Permanent Portfolio (Harry Browne)

[jacob]

How would you handle the gold component?
GLD? Bullion (like eagles or krugerrands)? PCGS collectible coins? Mining companies? Rolling futures?

[JohnnyH]

Whatever route you take I think you need at least a portion in your physical possession...
Peter Schiff's Crash Proof, was probably the best book I've read on gold ownership. Here are some excerpts:
"STRUCTURING YOUR GOLD PORTFOLIO

My advice is for you to have a portfolio that includes at a minimum some physical gold in your possession; some physical bullion outside your possession and offshore, such as the Perth Mint; and a mixed portfolio of gold stocks, say 40 percent senior producers, 30 percent midlevel, 20 percent juniors, and then maybe the last 10 percent exploration companies and speculative stocks. That would be a solid portfolio of gold stocks, and if you like silver, you can blend that in proportionately." -pg 232
He also recommends 8-30% of your total worth in gold, which some might find quite high. But is consistent with the Permanent Portfolio.
"Gold Exchange-Traded Funds

The main risk I see with these investments is that it could

turn out that the auditing has been false and that the metal they claim to have is not really there. I don’t know this to be a problem, but anything can happen, and my feeling is why take the chance when you can own gold and silver directly?

Another drawback is that gold ETFs are legally a form of debenture (an unsecured bond), meaning that if there were trouble and the GETF provider went into liquidation, holders would be general creditors instead of outright owners as would be the case with a PMGC purchase." -pg 228
I see there is now a physical gold trust to combat this fear: PHYS... Still, the above still applies to some extent.

[jacob]

Where "in your possession" would mean buried in your backyard rather than in a bank vault and offshore is to avoid government confiscation. I presume.

[JohnnyH]

I suppose so... Not exactly comforting the idea of trying to hide thousands in uninsured, tiny coins in/around your house! Could they even be insured?
I'm not sure gold confiscation is really a large risk anymore. The USD has no relationship to gold anymore, so why would the feds want it? Just print more money and buy gold.
I have read articles about mass scale openings of private safety deposit boxes in the UK. Could easily happen here under the guise of the war on terror... Still, I'd be more comfortable with a box, than hidden in my socks.

[jacob]

I think when gold was confiscated in the US, bank deposit boxes which hadn't been opened after the ban could not be opened without the presence of an IRS agent the first time it was opened.
On a side note, there has been some rumors about Russia creating a hard currency.

[Marius]

I'd say: physical gold (mostly kilo bars because premium is low) + some own a bit of GLD because it's easier to rebalance than physical gold.

I would steer clear from collectables (precious metals or other) and I'm afraid of gold stocks, they're special and very risky.
Every solution for storing bullion has risks and disadvantages. So maybe the best solution is to diversify into several types of storage. Example: some in a bank safe, some in a hidden home safe, some in other hiding places, etc.

Harry Browne recommended to hold some in a safe in a country like Switzerland, in case the US decides to confiscate or you have to flee the country and start over elsewhere.

For your safety, it's best that people don't know that you own gold. But if you die, your heirs should get the info to find it.
More info about the gold part of the PP:

http://crawlingroad.com/blog/2009/10/13 ... ation-faq/
These are strange and dangerous days. Gold could fall or shoot to the sky. Maybe physical gold will become hard to obtain. The market doesn't seem to work in a normal way. Nobody knows nothing...

http://www.zerohedge.com/article/lbma-c ... ading-data

[pbkennedy]

If you want to read a book on active investing, I'd recommend The Intelligent Investor by Benjamin Graham. Graham taught Warren Buffett at Columbia, and Buffett describes the book as "the best book on on investing ever written". Personally, I am primarily an indexer and use Vanguard index funds and ETFs for their low costs. I diversify based on correlation coefficients, where lower is better. Paula

[Marius]

Addendum to my comment:
"mostly kilo bars because premium is low"
Forget to remind that I'm in Europe, maybe in the US other bars are cheaper.

