PP: Gold vs. Silver

[WildAboutHarry]

I've always been a silver fan.  At least for the U.S. it is (or rather was) a monetary metal.  As with gold, the U.S. Government tried to control the price of silver for many years.  And silver coins look good, are available in reasonable (read smaller) value units, etc.

Appendix C in "Why the Best-Laid Plans..." has an interesting discussion of the evolution of the Harry Browne permanent portfolio.  Silver plays a prominent role in all versions from 1977 up to 1981.  The gold:silver ratio in those versions ranges from about 1:1 to almost 3.6:1.  Then silver drops off the map in the final version of the PP presented in "Why the Best-Laid Plans..."

Harry writes (page 481) that due to the volatility of silver

...it seemed to make sense to get silver out of the Permanent Portfolio...

Ignoring the market timing and non-Permanent aspect of this move, does anyone have any further insight into why Harry made this change?

It would be interesting to know what he had to say in his newsletters about silver during this period.  Are they compiled and available somewhere?  Coincidentally, silver is back to the $40 per ounce range (nominal) where Harry dumped silver.  That would be an inflation-adjusted $105 or so, though.

[dualstow]

Ignoring the market timing and non-Permanent aspect of this move, does anyone have any further insight into why Harry made this change?

Simplicity?
I just reread p481 of the hardcover and was reminded that Terry Coxon urged him to sell. It was fortunate.
But, as for why he *kept* silver out of the permanent portfolio, I think the short answer is that he felt it was superfluous. The four remaining elements do their job.

It would be really nice to have Harry around to hear his comments on the current economic situation. He'd have had some great shows this year.

I'm tempted to buy silver coins for the variable portfolio partly because I can- because a coin can be had for the price of lunch out for two. I'm trying to resist that temptation, however.

[Odysseusa]

Silver is much more volatile than Gold and Silver has not been around a long time like Gold. 

[rickb]

Silver is much more volatile than Gold and Silver has not been around a long time like Gold [emphasis added]. 

Silver is more volatile than gold but it has definitely been around as long.  Silver and gold have both been used as money throughout recorded history. 

[WildAboutHarry]

Silver is much more volatile than Gold

Usually, but isn't uncorrelated volatility of the four PP asset classes one of the reason the PP holds them?

I think simplicity is probably why silver was abandoned, as dualstow suggests, but I would like to read more of Harry's rationale on why he made the change, other than Terry Coxon made a good guess.

I've heard that Harry did extensive back testing, etc. in developing the 4x25 portfolio.  Perhaps he found something there to warrant the simplification.  Has anyone done any back testing on gold/silver combos as the "gold" portion of the PP?

[Odysseusa]

Please don't fool ourselves that gold and silver are the same. Gold is like the president and silver is like the vice-president. Most of the times, the president has the real power.

[Tortoise]

On HB's radio show, I think he responded a number of times to callers' questions regarding silver that he left it out of the PP due to the majority of its price being determined by industrial demand, not monetary demand.

He wanted the PP's inflation protection to be based on a monetary metal--gold--since it would be more likely to hold up under a worst-case scenario where industry might be taking a hell of a beating.

[rickb]

On HB's radio show, I think he responded a number of times to callers' questions regarding silver that he left it out of the PP due to the majority of its price being determined by industrial demand, not monetary demand.

He wanted the PP's inflation protection to be based on a monetary metal--gold--since it would be more likely to hold up under a worst-case scenario where industry might be taking a hell of a beating.

See, for example, the 2004-09-19 show.

[WildAboutHarry]

See, for example, the 2004-09-19 show.

I listened to the segment describing the monetary versus non-monetary properties of gold, silver, and platinum.  Harry stated that gold was mostly monetary, silver was a bit monetary, and platinum was non-monetary.  But then he discussed the non-correlation of gold and silver prices, which suggests an opportunity for re-balancing

Since there are no gold-backed currencies today, gold functions as a cash substitute when demand for currency falls (Harry's second-most popular form of money).  Its "monetariness" is dependent on the desire to hold something other than dollars, yen, etc.  And when the appetite for currency really falls, can't the demand for monetary metals spill over into silver or other things?  When inflation was hot in the late 1970s, gold, silver, rare coins, stamps, art, diamonds, wine, etc. were all favored over dollars.

