Precious metals

[guitarplayer]

Do you think buying land would be proxy enough for this asset class? Less liquid, but could be productive. More difficult to steal it. In Europe can be purchased very cheaply in some parts of the continent (so not that high entry threshold).

More generally, if someone happens to be involved in a real estate operation (REIT, owning [part of a] property in one way or another), would some people here see it as a proxy for gold? I am aware in this case more things can go wrong compared to owning land.

[ertyu]

currently ads plastered all over my humble Eastern European Country, online and off, "BUYING LAND, INCLUDING INHERITANCE CLAIMS THAT HAVE NOT BEEN RESOLVED." offices of land brokers buying land have opened on many a corner. not one of those offers to sell you any. Something is brewing with agricultural land. Smells like a large buyer that went to the locals and said JUST BUY.

[shemp]

All real assets should move together in the very long run: gold, silver, copper mines, oil in the ground, timberland, farmland, housing and commercial real-estate (raw land plus improvements), factories, operating businesses, brand names and patents and other non-tangible assets, etc. That is, you should normally get inflation, plus maybe part of growth in overall world wealth, plus risk premium. If you can buy timberland cheap, and can manage it yourself, it will likely do better than gold in the long run. Farmland is trickier to manage.

[shemp]

Smells like a large buyer that went to the locals and said JUST BUY.

Happens everywhere taxes on land are low. Stupid peasants think low taxes are great because they personally don't want to pay taxes, so eventually all the land is owned by the wealthy. When peasants complain, wealthy respond by making a big fuss about foreigners and pass new laws to restrict foreign ownership of land. Peasants are satisfied because they think being slaves to a small group of fellow countrymen who regard them as cattle is somehow much better than being slaves to foreigners. Maybe slightly better, or maybe even worse, but definitely not much better.

There have been revolutions where peasants turned against wealthy landowners, but the result is always merely to establish a new set of elite landowners, possibly indirect owners as under communism. I can't think of single case where peasants have figured out that higher land taxes would actually solve problem of parasitical landowners sucking up the value of peasant labor. Germany and Netherlands have high land taxes, but these were imposed and are maintained not by peasants, but rather by the industrial/commercial elite, who see feudal landowners as natural competitors for power and thus a threat that must be prevented from arising.

You see a lot of peasant mentality in this forum. People anxious to throw their support behind systems that will enslave them in the long run.

[guitarplayer]

All real assets should move together in the very long run: gold, silver, copper mines, oil in the ground, timberland, farmland, housing and commercial real-estate (raw land plus improvements), factories, operating businesses, brand names and patents and other non-tangible assets, etc. That is, you should normally get inflation, plus maybe part of growth in overall world wealth, plus risk premium. If you can buy timberland cheap, and can manage it yourself, it will likely do better than gold in the long run. Farmland is trickier to manage.

I should have probably mentioned that I was asking re gold vs real estate from the point of view of the permanent portfolio or similar. I see your point and in the very long run it probably matters little what one is invested in, as long as it is valuable. In fact, since gold does not produce anything, probably other assets would work slightly better in the very long run.

The reason for being interested in gold / real estate is wondering how to invest money that may be one day used for buying a house, so would not like to have much volatility there. Also looking at a sort of portfolio I would be happy with in a few years when I and DW will perhaps want to occasionally not work.

To put simply: is land enough of a proxy to gold to take its function in the permanent portfolio?

[Mister Imperceptible]

Look at performance of real estate vs gold 2006-2012.

Volatility is not synonymous with risk.

[shemp]

I am dubious about all these magical portfolios, including the "permanent portfolio", that propose to reduce risk more than would be accomplished by simply diversifying widely in stocks.

Investment markets pay for information and risk bearing. If you know something true that other people don't know (or other people know but can't act on what they know for some reason) and act on that information by putting money on the line (buying or selling), then you get paid. If you are willing to stand in the line of fire and risk catching bullets as they come, so that other people don't have to catch those bullets, then you get paid. Covid-19 is such a bullet, and everyone owning travel company stocks caught that bullet this year. Looking forwards, travel company stocks will have to offer much higher returns because investors are now alert to the risk of more such bullets in the future, and have to be paid for added risk. If you knew about the impact of covid-19 before everyone else, and sold stock market puts and bought long treasury bonds in February, you were well paid for bringing your superior information to msrket.

