Gold a Life Preserver for Russians

[goodasgold]

When a currency crashes, gold saves the day:


http://www.marketoracle.co.uk/Article48678.html

If we have any Russian PPers on the list, they must be smiling right now (while pondering a safe hiding place to keep Mr. Putin's bear paws off their yellow stuff) 

[MachineGhost]

Doom porn come to life!  Yummo!

[madbean]

I don't know if any part of the sanctions we are currently imposing on Russia includes restrictions on the sale of gold but I believe the Iranian sanctions still do.  A while back I read a story about Iranian citizens trying to buy up gold as a hedge against U.S. economic sanctions
until the U.S. cracked down and made other countries follow suit.

Very interesting that the U.S. government chooses to punish nations that don't behave the way we want them to this way.

[Ad Orientem]

Russia is not a country I would run a PP in.

[dualstow]

Russia is not a country I would run a PP in.

I lived there in '94 and a lot of establishments would only take U.S. dollars. So, cash is out...

[LC475]

You could just run an American one.  That business runs largely on US dollars makes this, in fact, all the more perfect.

25% American stock market
25% American long bonds
25% gold bullion
25% in an American treasury fund with checking/debit

I would say this is always the best way, anyway.  It will give you the best protection.  The dollar is the #1 money in the world, and so gold protects you against crashes in it, but does not protect you nearly so well against crashes in other less-important currencies.  In other words, the Ruble and gold are not particularly correlated.  The dollar and gold, on the other hand, necessarily are -- though only in a dollar crash, not at other times.

[Mike59]

This will be an interesting pilot test for gold and looks like it's doing it's job, more 21st century currency crises to come? I'm hearing interest rates of 17% end of last week in Russia and people hoarding physical cash to spend it as soon as possible.

I love how Putin blames the currency speculators, oh how terrible those currency speculators are, all their fault! 

[LC475]

This will be an interesting pilot test for gold and looks like it's doing it's job

No.  It is not going to work.  Gold is not going to be correlated to the Russian Ruble.  If the ruble crashes, gold may go up, or gold may go down.  It only works for the dollar.  Gold will only work as Harry designed it for the dollar.

[MachineGhost]

This will be an interesting pilot test for gold and looks like it's doing it's job

No.  It is not going to work.  Gold is not going to be correlated to the Russian Ruble.  If the ruble crashes, gold may go up, or gold may go down.  It only works for the dollar.  Gold will only work as Harry designed it for the dollar.

Rubbish, again!  Look at Japan.  Look at Iceland.  Look at Argentina.  Look at Iraq.  Look at Zimbabwe. 

Gold is the currency of last resort, when all else fails.  But there's also canned soup, cars and home appliances if you're too po'.

[Pointedstick]

This will be an interesting pilot test for gold and looks like it's doing it's job

No.  It is not going to work.  Gold is not going to be correlated to the Russian Ruble.  If the ruble crashes, gold may go up, or gold may go down.  It only works for the dollar.  Gold will only work as Harry designed it for the dollar.

It's not that gold will be correlated to the Ruble. Rather, each currency can rise or fall relative to gold independently; the price of gold in rubles can rise even if the price of gold in dollars falls. And that's exactly what's been happening. Here's the 1-year price of gold in Rubles:

http://www.goldpriceoz.com/gold-price-russia/

[img width=600]https://i.imgur.com/QozzL8U.png[/img]

If you have a Ruble-denominated portfolio and make your purchases in Rubles, some gold would sure be looking handy right about now...

[LC475]

It's not that gold will be correlated to the Ruble.

Exactly.  It hasn't been.  It's not.  It won't be.  There's no reason for it to be.

If there is a collapse in Currency X, and half of your assets are in Currency X assets (25% rubles, 25% long-term Russian bonds), then..... what?  No problem for the HBPP, because gold carries the lot.  But you know what?  That only works in one situation:

Currency X = US Dollar

[LC475]

No.  It is not going to work.  Gold is not going to be correlated to the Russian Ruble.  If the ruble crashes, gold may go up, or gold may go down.  It only works for the dollar.  Gold will only work as Harry designed it for the dollar.

Rubbish, again!  Look at Japan.  Look at Iceland.  Look at Argentina.  Look at Iraq.  Look at Zimbabwe. 

Gold is the currency of last resort, when all else fails.  But there's also canned soup, cars and home appliances if you're too po'.

You are so completely and utterly convinced at how correct you are about everything and, more importantly, so wrapped up in glorying in your rightness, that I do not think you have any idea what point I was even making.  You have no idea that I, too, see gold as a reliable store of value in extreme circumstances.

Feel free to keep taking out the garbage!  Someone has to do it!  And you're the best man for the job.

(just don't accidentally read too closely and realize that we're actually in agreement)

[Pointedstick]

It's not that gold will be correlated to the Ruble.

Exactly.  It hasn't been.  It's not.  It won't be.  There's no reason for it to be.

