and my portfolio going down (though only slightly for now). I wonder if I'm alone in this. Seems to me that government actions of late have been geared towards pumping up the stock market and only the stock market and if they finally succeed it's not going to be the best of times for the PP (Being the government I don't give them that much chance of success so I'm not really all that worried about it).

[Kshartle]

Finally succeed at what? They can blow up a bubble, but they can't print a vibrant economy. Either they've debased the dollar, or the economy is dependant on ultra-low rates and 85 billion created a month. The question is, how long will it go on. Everyone is scared that Bernenke will stop pouring fuel on the fire. At some point they'll realize there's no end in sight for the QE. It will take bigger and bigger does though to keep the bull market going.

You should read some of Harry Browne's books from the 70's on how inflation pushes up the stock market. They are his best IMHO.

I do think PPers are going to have a rough time. I am overweight gold and recently bought a lot of GDX at $42 and doubled it today under $38. So what do I know.........

[notsheigetz]

Finally succeed at what?

In "kickstarting" the economy, of course. Arousing the animal spirits. All that stuff!

Personally, my main goal right now is converting a lot of my ETF gold to physical. Since gold is down it seems like a good opportunity to get out of the ETFs without capital gains.

[globalcash]

I'm very new to pp too.  Please correct me if I'm mistaken, but why should we regularly monitor the price of gold?  Isn't the presence of gold more like an insurance component, rather than an active investment?  Wouldn't it be just depressing to continually watch it?  I think the value of gold will have a flat or downward trajectory for the next few years, but I will still be buying...only to sleep well at night, rather than to make significant appreciation.

Wouldn't monitoring and tweaking the three other components be a better use of our time?

[MediumTex]

I'm very new to pp too.  Please correct me if I'm mistaken, but why should we regularly monitor the price of gold?  Isn't the presence of gold more like an insurance component, rather than an active investment?  Wouldn't it be just depressing to continually watch it?  I think the value of gold will have a flat or downward trajectory for the next few years, but I will still be buying...only to sleep well at night, rather than to make significant appreciation.

It sounds like you are saying that if you plant a tree you probably shouldn't dig it up every week or two to inspect the roots to make sure that they are actually growing.

[globalcash]

I'm very new to pp too.  Please correct me if I'm mistaken, but why should we regularly monitor the price of gold?  Isn't the presence of gold more like an insurance component, rather than an active investment?  Wouldn't it be just depressing to continually watch it?  I think the value of gold will have a flat or downward trajectory for the next few years, but I will still be buying...only to sleep well at night, rather than to make significant appreciation.

It sounds like you are saying that if you plant a tree you probably shouldn't dig it up every week or two to inspect the roots to make sure that they are actually growing.

Exactly.  I think when the 2007-2009 crisis happened, there was worldwide panic that lasted a few years, and that's what boosted the value of gold.  Everyone was hanging on to USD and all of a sudden, it's intrinsic value was put into question.

Now, I don't think the world is as dependent on the US dollar, and have taken steps to lessen their exposure or dependence.  And so, if the USD declines, people will run to the yuan, euro, peso, or any other currency that seem less weak.

And gold would only be a last resort.

[Reub]

Finally succeed at what?

In "kickstarting" the economy, of course. Arousing the animal spirits. All that stuff!

Personally, my main goal right now is converting a lot of my ETF gold to physical. Since gold is down it seems like a good opportunity to get out of the ETFs without capital gains.

Is it possible to declare a capital loss on the sale of GLD, GTU, or gold?

[notsheigetz]

Finally succeed at what?

In "kickstarting" the economy, of course. Arousing the animal spirits. All that stuff!

Personally, my main goal right now is converting a lot of my ETF gold to physical. Since gold is down it seems like a good opportunity to get out of the ETFs without capital gains.

Is it possible to declare a capital loss on the sale of GLD, GTU, or gold?

Interesting question. I just assumed that you could. If it's an ETF or mutual fund, why not? I only had a small loss selling the portion I'm converting so it's not really going to be a big deal either way.

I suppose another question, if you're going to have a loss, would be whether the 30-day wash sale rule applied. I would think not.

