Replace a part of gold with gold miners?

[frommi]

I want to discuss if its a good idea to replace a part of the gold of the PP with some gold miners. In my eyes they have some advantages over physical gold when you are not awaiting the end of the world. They pay dividends so you are not losing out on storage costs for the gold. They should profit from inflation like gold and are more volatile than gold itself, which should be good for the PP in theory. Buying/selling commissions should also be lower. Opinions?

[Libertarian666]

I want to discuss if its a good idea to replace a part of the gold of the PP with some gold miners. In my eyes they have some advantages over physical gold when you are not awaiting the end of the world. They pay dividends so you are not losing out on storage costs for the gold. They should profit from inflation like gold and are more volatile than gold itself, which should be good for the PP in theory. Buying/selling commissions should also be lower. Opinions?

No. They do not respond to crises in the same way that gold does. Also, inflation pushes up the price of their inputs, mainly labor and energy, so their profitability is impaired by that effect. In addition, their valuation is affected by the fact that their gold reserves are not infinite, so any mine has a limited lifetime.

I'm not saying they can't be profitable to own sometimes, but they are not a replacement for gold.

[frommi]

When you overlay the charts of GDX and GLD you see that GDX follows GLD closely only with a much higher volatility.
See here (last chart): http://www.distressedvolatility.com/201 ... ed-in.html

At the current marketlevels it screams to buy GDX instead of GLD .
I think its common misconception that gold reacts to crisis or inflation. It reacts in my observations mainly to negative/low real cash yields. Or how can you explain that gold skyrocketed since 2003 at inflation rates of 2%? And why did gold lose in 2008 when its good in crisis?

[KevinW]

See the "Can I hold gold mining and metal mining stocks instead of gold?" section of the gold FAQ:
https://web.archive.org/web/20160324133 ... ation-faq/

[buddtholomew]

I own GLD in the PP and GDX in a VP. From my observations, mining stocks follow equities more closely than they mirror the price of gold. They do offer more frequent re-balancing opportunities when compared with my other equity positions, but I would never consider replacing gold with miners as it violates many of the PP principles.

[frommi]

I will exist the PP nontheless in the next month when i get rid of my longterm bonds, so i don`t want to follow rules that someone invented 30 years ago or renewed as a philosphy. The PP is a simple asset allocation, not more and not less. Sometimes i am under the impression that people in this forum treat the PP as their religion and fight back every attempt to invest wisely.

I don`t want to replace gold forever with gold stocks, but think it is a great time to do so currently. Perhaps i am simply the person who thinks too much .

[craigr]

Gold miners vs. gold bullion in 2008's crash:



Gold miners are subject to stock like risks that bullion is not.

There is nothing saying you can't load up on miners by lowering you core permanent portfolio position. But they are not a replacement for bullion.

[buddtholomew]

I will exist the PP nontheless in the next month when i get rid of my longterm bonds, so i don`t want to follow rules that someone invented 30 years ago or renewed as a philosphy. The PP is a simple asset allocation, not more and not less. Sometimes i am under the impression that people in this forum treat the PP as their religion and fight back every attempt to invest wisely.

I don`t want to replace gold forever with gold stocks, but think it is a great time to do so currently. Perhaps i am simply the person who thinks too much .

Don't criticize the PP investor for adhering to portfolio principles because you have a hunch on the direction of mining funds and interest rates. It looks like you haven't internalized the concept of the PP and still believe that you can outperform using active management and timing. Good luck!

[frommi]

ok, thanks for the chart. I should have used another thread title. "Are gold miners a good investment now?" would have been a better one.

[frommi]

Don't criticize the PP investor for adhering to portfolio principles because you have a hunch on the direction of mining funds and interest rates. It looks like you haven't internalized the concept of the PP and still believe that you can outperform using active management and timing. Good luck!

In the first months of the PP i was a believer, but than i learned more and more and questioned my decisions. I am not a market timer, i just don`t want to hold assets that are too expensive and want to buy an asset when its cheap or fair valued. When you call that market timing, ok i`m doing it. The rebalancing bands of the PP should do the same, but that only works when all 3 (or 4) assets in the PP are going to increase in value long-term. I don`t want to be in german bonds when they normalize from current levels of 2,5% to 5 or 6%. That will be the next drawdown the PP investor will face. Probably not this year or next year but sooner or later it will happen. With my current level of knowledge i don`t even trust the EMH anymore. As Graham said, in the short run the market is a voting machine, in the long run its a weighing machine. And risk is not volatility! ( only when you are the greatest risk in your investing )

[mortalpawn]

I bought a small amount of GDX in my VP recently.  I think its a very volatile fund, but that's why its in my VP.  Honestly for me it looks like a short term play - betting some of the likely market volatility this fall may drive GDX a bit higher in the coming months. 

