Gold Showing Some Muscle

Discussion of the Gold portion of the Permanent Portfolio

Moderator: Global Moderator

Post Reply
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Gold Showing Some Muscle

Post by MediumTex » Tue May 11, 2010 11:07 pm

I was surprised at the gold move today.  I guess that's what happens when capital in Europe hits the exit at the same time.

It makes perfect sense, but it was still surprising to see such a muscular move.

The PP grinds higher.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
Wonk
Executive Member
Executive Member
Posts: 473
Joined: Wed May 12, 2010 8:00 am

Re: Gold Showing Some Muscle

Post by Wonk » Wed May 12, 2010 8:24 am

MediumTex wrote: I was surprised at the gold move today.  I guess that's what happens when capital in Europe hits the exit at the same time.

It makes perfect sense, but it was still surprising to see such a muscular move.

The PP grinds higher.
MT,

There are some rumblings in the gold community that this is the first time gold has performed as a currency versus a commodity. 

People tend to get in a huff about the USD but sometimes forget that the rest of the world currencies look worse at the present time.  Euro holders appear to be moving to both USD and gold which really shouldn't be discounted.  This is very significant and signals a lack of faith in the world reserve currency. 

It looks like we may have just begun the next big move in gold relative to equities and priced in all world currencies.
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Wed May 12, 2010 10:29 am

When the Euro came out I didn't think it would last 20 years. The idea of taking all these different countries, cultures, languages and political systems and putting them under one bureaucracy and currency is a dead end. I'm by no means an expert on Europe other than being there many times. But I noticed that the notion that countries like Germany, France, UK, Italy, etc. have anything in common to think they'd want to be governed under common laws and spending mandates is farcical. It's going to be yet another collectivist governing failure and I wouldn't be surprised if it touched off a war when it finally implodes.
Last edited by craigr on Wed May 12, 2010 10:35 am, edited 1 time in total.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Gold Showing Some Muscle

Post by MediumTex » Wed May 12, 2010 10:37 am

craigr wrote: When the Euro came out I didn't think it would last 20 years. The idea of taking all these different countries, cultures, languages and political systems and putting them under one bureaucracy and currency is a dead end. I'm by no means an expert on Europe other than being there many times. But the notion that countries like Germany, France, UK, Italy, etc. have anything in common to think they'd want to be governed under common laws and spending mandates is farcical. It's going to be yet another collectivist governing failure and I wouldn't be surprised if it touched off a war when it finally implodes.
I think that the EU's troubles are a sober illustration of why a world government could never work.

Frankly, I think it is a miracle that the U.S. has been able to hold itself together, and I think that many histories of the Civil War miss out on some key truths about human nature and political structures.  The wisdom of the Founding Fathers in their design of the relationships between branches of the federal government and the relationship between the federal government and the states was truly enlightened.  They did their best to make it "human-proof" and it has held up pretty well (though the humans have done their best to dismantle many parts of the original design that attempted to limit concentrations of power).
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Wed May 12, 2010 10:42 am

MediumTex wrote:
craigr wrote: When the Euro came out I didn't think it would last 20 years. The idea of taking all these different countries, cultures, languages and political systems and putting them under one bureaucracy and currency is a dead end. I'm by no means an expert on Europe other than being there many times. But the notion that countries like Germany, France, UK, Italy, etc. have anything in common to think they'd want to be governed under common laws and spending mandates is farcical. It's going to be yet another collectivist governing failure and I wouldn't be surprised if it touched off a war when it finally implodes.
I think that the EU's troubles are a sober illustration of why a world government could never work.
Yep. The one-worlders are delusional. There is no way it can work without being abusive and tyrannical.
Frankly, I think it is a miracle that the U.S. has been able to hold itself together, and I think that many histories of the Civil War miss out on some key truths about human nature and political structures.  The wisdom of the Founding Fathers in their design of the relationships between branches of the federal government and the relationship between the federal government and the states was truly enlightened.  They did their best to make it "human-proof" and it has held up pretty well (though the humans have done their best to dismantle many parts of the original design that attempted to limit concentrations of power).
Each year the cracks grow deeper. I get the feeling many are going to see some interesting changes in the US in their lifetimes.

