Newbie gold question, help appreciated.

[Freedom_Found]

Hi All,

I have been lurking here for awhile, and just wanted to say thanks to all the regulars on here and for all the great info provided. I am a huge HB fan, it's hard to imagine that one man can be right on about so many things (financial and otherwise.)

Anyhow, I have about 200K in retirement savings, which I am going to convert to the PP That's about 50K for each of the four classes. I have some specific ideas about the gold asset class, and was wondering of some of the more experienced on here can look at them and tell me if I'm way off the mark or what.

Everything I see tells me that gold is currently in a bubble. Miners and mining companies are stumbling over themselves to mine as much of it as quickly as they can, and the inflation adjusted price is just about what it was in the previous craziness of the early 80's. Meanwhile, some are saying it will go to ridiculous highs (5K+ per oz) After the research I have done, I feel that gold should be in the $900/oz range tops, and could easily come down to that price (or lower) after our political instability passes and we have the next boom cycle and gold is no longer the "in" thing. To just dump all my 50K into bullion and watch it go down over the next 10 years just doesn't seem right. I've read Harry's book, and there is a section where he says not to play around with this stuff, to just put 25% in each class. But the book was written when gold was super low, and he addresses worries that people might not want to buy since the price is too low. That is not my worry. After just losing about 50% of my wealth in real estate, I have a good feeling now for what a bubble is like. While I want to follow Harry's advice to a T and not make the dumb mistakes he warns against, I also just can't seem to force myself into buying at what seems like an artificially high price. I was thinking of waiting a year or so until the election passes, and maybe DCA in slowly, or just wait until a crash and then buy all in. I understand this is awfully like "timing the market" and I realize that is a bad idea, but in this case it does seem to make sense. Does anyone have any thoughts on this?

As a side note, it would seem to me that holding physical gold in a secure location (floor safe, etc) would also be good insurance against litigation sharks, (lawsuits, etc) since it is not an asset that lawyers can research when they are deciding if you are worth suing or not, nor can it be taken in a lawsuit if its existence is not known, but I don't ever see this mentioned. Any thoughts on this as well? Thanks in advance.

[moda0306]

Gold in physical form is currency without government or leverage... money in its purest form... something that's almost unheard of on our earth.  It relies on no contracts, and is still very difficult for the government (or lawyers, as you mention) to know if you have any.  All other currencies are manipulated by government to generate some combination of bountiful economic activity at the expense of holders of existing currency and wealth for cronies.

I'm not an inflationist, but I tend to think gold will settle in the mid-2000's.

As long as rates are low and inflation is higher than those risk-free rates, people will be hunting for better return, and gold's a small enough market that it doesn't take long for money rushing into it to make its price explode.

I would also say that someone could argue that stocks appeared to be in a bubble after 1996, or that bonds appeared to be in a bubble just a few months ago.

It's a lot harder to see what the rollercoaster looks like when you're in the actual car.

I tend to agree that 25% in gold is a bit much, but to leave it at any less than 10% of the portfolio is a big mistake, IMO.

[craigr]

Hi All,

I have been lurking here for awhile, and just wanted to say thanks to all the regulars on here and for all the great info provided. I am a huge HB fan, it's hard to imagine that one man can be right on about so many things (financial and otherwise.)

Welcome!

Everything I see tells me that gold is currently in a bubble. Miners and mining companies are stumbling over themselves to mine as much of it as quickly as they can, and the inflation adjusted price is just about what it was in the previous craziness of the early 80's. Meanwhile, some are saying it will go to ridiculous highs (5K+ per oz) After the research I have done, I feel that gold should be in the $900/oz range tops, and could easily come down to that price (or lower) after our political instability passes and we have the next boom cycle and gold is no longer the "in" thing.

This is a valid concern. But let me be Devil's advocate: If inflation goes up sharply then the inflation adjusted price will rise. The $900 figure you point out may be valid if inflation stays in the 4% historic range. But if the next 10 years we get the 9% we got in the 1970s then all bets are off. Gold could go a lot higher. We don't know.

