Physical vs Paper

Discussion of the Gold portion of the Permanent Portfolio

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portart
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Physical vs Paper

Post by portart » Fri Mar 28, 2014 8:04 am

Here is my dilemma. HB and many others don't trust paper gold. They say a hard run on it would show the gold isn't there, at least entirely. I have a PP which is mainly in 401K money. I am old enough to take it out without penalty but the the taxes would crush me if I liquidated 25% of my fund to buy physical gold. I have a seven figure portfolio so were talkiing about a lot of money in my world. Most of the time I don't worry about but whenever I read about it, I get nervous. Any ideas?
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Cortopassi
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Re: Physical vs Paper

Post by Cortopassi » Fri Mar 28, 2014 10:11 am

If you are old enough, can you roll 25% of the 401k into an IRA that allows buying physical gold?  I wouldn't see any taxes or penalties in that case, right?  I've always rolled 401ks into my main IRA when I left jobs.

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portart
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Re: Physical vs Paper

Post by portart » Fri Mar 28, 2014 4:55 pm

I never heard of that. Usually the government likes control and ti know the whereabouts or your non paid tax money sheltered by retirement plans,
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WildAboutHarry
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Re: Physical vs Paper

Post by WildAboutHarry » Fri Mar 28, 2014 8:25 pm

Some 401(k)s allow in-service distributions/rollovers.  What Cortopassi is suggesting, I think, is to roll some of your 401(k) money (trustee to trustee, preferably) into a precious metals IRA.  The feds will know about the transfer you may be sure.

For my 2 cents, I don't like the IRA-physical gold option.  Ideally gold should be in your direct possession (or a you-controlled safe deposit box).  The IRA-Physical gold option still has counterparty risk.
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portart
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Re: Physical vs Paper

Post by portart » Sat Mar 29, 2014 11:25 am

I agree 100% with that. If you going to take risks, each of these has some element of lack of control. No way to accomplish what I want and still be in a PP. The reason I owned PPFRX for so long is that the gold portion of their assets are in hard metal. The costs are too high and there performance has been lacking my own PP this year in gains as well as charges. Just wish I could find a better way.
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Re: Physical vs Paper

Post by Reub » Sat Mar 29, 2014 12:12 pm

Are you close to rebalancing? If you are going to sell some equities out of your regular account buy some physical gold with it.
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Re: Physical vs Paper

Post by Ad Orientem » Sat Mar 29, 2014 12:32 pm

I honestly don't see any particular advantage to so called physical gold in an IRA over an ETF. You still have pretty much the same level of counterparty risk. If you are going to hold gold in an IRA, I'd just use IAU. Yes, physical is ideal, but that presupposes you actually have direct custody over it. That's not the case here.
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WildAboutHarry
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Re: Physical vs Paper

Post by WildAboutHarry » Sat Mar 29, 2014 7:27 pm

[quote=AdOrientem]I honestly don't see any particular advantage to so called physical gold in an IRA over an ETF. You still have pretty much the same level of counterparty risk. If you are going to hold gold in an IRA, I'd just use IAU. Yes, physical is ideal, but that presupposes you actually have direct custody over it. That's not the case here.[/quote]

Just so.

This argues for another kind of diversification -- diversification of investment tax status.  It is prudent (though difficult) to mix taxable accounts, various tax-paying options (IRAs, 401(k)s, Roths), and  tax-free (HSAs) funds.  If you can.  This maximizes options, hedges future tax uncertainties, and (hopefully) minimizes taxes.
It is the settled policy of America, that as peace is better than war, war is better than tribute.  The United States, while they wish for war with no nation, will buy peace with none"  James Madison
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Re: Physical vs Paper

Post by stuper1 » Sun Mar 30, 2014 9:56 am

portart wrote: Here is my dilemma. HB and many others don't trust paper gold. They say a hard run on it would show the gold isn't there, at least entirely. I have a PP which is mainly in 401K money. I am old enough to take it out without penalty but the the taxes would crush me if I liquidated 25% of my fund to buy physical gold. I have a seven figure portfolio so were talkiing about a lot of money in my world. Most of the time I don't worry about but whenever I read about it, I get nervous. Any ideas?
I think you are right to be nervous about paper gold.  I would guess that you have some money outside your 401k, like maybe some emergency cash.  One thing you could do as a starting point would be to convert some or all of that to physical gold.  Since you are old enough to take 401k withdrawals, you can have your emergency cash inside the 401k.

