A question arises frequently by those looking to hold hard assets in a portfolio:

Should I buy commodities or gold for my asset allocation?

This question has been covered here before, but I’m going to give three short and sweet reasons why gold is superior to any commodity fund you can buy:

1) Gold is a commodity and is also a monetary metal. You can get the protection then of both. In 2008 when commodities crashed (losing 50% in value very quickly!), Gold posted 5% gains. When the banking system was in shambles, gold was viewed as a form of money independent of what overall commodity prices were doing.

2) I don’t think most people really understand how commodity futures funds work (I don’t and I admit it). Investors shouldn’t buy anything they don’t understand. Gold is simple.

3) Gold has a track record of responding very strongly to currency problems that no other asset possesses.

Johnny Carson as Carnac the Magnificent

In investing discussions you will frequently get some debate about this or that asset. Will prices go higher? Will the prices crash? Someone gives a good narrative for why the asset must continue to go up and someone counters with an equally convincing narrative against. Both sound reasonable and, depending on what narrative most matches your own feelings, you respond positively or negatively.

Here’s my take: Market narratives may provide the emotional framework people want to see in life to explain events, but they mean nothing (a point made very clear in Nassim Taleb’s book The Black Swan). The future is not predictable no matter how plausible someone’s narrative about it may sound.

We hear this stuff all the time in the news. Some market guru says that such-and-such must happen because of some inevitable series of events that will take place. Well there’s an old saying I like that sums up my feelings on this:

“No matter how thin you slice it, it’s still baloney.”

I don’t listen to or care what a single financial guru has to say on anything about the direction of the economy or the markets. I don’t care what degrees they hold, what awards they’ve gotten, what books they’ve written, or what they predicted in the past. The future is just not knowable and it doesn’t matter who is predicting it. In fact, it has proven to be a consistently profitable maneuver to ignore every single prediction about the market I hear and hold a balanced and diversified portfolio instead.

There’s another saying I really like as well about investing:

“Never confuse the unlikely with the impossible.”

For instance, not a single mainstream financial guru I know of was talking about deflation in early 2008. In fact, many thought it simply couldn’t happen here due to our modern banking system. This is the meaning of confusing the unlikely with the impossible.

Yet here’s what I said when the question of deflation came up in March 2008 on an investing forum:

http://www.bogleheads.org/foru….ary#176337

The one thing I’ll say is I’ve read analyses that have made convincing cases for inflation and those that made convincing cases for deflation. Someone will be right and someone will be wrong, but that’s how markets work.

Inflation and deflation are opposite sides of the same coin. Conditions that cause high inflation can lead to deflation as bankers attempt to control the problem and vice versa. The markets are too unpredictable to rule out any possibility, even those that seem unlikely right now.

The Japanese are certainly not inept and if it can happen there it can happen here (again). The market is one big social psychology experiment and can’t be modeled or predicted. Solutions that economists say should work may not work depending on how people feel collectively. So I’m not predicting deflation will or won’t happen. I’m simply saying that I don’t know (and neither does anyone else) and structure my portfolio accordingly.

I don’t say this as a way to bolster my ego. Simply that this represents the correct attitude of “I don’t know and neither do you.” This is the attitude you need as an investor.

Now, that was written over two years ago and what happened since?

In Spring 2008 TIPS were predicting high inflation as they went negative in yields. In fact, there were many market narratives about inflation roaring in. Yet, by December 2008 interest rates collapsed due to deflation and Long Term bonds (which do very poorly under inflation) posted 30%+ gains and even gold posted 5% gains. TIPS funds by the way posted around -10% losses for the year. No guru saw that one coming. In fact, many gurus were telling people to stay out of the market in 2009 with frightening sounding bear market narratives about it going lower. What happened? The total stock market posted around 30% gains that year.

What’s the lesson? Simple: The markets are not predictable and we simply don’t know how people are going to react to future events.

So if you’re going to listen to narratives, make sure it is in a fiction novel and not with your investments.

Marc DeMesel runs his blog over in Europe and has built a European version of the Permanent Portfolio using Eurozone stocks, German Bonds, Cash and Gold. He too presents a mid-year report from the European perspective showing a 8.7% YTD return and goes over how the portfolio performed historically. Keep in mind that the Euro this year has taken a thrashing which is why the gold price appreciation in Euros is higher than that in the US.

His site is in Dutch and this is the English translation link:

Crisis? Not with a Permanent Portfolio

Marc talks about an important issue of buying things you may not think are worth owning and selling assets that are your favorites when they go up too much in value:

A crystal ball is not required, but an iron discipline in order to buy certain assets that you do not believe in and occasionally by balancing assets to sell what you believe in.