I see a lot of commentators talk about inflation adjusted prices. But this always assumes inflation stays where it was and can't anticipate what inflation may do going forward.

It's like when I see someone say that such and such a stock is too high because the P/E ratio is elevated. They think that the price will have to fall. But they forget that there are *two* ways for P/E to move:

1) Stock price falls to bring P/E down.
2) The company makes more than expected profits and that brings the P/E down.

Same with gold prices. The price may come down to today's inflation adjusted values. Or inflation may go up so much that the new inflation adjusted value spikes.

So I would be cautious on reading too much into historical data and projecting it into the future.

To just dump all my 50K into bullion and watch it go down over the next 10 years just doesn't seem right.

You don't know if it will go down. It might, but it might not. I read articles years ago when it was $600 an ounce predicting an imminent collapse to $300 at any moment.

I've read Harry's book, and there is a section where he says not to play around with this stuff, to just put 25% in each class.

Yes this is correct advice. IMO. Just get it over with.

The thing is each person is different with how their money is invested. Right now I don't know how you have your money invested. It could be in a very safe T-Bill fund, or it may be in extremely risky Nigerian bonds.

If it is in T-Bills then I would say you can take your time if you feel like it and ease into things. Just be careful not to turn it into a market timing adventure which most people cannot seem to do.

But if you have your money in the Nigerian bonds then you are being very risky and diversifying immediately into the Permanent Portfolio is the safer move.

I lumped sum in and didn't regret it. It saved me from the riskier portfolio I had before and provided good returns immediately. I also started not worrying as much about my money sooner. So these are good things for lump summing. When you dollar cost average you give yourself a new chance each month, quarter, year, etc. to question your previous decisions. This can make it hard to implement the strategy over time.

As a side note, it would seem to me that holding physical gold in a secure location (floor safe, etc) would also be good insurance against litigation sharks, (lawsuits, etc) since it is not an asset that lawyers can research when they are deciding if you are worth suing or not, nor can it be taken in a lawsuit if its existence is not known, but I don't ever see this mentioned. Any thoughts on this as well? Thanks in advance.

If you do this, then you probably need to carry insurance on it in case you get robbed. If you do that then you may still expose yourself to the discovery process. If you don't insure it, then you run the risk of theft, fire. etc. Only you can weight these risks.

[MediumTex]

After the research I have done, I feel that gold should be in the $900/oz range tops, and could easily come down to that price (or lower) after our political instability passes and we have the next boom cycle and gold is no longer the "in" thing.

Did you also think that $900 an ounce was the correct price back when it was $600 an ounce?

Most of the people who were saying $900 an ounce when gold was at $600 an ounce were considered crazy.

It's very hard to say what price an asset is "supposed" to be at.  Asset price movements over time typically surprise everyone in how high and how low they can actually go.

The beauty of the PP is that an asset can go up several hundred percent while it is rising in value, but a PP asset can never lose more than 100%.  This simple concept is one of the reasons that the PP works so well; losses get sticky--i.e., their descent must slow as they approach zero--but gains don't get sticky at all when the near the arbitrary 100% price appreciation point relative to where you originally bought them.

If I had bought stocks for my PP in 2000, I would have seen 40% or more declines since then, and as of now I would be about even.  If I also bought gold in 2000, though, I would have seen a 700% increase in value.  One more than offsets the other.

[Ad Orientem]

Freedom Found,
Welcome to the forum.  I will second the posts by Craig and Medium Tex.  My only addition would be on the subject of home storage.  I really don't recommend it.  It is almost always high risk.  We live in an age when violent home invasions are not unknown, and for a lot less gain than $50k in gold.  Just rent two safe deposit boxes at different banks, or at least different branches, and put 1/2 your gold stash in each one.  The security level is much higher than anything you are going to have at home unless you are prepared to turn your house into an armed fortress.  And seriously, who wants to live like that?  Also remember that unlike with an allocated gold account, you don't have to declare the contents of your safe deposit box to anyone.