I've got a little less than 10 years left to see if my prediction on the Euro comes true. I'm still thinking it will, but maybe it will just limp along. But I just don't see how it won't get into these problems again and again.
Last edited by craigr on Wed May 12, 2010 10:47 am, edited 1 time in total.
Wonk
Executive Member
Executive Member
Posts: 473
Joined: Wed May 12, 2010 8:00 am

Re: Gold Showing Some Muscle

Post by Wonk » Wed May 12, 2010 10:58 am

MediumTex wrote:
craigr wrote: When the Euro came out I didn't think it would last 20 years. The idea of taking all these different countries, cultures, languages and political systems and putting them under one bureaucracy and currency is a dead end. I'm by no means an expert on Europe other than being there many times. But the notion that countries like Germany, France, UK, Italy, etc. have anything in common to think they'd want to be governed under common laws and spending mandates is farcical. It's going to be yet another collectivist governing failure and I wouldn't be surprised if it touched off a war when it finally implodes.
I think that the EU's troubles are a sober illustration of why a world government could never work.

Frankly, I think it is a miracle that the U.S. has been able to hold itself together, and I think that many histories of the Civil War miss out on some key truths about human nature and political structures.  The wisdom of the Founding Fathers in their design of the relationships between branches of the federal government and the relationship between the federal government and the states was truly enlightened.  They did their best to make it "human-proof" and it has held up pretty well (though the humans have done their best to dismantle many parts of the original design that attempted to limit concentrations of power).
Have you ever noticed that as government gets further away from the people (in terms of sovereign territory), it becomes more bureaucratic, more corrupt, more authoritarian, more confiscatory, all while serving its constituents less?

Think of all the governmental bodies that stand over us as citizens of the world.  At least where I'm from in the U.S., I have local, state and federal governments to oversee.  I've found that local governs better than state and state better than federal.  Just think what kind of boondoggle we'd have if federal yielded authority to a super-sovereign continental or global government structure.  Sheesh!

Politicians are like little kids--you need them within eyesight to make sure they're not getting themselves into trouble. Btw, Craig, thanks for an outlet for these types of discussions.  This post would never fly on the B'head board.
pplooker

Re: Gold Showing Some Muscle

Post by pplooker » Wed May 12, 2010 12:48 pm

A smart person once told me that the main problem with government gets to be scale.  When the size of the government in question gets too big, it becomes distant and its agents feel unaccountable to their charges.  After all, if you're only one of millions of federal employees who likely has no real authority yourself due to the restrictions placed on you, why should you feel accountable for government waste, corruption, etc.?  It's probably not your fault.

The smaller and more localized, the better off you are in terms of government, regardless of its form.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Gold Showing Some Muscle

Post by MediumTex » Wed May 12, 2010 9:08 pm

pplooker wrote: A smart person once told me that the main problem with government gets to be scale. 
I think that's really the key.  It's not that there aren't legitimate functions of government (police and firefighters come to mind), it's the tendency that governments have to only expand in size and scope, regardless of the needs or desires of the citizenry.

A great example is the military.  Whatever size military a country has, it tends to find some sort of foreign policy that allows the military to be fully utilized.  Think of it as a political "Parkinson's Law" (i.e., work tends to expand to fill the time available to do it).  Here is what James Madison said on the subject of standing armies:
James Madison wrote:A standing military force, with an overgrown Executive will not long be safe companions to liberty. The means of defence agst. foreign danger, have been always the instruments of tyranny at home. Among the Romans it was a standing maxim to excite a war, whenever a revolt was apprehended. Throughout all Europe, the armies kept up under the pretext of defending, have enslaved the people.
The troubling thing about many of today's leaders is that they really believe that they know what society needs, and they don't necessarily have bad motives (compared to someone like Stalin, who I am pretty sure didn't care much at all about the toll his own ambitions took on his "comrades").  The problem is that today's politicians are simply seeking something which can never exist--a world in which government can give back more to its people than it takes in the form of taxes and other tribute.  This simple point never registers with many people.  It's not about being for or against government; it's just recognizing the limitations of government and its role in society.  If an economy is expanding, then a country can afford a big government that tries to change the world or improve upon human nature.  If an economy is not functioning well, however, an overly ambitious government can easily go from existing in an uneasy symbiotic relationship with the private sector to being a hostile and toxic force to all private capital. 

I understand that Keynesian economics would say that the government must take an active role in the economy when the economy contracts, but I just think this line of thinking is misguided (consider, too, that Keynesian economics presupposes a government that only runs large deficits in periods of economic contraction, whereas today's governments run large deficits all the time). 