Secondly, you need to come to grips with the paper gold risks.  If there were a run on gold and you take a say 50% haircut on your paper gold, guess what?  You also still have to pay taxes on whatever is left when it comes out of the 401k.  In that scenario, you would be better off taking the money out now, paying the taxes, and buying physical gold.  You say the taxes will crush you, but I think you should stop thinking of your 401k total as your asset, and start thinking of (1 - X) times the 401k total as your asset, where X is your tax rate.

Maybe a good compromise would be to take 2 - 3% per year out and buy physical gold, and do that for say 5 years until you have 10 - 15% as physical gold.  Leave the rest as paper gold for rebalancing.
Last edited by stuper1 on Sun Mar 30, 2014 4:57 pm, edited 1 time in total.
portart
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Re: Physical vs Paper

Post by portart » Sun Mar 30, 2014 8:55 pm

I am close to retiring. I have some physical problems that will prevent me from working full time anymore. I have money but I am short on cash. It's mainly retirement money taxed at a high rate. I have to talk to my Schwab guy about some strategies. Of course, he hates my gold allocation as you would expect so he won't be much use of agreeing with my selling 401k money, paying 40 cents on the dollar to buy some bullion. It does feel kind of drastic to do so. I probably would be more inclined to pay off my mortgage and other debt before I bought physical gold. I have some bullion but its not a major ant of my portfolio.

I wonder if there isn't some creative way to play gold in a  retirement account that is more reliable then an etf.  Is there any pure mutual fund that is made up of 100% held gold bullion? It would seem to me that if PRPFX and can it at 25% (20% gold, 5% silver), someone would come up with a fund that is all real held gold.
Last edited by portart on Sun Mar 30, 2014 9:05 pm, edited 1 time in total.
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Re: Physical vs Paper

Post by rickb » Sun Mar 30, 2014 10:59 pm

portart wrote: I wonder if there isn't some creative way to play gold in a  retirement account that is more reliable then an etf.  Is there any pure mutual fund that is made up of 100% held gold bullion? It would seem to me that if PRPFX and can it at 25% (20% gold, 5% silver), someone would come up with a fund that is all real held gold.
The closed end gold funds (GTU and PHYS) have significantly fewer moving parts than the ETFs - but their NAV does not track the price of gold as closely as the ETFs.  These funds essentially have a fixed amount of gold and a fixed number of shares which trade on the open market - so the share price relative to the price of gold is not constant.  In comparison, the ETFs have a constantly changing amount of gold and constantly changing number of shares with a fixed (and slowly declining) ratio of gold to shares - the variability in the amount of gold and shares is due to the actions of authorized participants who can trade gold for shares and vice versa at the fixed gold to share ratio (so they can effectively arbitrage any difference between the NAV and the actual value of a share's worth of gold). 

It's sort of perverse but I think it's true that due to how the ETFs and closed end funds are structured the ETFs track the price of gold more closely but the closed end funds are safer.
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Re: Physical vs Paper

Post by bronsuchecki » Mon Mar 31, 2014 12:36 am

WildAboutHarry wrote:I don't like the IRA-physical gold option.  Ideally gold should be in your direct possession (or a you-controlled safe deposit box).  The IRA-Physical gold option still has counterparty risk.
I think there is a big difference between IRA physical gold option held as allocated gold and an ETF, for example see http://www.bullioninternational.com/sol ... ra_program which is a facility resold/white labelled by Hard Assets Alliance and ASI. ASI also have a direct IRA service http://www.assetstrategies.com/strategi ... ra-as-well. Perth Mint Certificates has a lot of clients doing our Certificates in an IRA.

Why are you looking for a gold mutual fund, is there a problem rolling over some of the money as WildAboutHarry suggests?
Disclosure: I work for the Perth Mint. What I say is done in a personal capacity and is not endorsed by the Mint.
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