If a serious crisis looks like it is brewing you can always pull some or all of your gold out of the bank and bury it in the cellar.  Otherwise I'd just leave in the bank vault.

[AdamA]

But the book was written when gold was super low, and he addresses worries that people might not want to buy since the price is too low. That is not my worry. After just losing about 50% of my wealth in real estate, I have a good feeling now for what a bubble is like. While I want to follow Harry's advice to a T and not make the dumb mistakes he warns against, I also just can't seem to force myself into buying at what seems like an artificially high price.

One thing I would add to what's already been said is that although HB wrote Fail-Safe Investing when gold prices were low, he conceived the idea of the PP much earlier, as a way to diversify out of gold after making a lot of money speculating on precious metals.

He knew the price of gold could come down quite a bit, but he still recommended 25%.

As Craig points out a lot, even a 50% drop in gold (or any of the assets) will only put a 12.5% dent in your portfolio, and that assumes that nothing else goes up in response to whatever is happening to make gold prices fall.

I think it's best just to buy the 25% gold and see what happens.  I don't think there's anyone who's really capable of figuring out where the gold market will go in the future.  You'll kick yourself if  it goes to $5000, and you won't get that badly hurt if it tanks all of a sudden.

[Gumby]

But the book was written when gold was super low, and he addresses worries that people might not want to buy since the price is too low. That is not my worry. After just losing about 50% of my wealth in real estate, I have a good feeling now for what a bubble is like. While I want to follow Harry's advice to a T and not make the dumb mistakes he warns against, I also just can't seem to force myself into buying at what seems like an artificially high price.

One thing I would add to what's already been said is that although HB wrote Fail-Safe Investing when gold prices were low, he conceived the idea of the PP much earlier, as a way to diversify out of gold after making a lot of money speculating on precious metals.

The thing about gold is that since it doesn't produce or return anything, it can't accurately be given a value. In other words, gold is priceless. Therefore, it can never be "high" or "low" because its potential value is either infinity or zero.

We don't have the capacity to understand "infinity" in terms of dollar worth, but if dollars (or any currency) have the potential to become worthless, then by definition no amount of dollars would be able to buy an ounce of gold.

We may think gold is "high" now, but in reality dollars are just lower in value, in relation to gold, than they were in the past.

[Freedom_Found]

Thanks everyone for the replies. Some good points are made. I think I am convinced to at least begin to buy gold where I wouldn't have been before.

Did you also think that $900 an ounce was the correct price back when it was $600 an ounce?

I can see what you are saying, although I hadn't discovered HB until about 8 months ago, so other than buying an Vanguard 500 index fund in my IRA, I really hadn't done much investing and I wasn't paying attention to or familiar with the price of gold one way or the other. Only in the last few months have I started to analyze the price.

I think I can sum up Harry's book in one sentence. "No one knows anything, so don't try to know anything more than they do, just do what makes factual sense."

Does anyone have a recommended source to buy bullion?

[stone]

The thing about gold is that since it doesn't produce or return anything, it can't accurately be given a value.

To some extent, gold is also a commodity and can be dug out of the ground. I think it costs about $800/ounce to dig it out of the ground. Perhaps that provides some sort of force of gravity to the gold price. BUT gold is not like a normal commodity because it does not get consumed. So the huge $5T stockpile of above ground gold probably makes the gold price much less sensitive to the production cost than is the case for typical commodities.

[Gumby]

I think it costs about $800/ounce to dig it out of the ground. Perhaps that provides some sort of force of gravity to the gold price.

That shouldn't really matter, at least in a speculative market. If dollars were to become (more) worthless it would cost more than $800/ounce to dig it out of the ground.