Check out the Keynes/Hayek rap song if you haven't seen it yet -- http://www.youtube.com/watch?v=d0nERTFo-Sk 

I think that many of the factors listed above are obviously primary drivers behind gold's price action.  People are just waking up and realizing that the government is simply one more market participant and there are limitations on its ability to manipulate those markets, just as there would be with any other market participant, no matter how large or influential.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
Pkg Man
Executive Member
Executive Member
Posts: 401
Joined: Mon Apr 26, 2010 7:58 pm

Re: Gold Showing Some Muscle

Post by Pkg Man » Wed May 12, 2010 9:55 pm

Frankly, I think it is a miracle that the U.S. has been able to hold itself together, and I think that many histories of the Civil War miss out on some key truths about human nature and political structures.  The wisdom of the Founding Fathers in their design of the relationships between branches of the federal government and the relationship between the federal government and the states was truly enlightened
Exactly.  One of the key design elements was the limited powers delegated to the Federal Government versus the State Governments.  Perhaps our greatest failure has been the abrogation of the power of individual States. The US is simply too large and diverse to concentrate power in one place.  By reducing the role of the States we have removed not only a check on the Federal government, but also an important safety valve whereby individual differences amongst the people could be respected. 

Personally I think it is more patriotic to fly a State or other historical flag than the Stars and Stripes.
"Machines are gonna fail...and the system's gonna fail"
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Gold Showing Some Muscle

Post by MediumTex » Wed May 12, 2010 11:23 pm

Pkg Man wrote:
Exactly.  One of the key design elements was the limited powers delegated to the Federal Government versus the State Governments.  Perhaps our greatest failure has been the abrogation of the power of individual States. The US is simply too large and diverse to concentrate power in one place.  By reducing the role of the States we have removed not only a check on the Federal government, but also an important safety valve whereby individual differences amongst the people could be respected. 

Personally I think it is more patriotic to fly a State or other historical flag than the Stars and Stripes.
I understand we are straying a bit from the topic, but I think this is an interesting discussion...

Perhaps the finest example of ways in which the original state/federal Constitutional design was disturbed was the 17th Amendment, which changed the process of electing U.S. senators from selection by state legislatures to popular vote.  Consider, for a moment, if each U.S. Senator were elected by the members of his/her state legislature, rather than by popular election.  What kind of people would go to the Senate?  It seems to me that state sovereignty would be respected a lot more by a U.S. Senate that was beholden to the state legislatures for re-election. 

OTOH, popular election of Senators basically guarantees that the same dynamics that control the composition of the House will also determine the composition of the Senate (which facilitates the accumulation of power by the federal government).  Most people are not even aware that U.S. Senators have not always been popularly elected, much less the ramifications of the 17th Amendment on the delicate balance of power built into the Constitution as originally drafted.  It's just one of those historical tidbits that has enormously affected our country and no one ever talks about.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
Pkg Man
Executive Member
Executive Member
Posts: 401
Joined: Mon Apr 26, 2010 7:58 pm

Re: Gold Showing Some Muscle

Post by Pkg Man » Sun May 16, 2010 9:27 pm

I agree completely about the 17th amendment.  Let me try to bring this back around to the permanent portfolio and then maybe we can carry on this political conversation in the "other discussion" section.

Every now and then folks talk about eliminating the Electoral College.  If you ask the average Joe on the street they are usually in favor of doing away with it (once it has been explained what the EC is, of course).  But the framers of the Constitution spent A LOT more time thinking about government than the average Joe ever will.  It takes a lot of hubris to change our system of government after spending all of 10 seconds thinking about.

I think one can make a similar, although less serious, analogy to changes to the PP.  I am sure Harry Browne spent far more time thinking through portfolios and what can happen to them than I ever will.  As we stray from the original design we should do so advisedly.
"Machines are gonna fail...and the system's gonna fail"
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Gold Showing Some Muscle

Post by MediumTex » Sun May 16, 2010 10:45 pm

Pkg Man wrote: I think one can make a similar, although less serious, analogy to changes to the PP.  I am sure Harry Browne spent far more time thinking through portfolios and what can happen to them than I ever will.  As we stray from the original design we should do so advisedly.
That's a great point, and one that people often seem to overlook.

One of the most common responses to the PP strategy is something along the lines of "That's a great idea.  I think I might use the strategy, except I'm going to underweight bonds because I know interest rates are going up, and I'm going to hold off on buying any gold until it corrects by at least 20%..."

The PP is a package.  As HB said, break the package and you break the safety. 

My belief is that the PP would be suitable for many, many, many investors if they just had it explained to them properly.  The problem is that few people ever really "get" the PP concept and how the right mix of non-correlated assets can create a smooth and relaxing ride over almost any period of time (bull market, bear market, recession, inflation, etc.).

