Gyroscopic Investing

The 4x25 PP uses strictly gold as an inflation / catastrophe hedge. However, I think that diversifying a portion of this into silver might still be a good decision....as per the original Harry Browne PP.

#1 - Gold has no inherent industrial value to justify its price. Like other forms of past money (cowrie shells come to mind) its value is derived from the greater fool theory. Silver on the other hand has industrial value and no substitutes in many applications (price inelastic).

#2 - Past price charts show that silver price movements in bull markets tend to track that of gold pretty closely: http://www.thumbcharts.com/1333/gold-an ... since-1915 thus providing portfolio asset diversification. I believe that Clive found that silver and gold PP performed pretty similarly over longer time periods.

#3 - If economic recovery were to happen it is possible that silver being an industrial commodity could see a stronger floor underneath it while demand for gold drops very sharply once global currency risks dissipate.

#4 - In a true SHTF scenario with total currency collapse using silver would be much more practical to purchase items vs. gold.

#5 - If massive currency crisis were to occur it is possible that golds high price could cause many to be priced out of the market. Silver being some 50-60 times cheaper than gold could create a larger and more liquid market.

These are just a few ideas that came to mind. Curious as to comments or criticisms...

i would consider reason #1 to be a negative for silver as part of the PP...reason being that in a deflationary environment, silver demand from industry might go way down...gold is pure money.

I think a common error is that gold only does well during inflation...but people forget how govm't revalued it upwards during the deflation of the 1930s. You'll find articles online which examine this.

Its interesting that some people forcast correctly the gold bull market, but played it with equities, not the metal...they've been very disappointed.

Also, in 2011, silver had a negative return y-o-y of about 10%, I recall...gold was positive by roughly the same amount.

having said that, I'm very bullish in silver for VP purposes...

I think the biggest risk with silver is if there is deflation.  Gold is money but silver is a money/industrial commodity combination.  If economic activity slows down, the industrial demand for silver will probably drop.  Will it be offset by people buying silver to use as money?  I don't know. 

I do own some silver coins as part of my VP since I think you are right about silver outperforming gold in a high inflation era. 

doodle wrote:The 4x25 PP uses strictly gold as an inflation / catastrophe hedge. However, I think that diversifying a portion of this into silver might still be a good decision....as per the original Harry Browne PP.

I've amassed a collection of most of Harry Browne's investment books.  While I haven't made a detailed study of them yet, one thing that is obvious is that his permanent portfolio evolved over time, and that Harry usually described reasons why this asset or that rose or fell in favor with his PP concept.

With silver, I think he stated that the investment benefits of silver had been reduced, once the silver price had adjusted from past price manipulations.  He also made similar statements about gold.  And applying his arguments to the 4x25 portfolio long-term treasuries are approaching a threshold of minimal utility under his criteria.

Silver and gold are both very volatile stores of value.  The fact that their values occasionally move in opposite directions offers rebalancing opportunities.  I think the whole monetary vs. industrial argument with gold and silver is meaningless.  Both are monetary metals (currently and historically) and both have non-monetary uses.  The gold graphic posted elsewhere on this forum showed that non-monetary uses dominated current gold production amounts.

Legal tender gold and silver coins also have a cash "floor" under them in the event of deflation.  A pre-1965 US quarter is currently worth about 24x face, while a U.S. Double Eagle is worth about 83x face (precious metal content only).  So the floor is pretty far down there for gold

And I do realize that if you include silver in your PP you are not doing an HBPP.

Platinum would serve many of the same functions that silver would.

WildAboutHarry wrote:
With silver, I think he stated that the investment benefits of silver had been reduced, once the silver price had adjusted from past price manipulations.  He also made similar statements about gold.  And applying his arguments to the 4x25 portfolio long-term treasuries are approaching a threshold of minimal utility under his criteria.

Very interesting comment. If this was HBs reasoning, it seems it should cause many follow-on questions relating to the current situation. Such as, was this pulling silver before, during or after the Hunt Brothers episode? Its interesting that, if accurate, this might imply that the PP  might not be as "permanent" as we'd like it to be. It seems the best we can do is to learn from HB thinking so we can apply the principles to the current situation?

As someone who had gold stocks, platinum and silver in their portfolio last year I have to say gold makes the most sense.

I do agree that silver and gold both have monetary and non-monetary uses and also that silver would be easier to use if/when SHTF happens.