[stone]

Gumby since 2000 the cost of digging up gold from the ground has gone from $700/ounce to $800/ounce and the price of gold has gone from $300/ounce to $1600/ounce. Negative real interest rates make gold look extremely good value at <0.5x the production cost. Perhaps it is less good value at 2x the production cost?

[Gumby]

Gumby since 2000 the cost of digging up gold from the ground has gone from $700/ounce to $800/ounce and the price of gold has gone from $300/ounce to $1600/ounce. Negative real interest rates make gold look extremely good value at <0.5x the production cost. Perhaps it is less good value at 2x the production cost?

I'm saying that people obviously buy gold because they are more worried about the future than the current reality.

[Wonk]

We may think gold is "high" now, but in reality dollars are just lower in value, in relation to gold, than they were in the past.

This.  Talking about gold prices rising is akin to how people used to think the sun moved around the earth--not the other way around.  As Gumby mentions, gold doesn't really do anything.  It's the purchasing power of the currency it is priced in that changes.  Thinking about real interest rates in this context makes a lot of people go "hmmm."

There are metrics for valuing gold in a currency and periodically we brush up against those numbers when faith in paper assets bottoms out.  We're nowhere near those numbers at the moment.  Not even close.  Also, the cash cost to mine gold is relatively meaningless.  It's a very wide spectrum that varies from mine to mine and company to company.  Some miners have reserves that can be tapped at only several hundred dollars an ounce.  The "average" cash cost to mine gold is largely irrelevant.  Bringing new mines online takes years and sometimes decades.

Although more people are waking up to gold, it's still under the radar.  I was walking in the mall last week and there was a gigantic store with "cash for gold & silver" out front.  They weren't jewelers--just precious metals buyers.  Now, this mall is one of the largest in North America and rent must be outrageously high.  Do you think they are the suckers and Joe Sixpack is the savvy one?  Doubt it.  You will not see a store like this when gold is at bubble prices.  Their sign will change to "Buy your gold and silver here" and there will be a line out the door. 

Here's the thing.  Gold is volatile and will correct 20-30% on a routine basis--like now.  It's always possible we could see $1400 or $1300 gold in the near future, but don't count on it.  Now is a great time to make a purchase as part of your PP set up.  Pull the trigger and don't look back.

[stone]

Wonk you can employ someone for many more hours with the value of an ounce of gold now than was the case ten years ago. You can buy more acres of farmland or houses with a given amount of gold. I think it is undeniable that gold has moved relative to our real economy leaving aside currency value. I don't know whether wages of middle class Indians or Chinese have kept pace with the price of gold. If that were true, then perhaps the price of gold has remained grounded and other things have slipped back

[Wonk]

Wonk you can employ someone for many more hours with the value of an ounce of gold now than was the case ten years ago. You can buy more acres of farmland or houses with a given amount of gold. I think it is undeniable that gold has moved relative to our real economy leaving aside currency value. I don't know whether wages of middle class Indians or Chinese have kept pace with the price of gold. If that were true, then perhaps the price of gold has remained grounded and other things have slipped back

Land and labor have different supply and demand characteristics than gold and don't react to real interest rate changes the same way.

[stone]

Wonk I totally agree but if you don't take land and labour as your "grounding" for valuation then I don't think valuation makes a lot of sense. You might as well say that tech stocks or tulips are the real measure of value. Gold only gets the respect that it does because for five thousand years it has tracked the value of land and labour to within an order of magnitude or so. That is its entire virtue IMO. That also gives some credance to the concept that it is currently expensive. I still think it is sensible to hold it because it might become more expensive.

[Wonk]

I don't know that I would say gold has tracked land/labor.  I'd say they are mutually exclusive and have similar--but unique--price characteristics, so I'm with you on that.  Gold meets various requirements for a store of value and use as money that assets like land don't exhibit.  With respect to valuation, I'd say that at the moment--in historical terms--gold is still cheap (or alternatively most world currencies are still overvalued).  Hard and soft sovereign defaults have a way of bringing investors back to basics.