HB made many insightful points that sound so simple and obvious that they are easy to overlook.  Among them:

- The PP allows you to stop worrying about your investments and focus on more productive activities.
- The PP really is a PERMANENT allocation method.
- The future is impossible to predict.
- If you don't like the return you are getting on your investments you should consider that the problem may simply be that you don't have enough capital, and you should save more money rather than investing more aggressively.

These points take a while to really sink in (they did for me, anyway).
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Sun May 16, 2010 11:07 pm

MediumTex wrote:
Pkg Man wrote: I think one can make a similar, although less serious, analogy to changes to the PP.  I am sure Harry Browne spent far more time thinking through portfolios and what can happen to them than I ever will.  As we stray from the original design we should do so advisedly.
That's a great point, and one that people often seem to overlook.

One of the most common responses to the PP strategy is something along the lines of "That's a great idea.  I think I might use the strategy, except I'm going to underweight bonds because I know interest rates are going up, and I'm going to hold off on buying any gold until it corrects by at least 20%..."
I'm in complete agreement as well. Unless the changes are backed up with very specific research into the risks involved it shouldn't be done. IMO. Not only has the portfolio had a group of smart people look into it from just about every angle from the very beginning, it's also had over 30 years of refinement through empirical testing. I too urge people to be very cautious about changing something that seems to be working well enough as is.

When I initially started the site about the portfolio concept I exchanged e-mails with Harry Browne's widow. In one exchange she was very specific that Harry Browne thought that the Variable Portfolio was an important part of the concept. Reason being that he knew people would want to tinker with things. He felt that the core holding should always be the assets he advised in the Permanent Portfolio and if people wanted to play around they should only do it with money they can afford to lose in the Variable Portfolio.
Wonk
Executive Member
Executive Member
Posts: 473
Joined: Wed May 12, 2010 8:00 am

Re: Gold Showing Some Muscle

Post by Wonk » Mon May 17, 2010 8:15 am

MediumTex wrote: - The PP really is a PERMANENT allocation method.
I'll play the role of devil's advocate for a moment.  I think the faith and perhaps lack of full understanding of the permanent portfolio is ok for beginners at the start, but it's important to learn as much as possible for the inevitable changes that will likely occur.

What I mean is that I don't think the permanent portfolio will be permanent in my lifetime (although I'd prefer it that way).  I think it's likely some changes will need to be made due to factors outside our control.  Possible factors:

-Gold is impractical (prohibitively taxed) or illegal to own as in 1933-1972.
-30 year bonds are no longer issued and the longest duration is less than 20 years.

Both changes require some critical thinking on the part of the investor.  I'm not sure if HB referenced what an investor were to do between 1933-1972, but it would be nice to have a seance and ask.
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Mon May 17, 2010 11:19 am

If gold were illegal to own again I would probably replace it with some type of commodities, real estate, timber and other hard assets. They won't react like gold in a crisis, but I think all portfolios should have some type of exposure to hard assets because they do offer some protection against sudden and/or high inflation.
Roy
Senior Member
Senior Member
Posts: 127
Joined: Mon Apr 26, 2010 2:07 pm

Re: Gold Showing Some Muscle

Post by Roy » Mon May 17, 2010 2:42 pm

craigr wrote: If gold were illegal to own again I would probably replace it with some type of commodities, real estate, timber and other hard assets. They won't react like gold in a crisis, but I think all portfolios should have some type of exposure to hard assets because they do offer some protection against sudden and/or high inflation.
Hi, Craigr,

Using one of the "Wayback Machines" I found the following for comparison, substituting Commodities for Gold and still using TSM and ST Treasuries (2-year).  Seems similar in big picture to the Permanent Portfolio as correlations are also stark (Returns and SD) but differs in details, especially in 2008. 


Yearly Returns

2008    -12.79%
2007    11.1%
2006    4.5%
2005    8.72%
2004    9.26%
2003    16.56%
2002    10.91%
2001    -3.53%
2000    13.45%
1999    9.16%
1998    4.59%
1997    12.57%
1996    10.61%
1995    25.57%
1994    -0.47%
1993    10.06%
1992    7.63%
1991    16.65%
1990    8.45%
1989    20.81%
1988    12.89%
1987    5.67%
1986    11.58%
1985    22.36%
1984    7.32%
1983    10.89%
1982    21.14%
1981    -1.36%
1980    12.23%
1979    16.62%
1978    9.54%
1977    0.46%
1976    11.71%
1975    15.23%
1974    -2.4%
1973    13.83%
1972    16.3%