If there is a collapse in Currency X, and half of your assets are in Currency X assets (25% rubles, 25% long-term Russian bonds), then..... what?  No problem for the HBPP, because gold carries the lot.  But you know what?  That only works in one situation:

Currency X = US Dollar

Not sure I follow. If the ruble crashes against the dollar, that shouldn't affect a Russian who buys everything in Rubles by a huge amount, right? As for whether gold will save an otherwise crashing Russian PP, gold priced in rubles has doubled recently. I don't see how that's not relevant. It seems to me that this is how a Russian PP would be doing right YTD:

Cash: +10% (source)
Stocks: -44% (source)
Bonds -39% (source)
Gold: +79% (source)

That gives a total YTD performance of nominal 1.5%, and with a 9% inflation that gives -7.5% real YTD. Bad, but not catastrophic.

A lot of these numbers are sort of extrapolated based on my crude attempt to find data without knowing Russian, but is this wrong?

[LC475]

My very abbreviated point is that gold holding its own isn't enough.  It's great and all.  But what should happen is that gold should skyrocket way, way up... in real terms.  Look,

Zimbabwe (making this up)

Cash: -100% real
Bonds: -100% real
Gold: +20,000,000% nominal in Zimbabwe dollars, great, but +/- ~0% real
Stocks: who knows, but probably not terrific, given huge inflation makes it hard for business to function.

So 50% of your portfolio is a total, total loss.  It's gone.  Poof!  What saves you?  Answer: nothing.  Gold will do nothing, because gold does not really care about Zimbabwe, and the Harare Stock Exchange or whatever is in all likelihood a near total loss too, but in any case is at least not going to be doing well enough to carry the whole portfolio, making up for the loss of half of it.

The design only works for the dollar.  Because the dollar is the #1 currency in the world, when it has trouble people flee to #2: gold.  Because the Zimbabwe dollar, and the Russian Ruble, are nothing currencies, when one of them has trouble no one cares except for the 10 people who use it and they flee, probably, to the US dollar, and even if they were to flee to gold there are not enough of them to matter.  It doesn't powerfully affect the gold market.

[Pointedstick]

I think I'm starting to understand your point. If you're saying that in a crisis, the magnitude of gold's movement priced in a currency that is less important than the U.S. dollar is less powerful than it would be for an equivalent crisis in the USA, then you may be right, but I'm not sure that any of what either of us is saying can prove it one way or another. I've shown that gold priced in Rubles has gone up 79% in the last year. Would it have been more if what happened to Russia happened to the USA? Maybe. But I don't know. 79% is an awfully big gain for gold in one year--and in fact, most of it has been in the past 3 months! That's pretty huge.

Such a large gain in such a short period of time seems to show that even in a non-dollar country, the concept of gold rising when everything's going to shit still works. Of course it would have been nice if gold had gone up 145%; then a Russian PP would have yielded a 9% real return this year. But let's not forget that any other Russian portfolio except 100% cash is getting annihilated right now. When Bad Stuff™ happens, the PP is not designed to make you rich; it's designed to prevent you from going broke. If I were in Russia, I think I would be content with my -1.5% real return this year when everyone else I knew was drinking themselves to death more than usual over their bleak financial picture.

[Mark Leavy]

The only way this works for me is to think of gold as it's own value.

1 coin is a beef on the hoof.
1 coin is an acre of mediocre farmland.
1 coin is a month of manual labor.

Everywhere, at every point in history.

No matter what else happens to the local fiat currency - today - tomorrow - my ounces will always be worth the above.
This is the essence of what makes it crisis proof.

[craigr]

My very abbreviated point is that gold holding its own isn't enough.  It's great and all.  But what should happen is that gold should skyrocket way, way up... in real terms.  Look,

Zimbabwe (making this up)

Cash: -100% real
Bonds: -100% real
Gold: +20,000,000% nominal in Zimbabwe dollars, great, but +/- ~0% real
Stocks: who knows, but probably not terrific, given huge inflation makes it hard for business to function.

So 50% of your portfolio is a total, total loss.  It's gone.  Poof!  What saves you?  Answer: nothing.  Gold will do nothing, because gold does not really care about Zimbabwe, and the Harare Stock Exchange or whatever is in all likelihood a near total loss too, but in any case is at least not going to be doing well enough to carry the whole portfolio, making up for the loss of half of it.

The design only works for the dollar.  Because the dollar is the #1 currency in the world, when it has trouble people flee to #2: gold.  Because the Zimbabwe dollar, and the Russian Ruble, are nothing currencies, when one of them has trouble no one cares except for the 10 people who use it and they flee, probably, to the US dollar, and even if they were to flee to gold there are not enough of them to matter.  It doesn't powerfully affect the gold market.

I understand the point, but I think it's important to understand that the Permanent Portfolio only works for people that live in countries that aren't corrupt basket cases in general. So I don't think the Permanent Portfolio would work in Zimbabwe simply because no person with any investable capital should be staying there if they can leave. For instance, for a white Zimbabwe citizen having their land stolen and threatened their portfolio should be:

90% - Gold on their person or in funds stored outside the country.
10% - Airfare to get the hell out of there for them and their family.