[stone]

Wonk, I guess what I was trying to say was that land and labour are the real basis of value but are impractical to use as a store of value. Over a time span of thousands of years, gold has been the liquid, convienient store of value that has best tracked the value of those real measures.
You can't eat gold. Gold won't care for you in your old age.

[WildAboutHarry]

I don't know that I would say gold has tracked land/labor.  I'd say they are mutually exclusive and have similar--but unique--price characteristics, so I'm with you on that.  Gold meets various requirements for a store of value and use as money that assets like land don't exhibit.  With respect to valuation, I'd say that at the moment--in historical terms--gold is still cheap (or alternatively most world currencies are still overvalued).  Hard and soft sovereign defaults have a way of bringing investors back to basics.

An interesting perspective on the valuation of gold from the movie The Treasure of the Sierra Madre:

A thousand men, say, go searching for gold.  After six months one of 'em is lucky - one out of the thousand.  His find represents not only his own labor but that of the nine hundred ninety-nine others to boot.  Six thousand months or fifty years of scrabbling over mountains, going hungry and thirsty.  An ounce of gold, mister, is worth what it is because of the human labor that went into the finding and the getting of it.

And maybe add the storing and the keeping of it to the total.

[edsanville]

I love that classic movie, but that quote is an economic fallacy.  He's basically restating the "Labor Theory of Value,"  which was discredited in the 18th century by the Marginalist Revolution.  The Marginalists realized that the value of an item isn't directly caused by the human labor that goes into finding/creating/storing it, but that the value of something is equivalent to its "marginal use," where

"The marginal use of a good or service is the specific use to which an agent would put a given increase, or the specific use of the good or service that would be abandoned in response to a given decrease."

A byproduct of marginalism is the realization that subjective value is ordinal, not numerical.  In other words, economic agents rank things prima facie in order of preference...  the quanitative value of objects is only determined when many agents come together, in the marketplace, to dynamically, ordinally rank goods and services versus quantities of money, for the purposes of exchange with other agents.

I think of marginalism versus labor value theory this way:  according to the labor theory of value, the movie Waterworld was the "most valuable" movie ever made in 1995, because it was the most expensive to make (required the greatest sum of labor, goods, etc).  The moviegoers, and the marginalist theory disagreed heartily.

I don't know that I would say gold has tracked land/labor.  I'd say they are mutually exclusive and have similar--but unique--price characteristics, so I'm with you on that.  Gold meets various requirements for a store of value and use as money that assets like land don't exhibit.  With respect to valuation, I'd say that at the moment--in historical terms--gold is still cheap (or alternatively most world currencies are still overvalued).  Hard and soft sovereign defaults have a way of bringing investors back to basics.

An interesting perspective on the valuation of gold from the movie The Treasure of the Sierra Madre:

A thousand men, say, go searching for gold.  After six months one of 'em is lucky - one out of the thousand.  His find represents not only his own labor but that of the nine hundred ninety-nine others to boot.  Six thousand months or fifty years of scrabbling over mountains, going hungry and thirsty.  An ounce of gold, mister, is worth what it is because of the human labor that went into the finding and the getting of it.

And maybe add the storing and the keeping of it to the total.

[WildAboutHarry]

I love that classic movie, but that quote is an economic fallacy.

It may be an economic fallacy but it is great film making

Howard goes on to say this about gold's value:

There's no other explanation [for gold's value], mister.  In itself, gold ain't good for anything much except to make jewelry and gold teeth.

Marginalism assumes rationality, though, and that was certainly in short supply in The Treasure of the Sierra Madre

[MachineGhost]

Gold is not in a bubble yet.  Gold stocks have been chronically undervalued vs buillion for a long while.  When taxi drivers and other "Great Unwashed" are speculating on junior gold miners and Royal Gold is the creme de la creme gold stock to own, then and only then will it be a bubble.  It will be the speculative frenzy to end all speculative frenzies, probably surprassing the Tulip Bulb Mania.

