I'm building up a permanent portfolio. One big question, to buy gold now or not? In one sense it seems bubbled. On the other hand, its gaining against EVERY currency and currencies are not going to get stronger any time soon. And both the gov't of India & China are asking their people to buy gold...
http://www.asiaone.com/News/Latest+News ... 34057.html
Also, oil? Up or down? It seems dumb not to buy right now its so affordable vs only a few years ago. If you're a believer in Peak Oil, than you have to think that oil will never be this affordable again in our lives. But... if you think this recession is only just getting started, then who cares about supply... demand is going in a vicious cycle down.
Commodity Trading
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jacob
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Are you perhaps seeking advice on market timing? A witch! A witch! 
http://home.earthlink.net/~intelligentb ... dow-au.htm
Personally I'm not too sold on gold. If I were to set up a permanent portfolio, I'd use something more akin to the alpha strategy for my precious metal portion.
I think oil will never be as cheap as it is now until the next recession. The only thing that will make it permanently more expensive is being outpriced by the competition, like Chindia.
http://home.earthlink.net/~intelligentb ... dow-au.htm
Personally I'm not too sold on gold. If I were to set up a permanent portfolio, I'd use something more akin to the alpha strategy for my precious metal portion.
I think oil will never be as cheap as it is now until the next recession. The only thing that will make it permanently more expensive is being outpriced by the competition, like Chindia.
Ack - market timing, I just set my bank account to buy an ounce of gold each month regardless of the price from here until I die to please the gods of dollar-cost averaging (i.e. my bank).
My worry about studying trends of gold is that I think gold has gone from "commodity" to "currency", which is a major trend change that hasn't happened since??? (would have to look in history to understand last time paper currency gave way to gold) Do historical graphs apply?
The fact that China & India are the driving force behind pushing the price of gold higher higher totally blew my mind. It removes the idea that "fear" is driving the gold market higher. China and India have strong growth and still have inflation concerns after all???
Since the US is telling China that they have to unpeg or move the RMB to the USD, isn't the smartest counterattack by China to buy and control the price of gold... and keep the price of gold artificially high vs the RMB. In fact growing the price of gold with their economy (and keeping the RMB value low), wouldn't that be a dream come true? I wouldn't mind investing in something that is pegged to growth in China right now...
My worry about studying trends of gold is that I think gold has gone from "commodity" to "currency", which is a major trend change that hasn't happened since??? (would have to look in history to understand last time paper currency gave way to gold) Do historical graphs apply?
The fact that China & India are the driving force behind pushing the price of gold higher higher totally blew my mind. It removes the idea that "fear" is driving the gold market higher. China and India have strong growth and still have inflation concerns after all???
Since the US is telling China that they have to unpeg or move the RMB to the USD, isn't the smartest counterattack by China to buy and control the price of gold... and keep the price of gold artificially high vs the RMB. In fact growing the price of gold with their economy (and keeping the RMB value low), wouldn't that be a dream come true? I wouldn't mind investing in something that is pegged to growth in China right now...
Yeah, I think gold has always been more of a currency-of-last resort than a commodity. Its industrial uses are scant. All I can think of is jewelry, dental fillings, and contacts on audiophile stereo equipment.
Of course you're free to do what you want, but there is a reason why the vanilla permanent portfolio uses gold. All the assets except cash have some form of leverage that causes their price to appreciate faster than their corresponding economic condition. Long term bonds have their duration which causes a large increase relative to a small dip in interest rates. Stocks have their debt to equity ratio which is used to leverage economic booms. The supply of monetary gold is very small relative to fiat currency, so whenever people become scared of inflation and start buying gold, the price shoots up faster than the underlying inflationary force.
My concern with other inflation hedges such as tools, oil, and TIPS bonds, is that they don't seem to have this property and instead seem to appreciate at roughly the rate of inflation. The PP depends on the volatile (non-cash) assets rallying harder than that.
The PP is designed to have at least one asset rallying at all times, which conversely means at least one asset will seem to be overpriced at any given moment. A big part of the PP philosophy is accepting that we can't predict these things and so we should hold a diverse blend of assets at all times.