[Concojones]

For gold, avoid financial instruments because they can become worthless in a market crash (there's nowhere enough bullion to deliver on the promises of all those gold derivatives). I'd only use them if I needed a short-term hedge (exposure). Oh and there's nothing wrong with gold coins that command a premium. If gold goes up, so will the premium. Gold bars shouldn't have a premium.
Rolling futures: maybe if you do your own rolling, but don't buy into a big ETF because the rest of the market will feed on you. For a dramatical example, compare the price performance of UNG (US Natural Gas fund) to that of the commodity it's supposed to track.
Mining companies are good too. If you don't want to own too many companies (seniors, mid-level, juniors, explorations), pick some that have not only expansion projects but also ongoing production to fund them.

[Marius]

@Concojones "there's nothing wrong with gold coins that command a premium. If gold goes up, so will the premium."
Beware, we're in a gold bull market now. When gold is going down, you may lose the premium if Marc De Mesel is correct:

"Wanneer niemand goud wil krijg je geen premies op de munten maar gewoon de goudprijs. Wanneer iedereen goud wil is men bereid 5% of meer boven de goudprijs te bieden voor de munten."

Source: http://www.marcdemesel.be/2010/05/so-far-so-good.html
Translation:

"When nobody wants gold, you just get the price of gold when you sell coins, no premium. When everybody wants gold, people accept to pay 5% or more above the price of gold for coins."
I agree that financial instruments are a poor substitute for gold. They add counterparty risk, while one of the advantages of holding bullion is avoiding counterparty risk.
And if you buys bullion, get it from reputable resellers and makers. Buy bars only from major brands (Marc De Mesel refers to the Good Delivery List, even though private individuals normally can't afford good delivery bars). For coins, wellknown coins like eagles, krugerrands or maple leafs seem much safer than stuff like Russian coins, LOL:

http://www.zerohedge.com/article/rust-d ... gold-coins

[Concojones]

@Marius: good point! I was going to say "but gold's going up!" but I acknowledge that's irrelevant to a PP (permanent portfolio) holder. Interesting concept BTW, that PP!

[jacob]

I'd add that for collectors coins, the premium acts as a leverage. That leverage changes according to market conditions (say Eagles suddenly becomes fashionable) but remains more or less the same.
A good coin dealer is davidhall.com ... (I agree on the bit about buying from reputable sources. It can be a sold of money and you don't want to buy gold plated lead )

[JohnnyH]

I'd really like to see a chart of the PP's performance. Mostly to see what the drawdowns were like, still with the available data -those are very impressively consistent returns.

[Maus]

The problem I have with the gold portion of the PP is the capital gains exposure during the accumulation phase. If gold overweights in a particular year, some will have to be sold to rebalance to 25%. This will incur taxation at the 28% level. Of course, once you have achieved ERE, then your overall income is probably well below that threshold. If you are close, maybe you can make a painless transition to the PP.

[Marius]

@JohnnyH Here's some chart porn:

http://www.bogleheads.org/forum/viewtop ... 899#757899

http://www.bogleheads.org/forum/viewtop ... 296#595296

[Marius]

@Maus Maybe this helps:

http://www.bogleheads.org/forum/viewtop ... 2c2#788227
I don't know how it works in your country. In my country there are no taxes when a private person sells some of his physical gold, or at least I have never heard of such a thing.

[JohnnyH]

Thanks for the charts, Maus. It looks like that mutual fund took some liberties with the original PP... I'll have to look at these more.
@Marius: technically I think private bullion sales are supposed to be reported in the US... And they are taxed at the high "collectibles" rate. There's so much conflicting information on the web it's hard to know. I do know that it is a cash transaction and enforcement of any such taxes would be very difficult.

[Marius]

@Maus Just read this on Crawlingroad.com's permanent portfolio forum that keeping enough GLD in an IRA (tax sheltered) for rebalancing purposes could be a solution.

[Maus]

@Marius

I like that solution. Perhaps 20% in physical gold and 5% in GLD in my Roth IRA, rebalance annually. I am seriously considering the PP because to-date I have used the dividend growth strategy and it will be compromised by the sunsetting of the Bush tax cuts. Currently I am 20% cash, 10% bonds and 70% equities, which is a bit too beta for me. I am close enought to FI that I want to smooth out some of the volatility by trading upside >5% ROI for some protection on downside.

[Q]

Would the 25% across the board work if you practiced it in two (or maybe 3) economies.
Like say, 1 in USD, 1 in Brazil, and 1 in say Germany or some other stable Euro-Zone market - maybe 4, and include Japan.