Discipline is right. It takes discipline to sell off something that has gone up so much in price and you think can only go higher to buy today’s current dog that the news media says will only go lower. Likewise, there can also be an asset you’ll be holding in the portfolio that others will ridicule as foolish. It takes a lot of discipline to ignore this noise but the reward will be an ever growing pot of money.

I generally advise not looking at portfolio returns too often, but it’s about halfway through the year so we’ll take a peek because some people have wanted to know.

The standard Permanent Portfolio allocation is 25% split into stocks, bonds, cash and gold. So far Morningstar shows:

25% Stocks – Vanguard Total Stock Market (Ticker: VTI): -5.35%

25% Bonds – iShares Treasury Long Term 20+ year Bond Fund (Ticker: TLT): +14.37%

25% Cash – iShares Very Short Term Treasury Bond Fund (Ticker: SHV) [Equivalent to a Treasury Money Market Fund]: +0.04%

25% Gold – SPDR Gold Trust (Ticker: GLD): +13.0%

Total Return YTD: +5.4% (Total Returns including all interest and dividends according to Morningstar)

If you are using my modification which substitutes the Treasury Money Market cash for a 1-3 year Short Term Treasury Fund (Ticker: SHY) you are up YTD: +5.9%

—

For comparison I track a 60% Total Stock Market and 40% Total Bond Market portfolio as well:

60% Vanguard Total Stock Market (Ticker: VTI): -5.35%

40% Vanguard Total Bond Market (Ticker: BND): +5.10%

Total Return YTD: -1.5% (Total Returns including all interest and dividends according to Morningstar

—

Interesting year so far. Gold and LT bonds are showing some serious muscle at the same time – A very unusual thing. However the markets have been very volatile for the stocks yet the portfolio has been protecting and growing the value regardless.

Keep an eye on your asset allocation and be sure you are rebalancing if you need to do so.

There’s much discussion in the news about Gold’s new price high (about $1300). The word “bubble” is getting tossed around a lot. There are a flood of articles (and advertisements) about buying gold and an equal flood about selling gold. What to do?

Talks about gold seem to devolve into market timing arguments. But for someone holding gold as part of their total asset allocation, such as the Permanent Portfolio, it should be treated like stocks or bonds with no market timing involved.

The only reason to be timing the market with gold is if you are treating it as a speculation. In this case it’s no different than relying on various indicators to sell out of all your stocks or sell out of all your bonds, etc. So use what you feel is best because they are all equally unreliable as market timing doesn’t work.

I can recall seeing these gold conversations when it hit $600 an ounce. I recall them when it hit $850 an ounce (matching the high in 1981). I can recall them when it hit $1000 an ounce. I can recall them when it hit $1100 an ounce. And of course I am seeing them all over as gold hovers near $1300 an ounce. The price of gold could fall at any time, but then again it could just keep going up responding to world events. We have no way of knowing these things.

If you own gold in your portfolio already then be sure you keep it rebalanced and use the profits to buy your laggards. If you don’t own it already, be sure you are doing so with a logical plan in place why you are doing it and not some knee jerk reaction to what you are seeing in the news.

—

This topic is being discussed on the forum.

In two months the forum has reached 100 registered users and almost 1000 posts! Thanks to everyone for contributing and bringing your perspectives to the discussion.

Permanent Portfolio Discussion Forum

One of Harry Browne’s pieces of advice was to hold some assets overseas. However, options for US Citizens in this regard are very limited and/or impossible in today’s world (segregated gold storage in your own name in a foreign bank).

Some have wondered why holding an account overseas has become much more difficult the past few years for American citizens. Two words: Red Tape. This article goes into the latest reason:

Toxic Citizens?

The U.S. government – under a new law incorporated in the Hiring Incentives to Restore Employment Act signed by President Barack Obama on 18 March 2010 – is demanding that international financial institutions reveal which of their clients are U.S. citizens with accounts of more than $50,000. Foreign banks are, in effect, being asked to act as the international enforcement arms of the Internal Revenue Service. Those banks that don’t comply will be subject to a 30% withholding tax on all payments made to them in the U.S. Many banks and wealth managers have decided it is far easier to politely show their U.S. clients the door.

The basic message here is that you can be fully compliant with all tax laws but the banks will still not want you as a customer. In essence, the US Govt. is putting up capital controls without doing it overtly. They are doing it with red tape and it is deliberate.

These regulations have nothing to do with “tax evasion” and have everything to do with controlling where US citizens hold their money. A wall is being built very quietly and you have to wonder how it will be used.

This topic is being tracked on the forum. Stop by if you want to discuss it:

Overseas Accounts