I do like the simplicity of the 4x25 portfolio, but it doesn't seem too unorthodox to hold a bit of silver with the gold.

[l82start]

i have a bit of silver bullion left over from my pre-PP days, but i count it as a "VP" or "zombie apocalypse portfolio" depending on my mood , i can see some justification  for having silver, i cant come up with any justification for trying to shoe horn it into my PP, i like the 25x4 simplicity, more advanced investors may have good reasons for blending it in, and not be as bothered by adding complexity.... but i like the KISS method my self....

[rickb]

See, for example, the 2004-09-19 show.

I listened to the segment describing the monetary versus non-monetary properties of gold, silver, and platinum.  Harry stated that gold was mostly monetary, silver was a bit monetary, and platinum was non-monetary.  But then he discussed the non-correlation of gold and silver prices, which suggests an opportunity for re-balancing

Since there are no gold-backed currencies today, gold functions as a cash substitute when demand for currency falls (Harry's second-most popular form of money).  Its "monetariness" is dependent on the desire to hold something other than dollars, yen, etc.  And when the appetite for currency really falls, can't the demand for monetary metals spill over into silver or other things?  When inflation was hot in the late 1970s, gold, silver, rare coins, stamps, art, diamonds, wine, etc. were all favored over dollars.

I do like the simplicity of the 4x25 portfolio, but it doesn't seem too unorthodox to hold a bit of silver with the gold.

I believe the point is that the assets are not only not correlated, but each has a specific role in one of the 4 economic conditions and is picked precisely because it responds in the strongest possible way in that condition.  Gold's primary role is to carry the ENTIRE portfolio during periods of high inflation.  If this portion is diluted by something that doesn't respond as strongly (whatever it is), then the portfolio is not as protected from this event.  Harry doesn't say it precisely this way in this show, but I'd assume because he thought that silver is predominantly an industrial metal (he posits 95% of its price is related to its industrial supply/demand characteristics) he thought it won't respond to inflation as strongly as gold.  One can argue about whether he was right about this, but I think this was his line of thought.

Another secondary concern is the portability of gold vs. silver.  In a true SHTF scenario, gold serves another function in that it stores a significant portion of your accumulated wealth in a form that you can carry with you if you need to flee for any reason.  At current prices, $100,000 worth of gold fits in your pants pocket, while $100,000 worth of silver is about 5 monster boxes of silver eagles (or 25 100 oz silver bars) weighing 170 pounds.

[Tortoise]

At current prices, $100,000 worth of gold fits in your pants pocket

You'd better have a hell of a belt and strong pocket seams!

[shgrunewald]

Well, gold in comparison to silver, gold's resources are almost depleted therefore its value will go down while silver will continue to go up because of its purpose in computer parts manufacturing.

[stone]

Very roughly, the low points for silver price match the lows for stocks in terms of timing and extent and the highs for silver sort of match the highs for gold in terms of timing (give or take a few months) and extent. Silver is poor for rebalancing against stocks. If stocks drop by 40%, then silver is probably going to fall by whatever it takes to get silver down to the price that it was when stocks were last at that price. A variable portfolio of silver and LTT rebalanced might do well.
Historically over the past 5000 years far more GDP has been accounted for by monetary transactions using silver as money than using gold as money. Gold only really became more monetary than Silver once the Spanish empire dwindled and the British empire grew. That was simply because the silver mines were not in the British Empire. Currently the huge stockpile of gold and tiny stockpile of silver means that silver price is very volatile. Silver is constantly being produced as a byproduct of lead and copper mining. If supply does not meet industrial/speculative demand for silver, then the price rockets. If supply exceeds demand then supply continues unabated because lead and copper is still being produced so the silver price evaporates. The huge stockpiles of gold act as a buffer to prevent gold price volatility.

About using gold as a portable way to carry wealth- is that really feasible? Could you get on a plane with much gold? Criminals use 500 euro notes but sniffer dogs are trained to search for cash. I know someone who (legitimately) was carrying cash and was stopped at the airport by a sniffer dog. At Indian partition in 1947 or whenever it was, people did use gold jewelry as a way to start over in a new country but times are very different now. I can't imagine being able to leave the UK with much gold in a SHTF scenario.