[notsheigetz]

If you swap IAU or GLD for GTU, or vice-versa: no wash sale. If you swap GLD for IAU, that would probably be considered 'substantially identical' if you got audited.

I was swapping ETF gold for physical. Is that 'substantially identical'? An interesting question. Like I said, I suspect not but I haven't read all the fine print. Even if it is, how would they know?

[portart]

25% gold is a MAJOR insurance policy. So much so, that if it's not moving up or going down, you are going to be treading water. You can't make a portfolio go up with on one quarter of it in equities, even in a bull market. The only way PP makes money is to have gold hold it's own or rise while equities also move forward. The portfolio is designed to protect, not out pace. The idea is that over time, all of the components will move up while avoiding major moves down while the numbers work themselves out.

We have just finished a ten year major move in gold and so you looked like genius being in PP during this time. Gold is exhausted and could really do anything for awhile, going as low as 1100. or maybe hanging around 1500 if the gov keeps printing. If you have made your money for retirement, it's best to stay with PP because you won't lose it or much of it. If you haven't made it by now, then you have two choices. 1) Make it by working your job and adding to PP at different prices so your portfolio will grow and not give back much or 2) play the overweighting game in either gold or equities, whichever you believe in more and hope you get lucky with your timing.

[sophie]

That's the point:  we don't know.  If gold goes down to 1100, almost certainly something else will be going up, probably stocks.  Are you sure you're not just letting the recent price changes influence your asset allocation?  Right now, stocks look great and I'm sure lots of people are running out to buy them.  Which could very well mean they're buying at a peak, as stocks could easily go on another downswing tomorrow.

I personally think gold is on sale, but whether I'm right or wrong, I'm buying as part of my regular contribution.  Trying out Goldmart for the first time, as they definitely have the best price and I can't argue with free shipping.  I used Gainesville coins and Colorado gold in the past, which were both great to deal with.  The minimum purchase for Colorado Gold, though, means I won't be using them much unless I get a sudden windfall (most unlikely).  I liked Gainesville because you pay a small portion on your credit card, and the 1% cash back covers part of the shipping costs.  Just remember to set up the bank wire BEFORE you buy.

[dualstow]

We have just finished a ten year major move in gold and so you looked like genius being in PP during this time. Gold is exhausted and could really do anything for awhile, going as low as 1100.

I don't know where gold is going but with all respect, is ten years some kind of magic number, or just a number that humans cling to because we have ten digits on our two hands? Gold could go well below 1100, or it could go up. Or it could stay the same. And, the stock market could go down, too. I mean if stocks were the answer, we'd own 100% stocks, right?

[notsheigetz]

They likely wouldn't know, except that you just told them [who knows what 'they' read; paranoia at it's finest  ]. And even if they found out, you could certainly make a reasonable case that an ETF that holds physical gold is not the same as actual gold, the same way SPY, IVV and VOO are not exactly the same.

My understanding is that the wash sale rules only apply to securities so I don't think it is applicable. It is always possible that I didn't read section 123, paragraph A of Publication XYZ where it says that in certain cases spelled out in incomprehensible language that it might apply but if you're with the IRS and you're reading this I plead ignorance.

[sophie]

They likely wouldn't know, except that you just told them [who knows what 'they' read; paranoia at it's finest  ]. And even if they found out, you could certainly make a reasonable case that an ETF that holds physical gold is not the same as actual gold, the same way SPY, IVV and VOO are not exactly the same.

My understanding is that the wash sale rules only apply to securities so I don't think it is applicable. It is always possible that I didn't read section 123, paragraph A of Publication XYZ where it says that in certain cases spelled out in incomprehensible language that it might apply but if you're with the IRS and you're reading this I plead ignorance.

+1.  I'm not a tax expert, but the IRS can't have it both ways:  if a "collectible" doesn't get the same preferential tax treatment as a security for long term gains, then it's hard to argue that it's subject to wash sale rules which apply to "securities".  That seems to be the internet consensus as well.  All the same, if you sell a gold ETF or fund in order to buy bullion (or vice versa), you might want to consider whether it's worth the headache to explain all this the the friendly IRS agent if you happen to get audited.

