The Permanent Portfolio, Investing, Finance and Random Thoughts.
Posts tagged ETFs
Gold ETFs and Gold Bubbles – Who Cares?
1 year ago
I’m seeing other articles on Gold ETFs (H/T Austen Heller) fueling a gold market bubble. I made comments about this in the recent past. My position is still the same which is that I don’t worry about it.
Why not?
Well the #1 reason is I don’t look at assets in isolation. Gold is just one part of the Permanent Portfolio. So let’s look at this quickly from a portfolio perspective and away from the realm of market prognosticators (which cannot predict the future).
Worst case scenario: Gold drops to $0.
How does that affect the portfolio? With a 25% allocation you are, at worst, down -25%.
But what are the odds of that happening? I’d say zero. Yes, I’m going on the record to state that gold will not approach $0. This is barring some amazing breakthrough in fusion technology. Or, an end of the world scenario where humans revert to a leather clad motorcycle gang nomadic life as we desperately try to escape the Thunder Dome. Even in that case, I doubt gold would be worthless.
Going further, even assuming gold becomes worthless (which is one of the most moronic statements I hear on this subject) what are the odds that your stocks or bonds wouldn’t go up to offset such an event? Pretty low. Again, an end of the world scenario comes to mind. But, why should some other investment portfolio be doing any better in this case?
But, let’s say the drop is -50% back to $700 an ounce (a -12.5% portfolio loss). Not great, but hardly a life destroying event for most I suspect. Again though, what are the chances the stocks and bonds couldn’t take up the slack? How does this -12.5% loss compare to the -30+% loss stock heavy portfolios took in 2008? Pot, meet kettle.
I don’t worry about this stuff. The Permanent Portfolio uses the 25% split because it protects you against catastrophic losses in any one part of the portfolio. The portfolio needs to be viewed as a package and not as assets in isolation. The portfolio doesn’t hold just gold. It holds stocks, bonds, cash and gold. A massive loss in one asset (like happened to stocks in 2008) was not a major event for the allocation. And, a massive gold crash won’t be either (already happened in the early 1980s with minimal effect).
Investors that need to worry about these catastrophic events are those with very concentrated exposure to individual investments. Gold bugs and stock bugs with heavy allocations to their pet assets are one group that face this risk. The reason we diversify and we hold all the assets, all the time, is to protect against these possibilities.
Stay diversified and don’t time the market. It’s the only strategy that works.
Have Gold ETFs Ruined Gold as an Asset Class?
1 year ago
Forum member “murphy_p_t” posted an article from the Wall Street Journal:
Behind Gold’s New Glister: Miners’ Big Bet on a Fund
From the article:
…skeptics argue GLD could become a Godzilla-like beast if the gold rally reverses sharply. They say its buying has already turbo-charged gold prices, exposing the market, and legions of small investors, to a rapid fall. Smaller copycat funds add to the risk.
“We tell our clients to watch out for it, because it’s there, and it’s a real risk,” said Jeffrey Christian, founder of CPM Group, which advises major investors worldwide on gold…
This is a fair question. Have gold ETFs ruined the gold market? I don’t think so.
Gold ETFs were actually around when Harry Browne was still alive so their use in the Permanent Portfolio was considered. They are not the preferred way to hold gold in the Permanent Portfolio however.
But to the question. Yes, gold is more accessible now but it’s not likely to impact the results because people are still buying it for the same reasons they did when it was less accessible: protection against possible inflation.
I think blaming a gold ETF for the rise in gold prices is a bit of a stretch. It completely ignores the market reactions to overseas and domestic spending (welfare and warfare) which has historically been inflationary. It also ignores the unprecedented actions of the Fed after the housing bust to dump dollars into the falling market. This is not saying inflation is coming because there are good arguments for deflation. It’s just saying that the market’s reaction and jittery nature with buying gold is not totally unjustified given the past few years of market turmoil, banking failures, government spending, etc. This is hardly the fault of the Gold ETFs and I suspect gold prices would have gone up anyway even without an ETF around based on these incidents.
But this is an issue brought up by Rick Ferri in the Podcast I had with him. He made the same point about gold ETFs. My point is why doesn’t this apply to value stock investing strategies? Or how about just the stock market in general? The emergence of cheap stock index funds and ETFs has not ruined the markets has it?
If the gold prices plunge it’s not going to be because of a gold ETF. It’s going to be because the markets think that money is better invested somewhere else (stocks, bonds, T-bills, etc.). The gold ETF will be the poster boy for the fallout, but blaming it doesn’t make much sense. Even before the ETF existed gold purchases were routinely done by large institutional players and indivuduals. So gold trading is not a new phenomena for the markets and they carried on through ups and downs just fine.
But does a gold ETF impact the portfolio ideas and diversification? I don’t think so. Buy, hold and rebalance the assets. I don’t worry about a gold ETF affecting gold prices any more than I do a stock ETF affecting stock prices. Yes it made the asset more accessible, but that doesn’t mean the reasons people are buying it have changed.
If people want gold they want gold. If they want it in an ETF or a gold bar in safe deposit box it doesn’t matter any more than whether a stock investor wants a stock ETF or physical certificate in their filing cabinet. And ETF or no, the investors are going to buy that asset. In fact, these investment products exist and are popular because that’s what the markets wanted. Besides, gold has been popular in the past and in fact it had a much higher inflation adjusted price in the late 1970s/early 1980s (over $2200 in today’s dollars) when there was no gold ETF around at all. If ETFs are driving gold prices then how do we explain that?
Gold has always been a volatile asset. Same for stocks. Same for long term bonds. Nothing has changed. For a Permanent Portfolio investor it doesn’t matter anyway because we hold all the assets all the time and rebalance when needed. Gold prices in the portfolio have dropped almost 50% in the past with minimal impact on overall value. The following years the other assets more than made up for the losses. On the opposite side of the coin (pardon the pun), gold investors have been rewarded for holding the asset when stock investors have been severely beaten about the past decade. Every asset has its day in the sun and day in the dog house. This is why investors shouldn’t try to time the market and hold all the assets all the time no matter what they think may happen.
A New Swiss Gold ETF
Blog reader Kyle sent me some information on a new gold ETF trading under the symbol SGOL. This ETF is a gold bullion ETF similar to the Street Tracks and iShares gold ETFS (Ticker: GLD and Ticker: IAU).
What makes this ETF different is SGOL’s gold is stored in Swiss bank vaults and not US financial centers. Since part of the Permanent Portfolio concept is to have some assets geographically diversified this could be an advantage. The expense ratio of this ETF is also very competitive as well at 0.39% which is right in line with the other offerings.
Now, some worry about a remote risk of US gold confiscation happening again in the future and this ETF would probably not prevent that (the govt. could simply pass an order requiring repatriation of funds for instance which would accomplish the same thing). However, this does give you a place for your assets that may not be open to the same type of risks as gold stored in the US. Risks such as from terrorist attacks, natural disasters, cyber attack, civil unrest, etc.
On the other hand, I’m not sure how if your US-based brokerage is having problems due to these issues here that it wouldn’t impact your ability to prove ownership in SGOL. Well, it’s a start at least.
This fund is brand new and I’m not one to jump into new financial products so I may give it time to build up some momentum. However, it’s something to consider for those that want to build a Permanent Portfolio and use ETFs for the gold portion but would like to have a modicum of geographic diversification.
Thanks again to Kyle for the tip.