Of course you're free to do what you want, but there is a reason why the vanilla permanent portfolio uses gold. All the assets except cash have some form of leverage that causes their price to appreciate faster than their corresponding economic condition. Long term bonds have their duration which causes a large increase relative to a small dip in interest rates. Stocks have their debt to equity ratio which is used to leverage economic booms. The supply of monetary gold is very small relative to fiat currency, so whenever people become scared of inflation and start buying gold, the price shoots up faster than the underlying inflationary force.
My concern with other inflation hedges such as tools, oil, and TIPS bonds, is that they don't seem to have this property and instead seem to appreciate at roughly the rate of inflation. The PP depends on the volatile (non-cash) assets rallying harder than that.
The PP is designed to have at least one asset rallying at all times, which conversely means at least one asset will seem to be overpriced at any given moment. A big part of the PP philosophy is accepting that we can't predict these things and so we should hold a diverse blend of assets at all times.
Yes, that's one way of thinking about it: an even 50/50 split between production and reserves. The production side is split between owning and loaning. The reserves are split between paper money and hard assets.
Since up to three assets will be dead weight at any given time, you want each corner represented by its purest essence, hence the long term treasury bonds and the physical gold.
The volatility allows you to capture a small (1-2%) rebalancing bonus from the cash and gold, which otherwise would have an expected-value real return around 0%. I think of this as compensation for being an "ant:" occasionally the world is starving for the reserve side of the portfolio.
Since up to three assets will be dead weight at any given time, you want each corner represented by its purest essence, hence the long term treasury bonds and the physical gold.
The volatility allows you to capture a small (1-2%) rebalancing bonus from the cash and gold, which otherwise would have an expected-value real return around 0%. I think of this as compensation for being an "ant:" occasionally the world is starving for the reserve side of the portfolio.
If I were pursuing a PP I would be very hesitant to substitute anything for gold for the reasons KevinW states. However, I might consider TIPS (which protects against unexpected inflation -- not inflation that everybody expects) but I also think theres a good chance it would be sub-optimal going forward even with the high current gold prices.
@dpmorel -- since you mentioned oil, are you intended for the PP to only be portion of your asset allocation? or are you looking at oil as a substitute for gold?
@dpmorel -- since you mentioned oil, are you intended for the PP to only be portion of your asset allocation? or are you looking at oil as a substitute for gold?
The oil comment is totally seperate from PP. I look at the price of oil and feel like a fool that I don't hold any. Literally, at this price I feel like I should build a concrete shelter in my yard and store oil barrels.
Buuuuuuuuuuuutttttttttttt.......
I think permanent portfolio only makes sense in a world where resources are abundant. In an era of energy (or any resource) being scarce you'd end up with:
-stagflation (don't want bonds or stocks)
-currencies that have poor oil supply/demand economics getting devalued quickly (don't want cash if you live in say the US)
That leaves gold as "safety". In the past gold has not kept up with energy prices when they have soared. So gold may get "devalued" as a currency vs a more scarce resource. Also gold production is tied to the price of energy, i.e. gold supply drops and its usefulness as a currency diminishes... though perhaps this drives price up (but trade volume down?). Also oil/energy rich countries would have no interest in letting another less scarce/valuable resource drive the price of their resource.
So if the goal of your permanent portfolio is hedging against all financial risk, you have to keep ann eye on resource scarcity... wouldn't you? Especially if you believe in peak oil...
Buuuuuuuuuuuutttttttttttt.......
I think permanent portfolio only makes sense in a world where resources are abundant. In an era of energy (or any resource) being scarce you'd end up with:
-stagflation (don't want bonds or stocks)
-currencies that have poor oil supply/demand economics getting devalued quickly (don't want cash if you live in say the US)
That leaves gold as "safety". In the past gold has not kept up with energy prices when they have soared. So gold may get "devalued" as a currency vs a more scarce resource. Also gold production is tied to the price of energy, i.e. gold supply drops and its usefulness as a currency diminishes... though perhaps this drives price up (but trade volume down?). Also oil/energy rich countries would have no interest in letting another less scarce/valuable resource drive the price of their resource.