However, I'm not considering it as a substitute for the main PP assets.  GDX and the miners have roughly twice the volatility of gold, and if you run any kind of long term backtest, the results are not good.  For example, I took EZBacktest and ran a sample PP of VTI-TLT-GLD-SHY and then substituted GDX for GLD over the last 104 months, and the returns dropped from 8%/year to 4.2%/year while the standard deviation went from 7.6 to 12.2!  The sharpe ratio was 1/3 the value for the GDX (i.e. 1/3 the risk/reward for this portfolio).

[buddtholomew]

Don't criticize the PP investor for adhering to portfolio principles because you have a hunch on the direction of mining funds and interest rates. It looks like you haven't internalized the concept of the PP and still believe that you can outperform using active management and timing. Good luck!

In the first months of the PP i was a believer, but than i learned more and more and questioned my decisions. I am not a market timer, i just don`t want to hold assets that are too expensive and want to buy an asset when its cheap or fair valued. When you call that market timing, ok i`m doing it. The rebalancing bands of the PP should do the same, but that only works when all 3 (or 4) assets in the PP are going to increase in value long-term. I don`t want to be in german bonds when they normalize from current levels of 2,5% to 5 or 6%. That will be the next drawdown the PP investor will face. Probably not this year or next year but sooner or later it will happen. With my current level of knowledge i don`t even trust the EMH anymore. As Graham said, in the short run the market is a voting machine, in the long run its a weighing machine. And risk is not volatility! ( only when you are the greatest risk in your investing )

How do you know that long-term bonds are too expensive? Also, the short end of the yield curve could rise disproportionately higher than the long end. So without any fixed income, how do you intend to invest 100% of your assets?

[MediumTex]

Nooooooooooooooooooooo.

[frommi]

How do you know that long-term bonds are too expensive? Also, the short end of the yield curve could rise disproportionately higher than the long end. So without any fixed income, how do you intend to invest 100% of your assets?

Longtermbonds were never in the last 130 years as expensive as last year. When i want to retire i need at least 3-4% real returns from an asset and german long term bonds are far away from that number. At 5-6% i become a buyer of longterm-bonds again. I will replace them with hand picked and researched dividend growths stocks. I have done it with the cash portion allready and feel really great doing it. Currently i am at dividend yield of around 3,5% with yearly growth of around 6-8%. No other asset can give me that kind of return, its nearly perfect for retirement. As long as dividends are coming in i can ignore the market (and they did that even through 2008 except of some banks). My target is to have >50 stocks.

[frommi]

When LTTs go to 6%, why is that the time to buy? What makes you so sure they will not then go to 10%?

Isn`t that obvious? At 2% inflation bonds with 6% give the returns needed for retirement at 4% withdrawal rate  and its simply return to the mean.

[frommi]

When LTTs go to 6%, why is that the time to buy? What makes you so sure they will not then go to 10%?

Isn`t that obvious? At 2% inflation bonds with 6% give the returns needed for retirement at 4% withdrawal rate  and its simply return to the mean.

But when rates get to 6%, what is to say inflation will still be at 2%?

Ok, i will buy when i get 3-4% real returns with bonds. Better?

[Ad Orientem]

Bad idea.
Really bad idea.

At the risk of piling on...

Mining stocks are... STOCKS. Not gold. There are a lot of variables that affect their performance that have little or nothing to do with the price of gold. And they do not fulfill the function of disaster insurance the way gold does. If you want to play around with mining stocks that's a good topic for the VP forum.

Beyond which I am sensing a bad case of market timingitis here. The future is unpredictable. There have been cases where long bonds have gone down to near 1%. I'm not saying that this is going to happen again. In fact my gut says that's unlikely. But it is dangerous when people become dogmatic about what the future holds. In my experience that is a train wreck waiting to happen. It's like daring God to prove you wrong.

See "this ship can't sink" and related examples.

[Pointedstick]

When i want to retire i need at least 3-4% real returns from an asset[...]

Well then it's a good thing that the PP has historically provided that!