Volatility is only different from risk because of noise traders who treat the market like a casino, versus idealized rational investors who update prices only because of new information. Rational investors can take advantage of the volatility noise traders create to buy low and sell high with low risk (just risk associated with holding after buying low, since real world events could push fair price below that buy low price).

But to answer your question, no, timberland is by no means a substitute for gold. In particular, it's extremely illiquid. You should plan on buying and holding timberland forever, and preferably plan to pass on to grandchildren. 30 years between harvests, or something like that, though of course you can stagger harvests if you own several parcels.

[jacob]

To put simply: is land enough of a proxy to gold to take its function in the permanent portfolio?

The way I see the permanent portfolio is as a diversification along the yield curve rather than as a hedge of four economic states. Specifically,

Cash duration: 0 years
Bond duration: 20-30 years
Equity duration: 50-70 years
Gold duration: negative 5-20 years

A good design matches duration to your liabilities. The PP has duration spread across "all times" and will thus match liabilities at "all times". Gold in that sense represents liabilities that were formed 5-20 years ago. Specifically when the current bubble in one of the other classes started inflating.

As such, it is a preserver of permanent value---not an income generator. HB specifically stated that earned income from work was to be the means of growing the portfolio.

The way land is currently trading (most people can borrow money by writing bonds), it's more like a short long term bond. IIRC, the Harry Browne book, it is assumed that you fully own your residence(?) ... in that case, you also have Home duration of negative 30 years to add for further diversification. Keep in mind, that talking about duration like this is considered a form of mathematical abuse. However, as a physicist I can do that if I want

In that sense, land could substitute for gold if it wasn't for the fact that most people can buy and sell it easily with enormous amounts of leverage on the interest rates. They can't do that with gold. This renders land useless as a financial proxy.

[ertyu]

disadvantage of land vs. gold:

- cannot sell arbitrarily small fractional pieces of land: if you need cash you must sell the entire property
- land is location-dependent, thus, if you need to change locations e.g. because of war, you're fucked. gold can be stored for you somewhere else, and you are free to move around. i would assume that property lax roughly squares with gold's carry cost.

advantage of land vs. gold:

- gold is a commodity. one bar of gold is identical to another. whereas with land, if you luck out and the place where you own is a beneficiary to future demogrpahic or climatic developments, you benefit disproportionately (you are screwed disproportionately if you pick a bad location, too).
- land grows shit which you can eat. thus while gold does not generate a return, land does.

as with everything else, pick your poison. the aggressiveness with which land is being bought up where i am indicates to me that someone expects significant inflation.

[Mister Imperceptible]

Gold at all time highs. Up nearly 60% in 24 months.

Suppose you took out a significant loan for education, studied, worked hard, procured a job that pays you X dollars per year. If you are still making X per year in July 2020, you can buy 40% less gold now than you could in July 2018. So most people without any understanding of what is going on have seen the government reduce their purchasing power by 40% in gold terms. If you made $100,000 per year in 2018, now you only make $60,000 in 2018 dollars, if you have not procured a two thirds earnings increase. Remember that gold was $35 an ounce in 1971. This is why the middle class is increasingly bankrupt. But do not worry, the devaluation of savings and earning power goes to bail out corporate bond holders and feeds a single mother and her 6 children, so all for a good cause.

[guitarplayer]

@MI, @shemp, @jacob, @ertyu thanks for your clarifications, part of which I have managed to get and part of which I'll get in a moment of illumination I am sure.

land could substitute for gold if it wasn't for the fact that most people can buy and sell it easily with enormous amounts of leverage on the interest rates. They can't do that with gold. This renders land useless as a financial proxy.

This pretty much closes the subject for me re land as a proxy for gold. I so rarely think in terms of borrowed money that I ommited the simple fact of the possibility of leverage.

@MI your last post entry is interesting. So how much gold do you recon are dollars / pounds really worth atm?

If I ever have to take care of intellectually capable children or young people (professionally I sometimes care for the incapable), I am going to get them read this comic:

http://www.takelifeback.com/moltz/

[LookingInward]

The book Permanent Portfolio has a chapter on gold and it probably answers most of your questions. If I remember correctly:
* Advices against investing in gold miners stock;
* Advices against investing in any precious metal other than gold;
* Gives some specifics to keep in mind when it comes to gold ETFs;
* Goes into some detail when it comes to trading physical gold.

@jacob How are you calculating those durations? Thanks.