So if the goal of your permanent portfolio is hedging against all financial risk, you have to keep ann eye on resource scarcity... wouldn't you? Especially if you believe in peak oil...
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jacob
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Given the premises of the PP, it seems like it is a purely financial strategy, that is, it'll work insofar that a trading market exists... all four markets must be in effect: bond, stock, hard currency, and soft currency.
It lacks real commodities.
In a stagflation economy it would make sense to hold commodities whether it's raw resources or things that require a lot of skilled labor to produce, no?
It lacks real commodities.
In a stagflation economy it would make sense to hold commodities whether it's raw resources or things that require a lot of skilled labor to produce, no?
"So if the goal of your permanent portfolio is hedging against all financial risk"
I think this goes to the heart of why I'm not that interested in the PP. I don't want to hedge against everything -- lower risk means lower expected returns. (This is not to say I don't think there's a place for cash, long bonds, or gold/commodities but I would hold them in vastly different proportions than 4x25).
I think this goes to the heart of why I'm not that interested in the PP. I don't want to hedge against everything -- lower risk means lower expected returns. (This is not to say I don't think there's a place for cash, long bonds, or gold/commodities but I would hold them in vastly different proportions than 4x25).
I believe in PP as much as anything else.
There has to be a point where reality of our own situation sets in - will currencies fall within the next 70 years? Will oil be completely gone? Will we see WW3? WW4 or WW5? Will the US have a coup? and finally - will a bus hit you, and you survive from your watch?
Cmon now! We don't know right?!? I am afraid of many things, mainly losing family and myself no longer being here. It is scary - extremely scary. But in some weird way it pushes me to have progress on my lists, progress in working to not work, and progress to enjoy what I can now.
PP is a hedge for the future in the current known times. ERE prepares for lack of resources by relying on self. Exercising, eating right, being healthy ups your personal reserves across the board. People connections, planning, pre-prep, all this goes into an advanced equation with too many variables - and the variable you think you can control, you can only control so much. See San Bruno pipeline explosion, 9/11, WW2, Hiroshima, on and on and on
/end rant
There has to be a point where reality of our own situation sets in - will currencies fall within the next 70 years? Will oil be completely gone? Will we see WW3? WW4 or WW5? Will the US have a coup? and finally - will a bus hit you, and you survive from your watch?
Cmon now! We don't know right?!? I am afraid of many things, mainly losing family and myself no longer being here. It is scary - extremely scary. But in some weird way it pushes me to have progress on my lists, progress in working to not work, and progress to enjoy what I can now.
PP is a hedge for the future in the current known times. ERE prepares for lack of resources by relying on self. Exercising, eating right, being healthy ups your personal reserves across the board. People connections, planning, pre-prep, all this goes into an advanced equation with too many variables - and the variable you think you can control, you can only control so much. See San Bruno pipeline explosion, 9/11, WW2, Hiroshima, on and on and on
/end rant
What I find funny is that it is completely ok to hedge against the risk of technological disruption. Many, many. many investors make investments in "high-tech" betting that the technology will disrupt current economics in a given industry. For some reason this is thought of as normal, good, risk-aggressive investment behaviour.
Trying to do something similar, invest in industry disruption due to resource scarcity makes you look like a crazy person. But really its the same game, isn't it?
I'm going down to my bunker to go eat spam and think about this.
Trying to do something similar, invest in industry disruption due to resource scarcity makes you look like a crazy person. But really its the same game, isn't it?
I'm going down to my bunker to go eat spam and think about this.
@Jacob
Good question, you made me think quite a while about this. For me, I look at risk as the probability of having an unhappy outcome in the future. For example, an unhappy outcome would be my portfolio not being able to pay for health care in 10 years. Personally, I don't care much about short term volatility and didn't even blink in the recent downtown.
I think the market has tendency (not guaranteed) to reward the weighted average of what investors see as risks. Although I do not care much about short term volatility, I think many market participants do care and all other things being equal, would tend favor investments with lower std. dev given equal expected returns. Of course defining volality as std. dev. is a very coarse model and doesn't really capture some things well like once the price goes to zero it's game over.