Silver gets produced continuously as a byproduct of lead and other base metal production. That means that even if there is no demand for more silver it still gets produced and the excess just pushes the price down. The lack of a reserve pool for silver and the higher storage cost for silver versus gold also feeds into the volatility. Silver seems to act much more like a regular commodity and much less like a currency in comparison to gold. The PP holds gold basically as a currency from what I can make out.

murphy_p_t wrote:

WildAboutHarry wrote:
With silver, I think he stated that the investment benefits of silver had been reduced, once the silver price had adjusted from past price manipulations.  He also made similar statements about gold.  And applying his arguments to the 4x25 portfolio long-term treasuries are approaching a threshold of minimal utility under his criteria.

Very interesting comment. If this was HBs reasoning, it seems it should cause many follow-on questions relating to the current situation. Such as, was this pulling silver before, during or after the Hunt Brothers episode? Its interesting that, if accurate, this might imply that the PP  might not be as "permanent" as we'd like it to be. It seems the best we can do is to learn from HB thinking so we can apply the principles to the current situation?

He said goodbye to silver (somewhere around $40) in late 1979/early 1980 before the Hunt Brothers espisode.  He didn't come up with the balanced PP concept as we know it until the early/mid 1980s.   

doodle wrote: These are just a few ideas that came to mind. Curious as to comments or criticisms...

Because silver (and platinum or palladium) is an industrial commodity, I would only hold 1 bag of junk silver for SHTF protection and no more. 

Gold won't have that much use in a SHTF scenario where the financial system is destroyed or implodes.  For that, you want jewelry, soap and toilet paper to barter with.

If you're looking to expand protection against gold buillion confiscation, then other real assets can be useful (in no particular order): rare colored diamonds, nonleveraged prime real estate, farmland, timberland, rare collectible stamps, investment-grade art (careful, it tracks the stock market on a lagged basis) and semi-numismatic gold coins (tracks gold buillion on a lagged basis).

A small portion of the gold allocation can easily accomodate this miscellany.  Small being the operative word.  It is insurance for the insurance.

MG

Another argument that I forgot to post above is that every year a proportion of the silver supply is used up and not recovered which (unlike gold) means that there is both a faucet and a drain on the supply of this metal.

MG,

Because silver (and platinum or palladium) is an industrial commodity, I would only hold 1 bag of junk silver for SHTF protection and no more.

Silver is both an industrial commodity AND a precious monetary metal. In fact, the word for money in many Spanish speaking countries is "plata" (silver)....or in Great Britain...the name "Pound Sterling". Silver coinage dates back to before that of gold and most major world empires used silver as the primary monetary metal.

Paladium and platinum as well as other trace metals are fundamentally different from silver in this regard.

To those who advocate diamonds as a store of value, I would highly recommend against this as there is no shortage of diamonds in the world. Their high price is almost entirely due to restriction of supply by DeBeers diamond monopoly which tightly controls their release into world markets.

murphy_p_t wrote:Very interesting comment. If this was HBs reasoning, it seems it should cause many follow-on questions relating to the current situation. Such as, was this pulling silver before, during or after the Hunt Brothers episode? Its interesting that, if accurate, this might imply that the PP  might not be as "permanent" as we'd like it to be. It seems the best we can do is to learn from HB thinking so we can apply the principles to the current situation?

Here is what Harry had to say in Why the Best Laid Plans... (1987) about silver.

Harry Browne wrote:During the 1970s, I suggested both gold and silver for the Permanent Portfolio.  But now that silver has compensated for the decades of price control, it no longer has a built-in reason for appreciation.

Harry Browne wrote:[my] timing was remarkable, and that was luck.  The newsletter article "Farewell to Silver" appeared with the price [of silver] at $38 - within two weeks of the all-time high of $48.

So Harry pulled the plug on silver during the peak of the Hunt Brothers run up.

Harry's permanent portfolio was really "semi-permanent" in that he constantly evaluated alternatives, modified allocations, etc.  Part of that reflects the times, of course, but it also reflects Harry's obviously inquisitive nature and thoughtful evaluation of economic circumstances.  I do think the 4x25 portfolio represents a maturation of his concept, simplified (but not simplistic!) for ease of implementation and operation.

In the Why the Best Laid Plans... Harry had this to say about modifications to the Permanent Portfolio:

Harry Browne wrote:... you might decide to add foreign currencies, foreign stocks, silver, or some other long-term investment.  These other investments aren't essential to a Permanent Portfolio, but they might be included to provide additional diversification...

To those who advocate diamonds as a store of value, I would highly recommend against this as there is no shortage of diamonds in the world. Their high price is almost entirely due to restriction of supply by DeBeers diamond monopoly which tightly controls their release into world markets.

Understood, but do note I said colored diamonds.  Those are the true, natural rarities.

MG