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.

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.

A while back I ran across a blog run by an employee of the Perth Mint in Western Australia. This blog presents solid analysis from a precious metal industry insider. He does a great job of cutting through the gold conspiracy theories that seem to abound:

Gold Chat

I’ve come across a lot of really bad information about gold through the years. This blog however is an oasis in the vast wasteland for those that want to learn more about the gold market. *

* The Gold FAQ is my own attempt to cut out the bad information as well.

Thanks everyone for checking out the new forum. We have almost 200 messages in just two days. Come on over and join the discussion:

Permanent Portfolio Discussion Forum

We have some really knowledgeable posters and great questions. Thanks for participating if you have already.

I am seeing recent books from old authors touting this or that new investment idea. Their previous advice may have been off the mark, but this time they’ve got it all figured out.  And just think, they are willing to sell you their wisdom for the low price of $12.95 in soft cover or a low monthly subscription fee.

No thanks.

People should be absolutely ruthless when it comes to assessing investment advice. An attitude of guilty until proven innocent will serve them well.

Be ruthless when looking at what an investment guru is saying. Maybe they did change their tune, but what is to say the new tune is right this time either? How did their advice work in the past? Was their economic thinking sound? Did they tell you to do things with your money that in hindsight were very risky? Did they make predictions and how did they turn out? Don’t rely on what they said their predictions were, go back yourself and read what they said and compare it to what actually happened. Be ruthless about the accuracy.

Also, don’t be lulled into “Aw, schucks…” apologies about how off they were before and how much they’ve learned their lesson. Those kinds of statements don’t get your money back. Early in my investing career I learned this lesson the hard way. Following a popular investment guru cost me money that didn’t need to be lost. I wasn’t ruthless enough in questioning the advice I was getting. I am now.

Investing is not a popularity contest and investors are not graded lower for coming off like a skeptical jerk. Be a jerk. Be ruthless. Question everything a guru says and why they are saying it. Make them prove what they are saying is true – Every last word of it.

Investors that are ruthless in assessing where to put their money put the odds in their favor. Unleash the ruthless investing jackass that is deep inside of you. You’ll be better off for it.