I think it's much harder to tell if risk-reward are linked in stocks because individuals often care about different risks (e.g., for growth stocks you might be concerned about fluctuations in p/e multiples and in value stocks the risk of bankruptcy). However in bonds, the story seems clear: treasuries (low yield)-> corporate (med yield) -> junk (high yield) which mirror the default rates.
I'm not that familiar with the Black-Scholes equation (I've heard of it and know it's used for option pricing but that's it), so I'm going to go look it up to see if I can understand your comment re arbitrage.
@dpmorel -- i don't think the PP is a crazy idea and is probably the right thing for some investors to do. However, it is not a fit for me because it doesn't match my ability, need, desire to take risk. The hedging ability of PP comes at a cost of having 50% of you assets in cash/gold which essentially have zero expected return.
Good question, you made me think quite a while about this. For me, I look at risk as the probability of having an unhappy outcome in the future. For example, an unhappy outcome would be my portfolio not being able to pay for health care in 10 years. Personally, I don't care much about short term volatility and didn't even blink in the recent downtown.
I think the market has tendency (not guaranteed) to reward the weighted average of what investors see as risks. Although I do not care much about short term volatility, I think many market participants do care and all other things being equal, would tend favor investments with lower std. dev given equal expected returns. Of course defining volality as std. dev. is a very coarse model and doesn't really capture some things well like once the price goes to zero it's game over.
I think it's much harder to tell if risk-reward are linked in stocks because individuals often care about different risks (e.g., for growth stocks you might be concerned about fluctuations in p/e multiples and in value stocks the risk of bankruptcy). However in bonds, the story seems clear: treasuries (low yield)-> corporate (med yield) -> junk (high yield) which mirror the default rates.
I'm not that familiar with the Black-Scholes equation (I've heard of it and know it's used for option pricing but that's it), so I'm going to go look it up to see if I can understand your comment re arbitrage.
@dpmorel -- i don't think the PP is a crazy idea and is probably the right thing for some investors to do. However, it is not a fit for me because it doesn't match my ability, need, desire to take risk. The hedging ability of PP comes at a cost of having 50% of you assets in cash/gold which essentially have zero expected return.
@jacob
"Given the premises of the PP, it seems like it is a purely financial strategy"
I agree, the PP is a financial investing strategy, in the same category of thing as the 60/40 policy portfolio, Coffehouse portfolio, value investing, etc. The gold component seems to be a red herring that draws criticism from both sides: mainstream investors and self-sufficient types both think it's useless, but for opposite reasons.
@photoguy
I agree completely that the portfolio needs to be tailored to individual circumstances and temperament. On
"50% of you assets in cash/gold which essentially have zero expected return"
I agree that either's expected return is zero when viewed as a single asset in isolation. However the PP holds them as decorollated assets and captures a modest rebalancing bonus from the cash/gold.
"Given the premises of the PP, it seems like it is a purely financial strategy"
I agree, the PP is a financial investing strategy, in the same category of thing as the 60/40 policy portfolio, Coffehouse portfolio, value investing, etc. The gold component seems to be a red herring that draws criticism from both sides: mainstream investors and self-sufficient types both think it's useless, but for opposite reasons.
@photoguy
I agree completely that the portfolio needs to be tailored to individual circumstances and temperament. On
"50% of you assets in cash/gold which essentially have zero expected return"
I agree that either's expected return is zero when viewed as a single asset in isolation. However the PP holds them as decorollated assets and captures a modest rebalancing bonus from the cash/gold.
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Concojones
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As an alternative to gold, consider a stock like Jaguar Mining. I bought it recently because it's really attractively priced. 600,000 ounces of annual production in a few years. That's a gross profit of around 600 million, about today's market cap. A steal, IMO.
If you look into it, you'll see that the stock price has declined this year over technical problems with their production, which will be solved one day. Overall, I'd say this stock is somewhat riskier than physical gold, but with way more upside. I'm not advocating to put 100% of your gold money in one stock, however.
If you look into it, you'll see that the stock price has declined this year over technical problems with their production, which will be solved one day. Overall, I'd say this stock is somewhat riskier than physical gold, but with way more upside. I'm not advocating to put 100% of your gold money in one stock, however.