If any of you hold GLD, SGOL, IAU etc in a taxable account, you might want to take advantage of the recent price drop to get rid of it.  I hadn't realized this, but if you incur a long term gain with one of those funds and your tax bracket is 25% or below (which would be the case if you're retired), you could actually end up paying more than your marginal tax rate since the 28% collectibles tax would apply.  I think that would also apply to physical gold. 

I definitely wouldn't want to be rebalancing out of gold in a taxable account post retirement.  Harry Browne didn't seem to be overly bothered by this, but there's an argument to be made for keeping at least 1/3 - 1/2 of the gold allocation in tax deferred accounts plus CEFs, like GTU.  The counter-argument would be that swallowing the collectibles rate could be better than paying GTU's expense ratio, which is like a long, slow tax that adds up over the years.

[notsheigetz]

If any of you hold GLD, SGOL, IAU etc in a taxable account, you might want to take advantage of the recent price drop to get rid of it.  I hadn't realized this, but if you incur a long term gain with one of those funds and your tax bracket is 25% or below (which would be the case if you're retired), you could actually end up paying more than your marginal tax rate since the 28% collectibles tax would apply.  I think that would also apply to physical gold. 

This has been kicked around on the forum before and I could be wrong but my understanding was that we decided that the 28% figure is actually a cap representing the maximum percentage you will be required to pay. If you are in a higher bracket this would actually be to your advantage and if your marginal rate is lower, that is the percentage you will pay - not the 28% rate.

Somebody please correct me if I'm wrong.

[dragoncar]

Any idea what gtu expense ratio actually is?  They just dilute the stock over time right?

[whatchamacallit]

This has been kicked around on the forum before and I could be wrong but my understanding was that we decided that the 28% figure is actually a cap representing the maximum percentage you will be required to pay. If you are in a higher bracket this would actually be to your advantage and if your marginal rate is lower, that is the percentage you will pay - not the 28% rate.

Somebody please correct me if I'm wrong.

This is correct but I didn't know this since I have never sold gold. Thank you. That is good to know.

http://www.irs.gov/publications/p17/ch16.html#d0e56153

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

Example.

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.

[sophie]

This has been kicked around on the forum before and I could be wrong but my understanding was that we decided that the 28% figure is actually a cap representing the maximum percentage you will be required to pay. If you are in a higher bracket this would actually be to your advantage and if your marginal rate is lower, that is the percentage you will pay - not the 28% rate.

Somebody please correct me if I'm wrong.

This is correct but I didn't know this since I have never sold gold. Thank you. That is good to know.

http://www.irs.gov/publications/p17/ch16.html#d0e56153

Capital Gain Tax Rates

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates.

Example.

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.

Interestingly, opinions on this seem to be divided.  This sentence in the above IRS pub, though, is reassuring:

If you figure your tax using the maximum capital gain rate and the regular tax computation results in a lower tax, the regular tax computation applies.

Regarding expense ratios....of necessity, gold ETFs or funds must sell some gold to pay expenses, so the amount of gold per share has to drop over time.

[notsheigetz]

All of your net capital gain is from selling collectibles, so the capital gain rate would be 28%. Because you are single and your taxable income is $25,000, none of your taxable income will be taxed above the 15% rate. The 28% rate does not apply.

If I was writing IRS publications I would write them to say that "income from collectibles will be taxed at the ordinary income tax rate but at a rate not exceeding 28%" and be done with it.

That is my understanding and I do believe it is correct once you sort though all the mumbo-jumbo.

[vnatale]

That's the point:  we don't know.  If gold goes down to 1100, almost certainly something else will be going up, probably stocks.  Are you sure you're not just letting the recent price changes influence your asset allocation?  Right now, stocks look great and I'm sure lots of people are running out to buy them.  Which could very well mean they're buying at a peak, as stocks could easily go on another downswing tomorrow.

With the benefit of great hindsight one can note that our in-house Prophetess, Sophie, offered here yet more of her unending wisdom!

Vinny