The portfolio for them is not anything other than the above in my opinion based on the political situation.

Russia is obviously not as bad, but certainly if you live in a place where the government has a lot of problems keeping a stable currency and financial system (Argentina perhaps as another current example), then you need to use different tactics and the Permanent Portfolio is probably not a good option for person's in that situation. People living in those countries should be leveraging international diversification out the wazoo, Swiss banks, foreign real estate, etc. along with domestic investments that are likely to weather serious disruptions. They should probably keep only money for immediate living expenses in the national banks, with the rest being kept overseas in a basket of currencies and only wired in as needed monthly/quarterly. If they don't have assets to do that, they should be holding the funds in tangible assets locally they can quickly liquidate as needed for living expenses when needed.

So I think the argument here is not that there is/isn't enough gold in the portfolio. I think it really is whether extraordinary situations require a radically different investment approach than people in stable countries are used to. In cases where there is severe political instability you have to be extremely defensive with your wealth.  You don't have the luxury to sit back and be passive and have concentrated bets in single stable currencies.

[LC475]

...

[LC475]

I think I'm starting to understand your point. If you're saying that in a crisis, the magnitude of gold's movement priced in a currency that is less important than the U.S. dollar is less powerful than it would be for an equivalent crisis in the USA, then you may be right,

That is exactly what I'm saying.

Gold does very well -- and should always do very well, for some very sound reasons -- whenever there is high inflation in the US dollar.

Not when there's high inflation in any other currency.  Just the US dollar.  That could change.  But for now, that's the way the world is.  And so the PP is designed to take advantage of that.

but I'm not sure that any of what either of us is saying can prove it one way or another.

What does that mean to "prove" something in the investment field?  Investment is different than geometry, because there are humans involved and humans are unpredictable.

I've shown that gold priced in Rubles has gone up 79% in the last year. Would it have been more if what happened to Russia happened to the USA? Maybe. But I don't know. 79% is an awfully big gain for gold in one year--and in fact, most of it has been in the past 3 months! That's pretty huge.

Is it?  I'm not so sure.  What has it gone up in real terms?

See, real is a little bit of a tricky thing.  But I think the most useful, practical real is "how much wealth does this really represent" and to determine that, you ideally use a global scale.  In the end, it will be global, because we live in a global world (LOL) and arbitrage opportunities will be evened out by global entrepreneurship and trade.

So, can gold really buy 79% more right now on the global market than it could one year ago?  Highly doubtful.  I would go out on a limb and say: absolutely, definitely, not.

Such a large gain in such a short period of time seems to show that even in a non-dollar country, the concept of gold rising when everything's going to shit still works.

It's a different concept you're talking about.  It's a different(ish) principle at work.  What's will happen to gold in the Australian PP or the Russian PP or the Argentinian PP or the Indian PP or the Swedish PP when the currency of that country goes to pot is that gold will hold its own.  You're not looking at gold rising when you see it "rising" in terms of the ruble this year.  This is not a case of gold rising, but of the ruble falling.  Can the hypothetical Russian gold holder now buy 79% more iPhones with his holding?  79% more Lexuses or Mercedes-Benzes?  79% more yacht?  79% more blue jeans?  None of the above, my friend!

So the concept you're talking about is: gold can preserve his wealth.  And that's a good, true concept.  Applies worldwide.  But the concept of gold doing so sensationally well during an inflationary period that it can carry an entire portfolio consisting of 75% other stuff is a concept that I think we can count on being true for US dollar inflationary periods, and not for inflationary periods of any other currency, as the world stands now.

[LC475]

So I think the argument here is not that there is/isn't enough gold in the portfolio. I think it really is whether extraordinary situations require a radically different investment approach than people in stable countries are used to. In cases where there is severe political instability you have to be extremely defensive with your wealth.  You don't have the luxury to sit back and be passive and have concentrated bets in single stable currencies.

I agree completely.  I am not criticizing the PP in my points.  The amount of gold is good.  What I'm saying is that I am not sure that it can be applied to other currencies, even those of stable, honest, private-property-respecting countries. It will not provide the exact same design characteristics.  The new design characteristics may be good enough for a person, or they may not.

Because dollar and US assets are so widely and easily available, I think that for individuals with a large enough net worth it makes a lot of sense to use a standard Harry Browne Permanent Portfolio as their main investment portfolio, rather than attempting to construct a "German PP" or a "Singapore PP".  They can hold US stocks, US bonds, and gold that's the same everywhere, and, yes, US treasuries.  And then they can write themselves a check each month for their living expenses.  Or, can keep some amount in an account with easy spend features, such as a local (or overseas!) checking or debit account.  The cash is the trickiest part, and doing what I suggest will take away a couple of the features of the cash that it otherwise has in a PP: rock-solid non-volatility in terms of local purchasing power, and extreme liquidity and ease of access in an emergency.  But I think that the advantage outweighs the disadvantages.  The advantage is: it will perform 100% as designed in all economic conditions, and so you will be safe and covered 100% of the time.

Different people might differ in their priorities, and that's fine.  But this is my reasoning.