CAGR                9.66%
Standard Dev      7.77%
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Mon May 17, 2010 3:10 pm

Yes I remember that now. If inflation is bad, it is a natural reaction for people to want to get rid of paper money and buy "stuff" to protect purchasing power. Commodities will rise in response to high inflation like gold, but perhaps not as strongly as the monetary component isn't present as it is with gold.
User avatar
Pkg Man
Executive Member
Executive Member
Posts: 401
Joined: Mon Apr 26, 2010 7:58 pm

Re: Gold Showing Some Muscle

Post by Pkg Man » Wed Jun 09, 2010 8:21 pm

I found this bit about Ben Bernanke and the rising price of gold interesting.

http://blogs.wsj.com/economics/2010/06/ ... nanke+gold

Seems that Ben is confused.
"Machines are gonna fail...and the system's gonna fail"
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Wed Jun 09, 2010 10:25 pm

Pkg Man wrote:Seems that Ben is confused.
Keynesianism is the definition of confusion.
User avatar
Pkg Man
Executive Member
Executive Member
Posts: 401
Joined: Mon Apr 26, 2010 7:58 pm

Re: Gold Showing Some Muscle

Post by Pkg Man » Tue Jun 15, 2010 6:44 pm

For a follow up on Ben's comments about gold by an economist I have a ton of respect for, check out a recent post on Econbrowser http://www.econbrowser.com/archives/201 ... lat_1.html.  He basically says Ben has it right.  For some really confused statements about gold, make sure to read through all the postings.

In case you haven't heard of Econbroswer, it is a great blog on mostly economic topics run by James Hamilton and Menzie Chinn.  I tend to prefer the posts by Hamilton, as Chinn is IMHO a bit too political, at least for my political tastes.
"Machines are gonna fail...and the system's gonna fail"
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Tue Jun 15, 2010 7:36 pm

Bernanke, et al. seem to also be disregarding the problems in Europe that are potentially panicking people. If the Euro has big problems there is no telling where gold will go if people do not think the dollar is a safer place to be.

I was contacted by someone living in Greece recently and he was not interested in buying dollars, but was very interested in buying gold to protect himself for instance. I suspect this feeling is widespread in many countries over the pond.
Last edited by craigr on Tue Jun 15, 2010 7:38 pm, edited 1 time in total.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: Gold Showing Some Muscle

Post by MediumTex » Wed Jun 16, 2010 8:41 am

I am currently on a "news fast", which I do periodically to clear my head.  I read no news about anything for a while.  It's sort of like a mental colon cleanse.

Yet another benefit of the PP is that I can do my news fasts without having to worry about something happening to my investments while I am clearing my mind.

For anyone who hasn't tried it, a news fast can be an amazing experience.  You don't realize how much of the information you expose yourself to is just pure garbage until you take a break from it.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Gold Showing Some Muscle

Post by craigr » Wed Jun 16, 2010 11:23 am

MediumTex wrote:For anyone who hasn't tried it, a news fast can be an amazing experience.  You don't realize how much of the information you expose yourself to is just pure garbage until you take a break from it.
I did news fast a couple weeks ago. About to do another. You're right about the PP and news. You just learn to ignore these types of articles eventually. The more of an expert the person is writing their opinion about the future, the more I ignore it.

The news is designed to stir people up because that's what makes money for the news providers. Nobody wants to read about how great things are going because that's just mundane. They want the meat and blood and that's what the media provides. I think news fasts are a great idea. It's a great way to lower your level of stress without taking any meds.
Last edited by craigr on Wed Jun 16, 2010 11:30 am, edited 1 time in total.
nomimono

Re: Gold Showing Some Muscle

Post by nomimono » Wed Jun 16, 2010 4:48 pm

This reminds me of the time I had an unscheduled "news fast" in Sep 08 caused by Hurricane Ike. By the time the power came back on and the local stations stopped running Ike stories all day long, everyone in the city came out of the haze to the biggest financial crisis in generations, already well in progress. I remember watching the national news for the first time in a while and they were talking about WAMU and AIG, and we were like, huh?

The news fast did it's job though. After being sick of being stuck at home for 2 weeks cooking everything on the grill, everyone was so happy to get back to normal and have power and mundane things like working stop lights, no one cared about what was happening on Wall Street. All the restaurants seemed packed for months as the crisis ground on in the background. In the end though, there's another reason to use the PP - you never know when a natural disaster will strike and leave you cut off at the same time a major financial event unfolds.
Post Reply