Theres nothing wrong with legging into the portfolio as long as you respect the order of the risk:

Cash <- Gold <- Bonds <- Stock.

A simple method for timing gold bullion that historically outperforms buy and pray is to check the price of gold in the four major currencies (USD, EUR, GBP, JPY) at the end of each month and if all are showing a positive gain, then buy the gold, otherwise wait until next month.  However, I do not know how that compares to DCA into gold in a bull market.  As long as real interest rates remain negative, gold will remain in a bull market.

MG

Hi All,

I have been lurking here for awhile, and just wanted to say thanks to all the regulars on here and for all the great info provided. I am a huge HB fan, it's hard to imagine that one man can be right on about so many things (financial and otherwise.)

Anyhow, I have about 200K in retirement savings, which I am going to convert to the PP That's about 50K for each of the four classes. I have some specific ideas about the gold asset class, and was wondering of some of the more experienced on here can look at them and tell me if I'm way off the mark or what.

Everything I see tells me that gold is currently in a bubble. Miners and mining companies are stumbling over themselves to mine as much of it as quickly as they can, and the inflation adjusted price is just about what it was in the previous craziness of the early 80's. Meanwhile, some are saying it will go to ridiculous highs (5K+ per oz) After the research I have done, I feel that gold should be in the $900/oz range tops, and could easily come down to that price (or lower) after our political instability passes and we have the next boom cycle and gold is no longer the "in" thing. To just dump all my 50K into bullion and watch it go down over the next 10 years just doesn't seem right. I've read Harry's book, and there is a section where he says not to play around with this stuff, to just put 25% in each class. But the book was written when gold was super low, and he addresses worries that people might not want to buy since the price is too low. That is not my worry. After just losing about 50% of my wealth in real estate, I have a good feeling now for what a bubble is like. While I want to follow Harry's advice to a T and not make the dumb mistakes he warns against, I also just can't seem to force myself into buying at what seems like an artificially high price. I was thinking of waiting a year or so until the election passes, and maybe DCA in slowly, or just wait until a crash and then buy all in. I understand this is awfully like "timing the market" and I realize that is a bad idea, but in this case it does seem to make sense. Does anyone have any thoughts on this?

As a side note, it would seem to me that holding physical gold in a secure location (floor safe, etc) would also be good insurance against litigation sharks, (lawsuits, etc) since it is not an asset that lawyers can research when they are deciding if you are worth suing or not, nor can it be taken in a lawsuit if its existence is not known, but I don't ever see this mentioned. Any thoughts on this as well? Thanks in advance.

[dualstow]

Theres nothing wrong with legging into the portfolio as long as you respect the order of the risk:

Cash <- Gold <- Bonds <- Stock.

Is that right? I'm not challenging that order. I've simply never seen it before.

[melveyr]

Theres nothing wrong with legging into the portfolio as long as you respect the order of the risk:

Cash <- Gold <- Bonds <- Stock.

Is that right? I'm not challenging that order. I've simply never seen it before.

This order seems rather subjective to me. The whole point of the PP is to have asset classes that balance each other out. For the most part gold, stocks, and long bonds have similar price volatility. If we assume the future is unknowable, than I would make the argument that stocks, bonds, and gold have similar risk profiles.

I do agree that short-term debt obligations lack the juice of the three other components, making them less risky.

[MachineGhost]

Right according me, yes. 

It is simply that cash is the least riskiest, but suspectible to negative real interest rates.  To hedge that risk, you need gold, which is then suspectible to positive real interest rates.  To further hedge away that risk, you need LT bonds.  And only after you have the LT bonds, can you then safely add in the stocks as it also requires the LT bonds for hedging.

MG

Theres nothing wrong with legging into the portfolio as long as you respect the order of the risk:

Cash <- Gold <- Bonds <- Stock.

Is that right? I'm not challenging that order. I've simply never seen it before.