What if Gold drops to $300.00 per ounce?

[NWODurruti]

Hello All,

I am coming up on two years of cash savings (that is, I could live for two years without working on what I have in cash).  I am thinking of going into the permanent portfolio, but the biggest concern I have is putting 25% of my money into an investment whose bottom I have no way of discerning.  With Stocks and bonds, I don't believe that their value could fall by 75% and stay down unless the zombie apocalypse was already halfway across the Atlantic.  With gold...I am not so sure (the spot price seems to me of little to no help, and price fixing seems like something that has had a more caustic effect in gold than in the other three assets). 

[Kbg]

What if interest rates rise, what if the stock market reverts to historical CAPE, what if inflation starts up again?

[NWODurruti]

What if interest rates rise, what if the stock market reverts to historical CAPE, what if inflation starts up again?

1) "What if interest rates rise..."
                     
                        They probably will, but I at least I have a general idea of why they would arise, and a general idea of, if not exactly how high they would rise, at least the forces that would eventually limit, or slow down, any rate increase.  With gold, the price seems completely random.

2)  "...what if the stock market reverts to historical CAPE..."

                      Another possibility whose likelihood, or unlikelihood, I have a pretty good conception of.  Bu then, I do not think that CAPE is of a lot use in predicting future stock market performance. 

3)  "...what if inflation starts up again?"

                  Then obiously stocks would be the way to go, but, again, that is an eventuality that I have a pretty good idea of how I would prepare for.

[Pointedstick]

Well the bottom is clearly $0.00.

I share your concern, but the truth is that we just don't know. It's highly unlikely that gold will ever go to zero, but what about $100/oz? $50? $10? Nobody knows. In a climate of declining inflation expectations (thanks, other thread!), it may well fall for a while. But again again, expectations are often wrong, and that's why we hold gold.

[Libertarian666]

Almost all assets have gone to zero at some time in history.
Gold hasn't.

[Cortopassi]

but what about $100/oz? $50? $10?

In USD terms, I am pretty darn confident that won't happen!

[Ad Orientem]

A few quick observations...

1. Part of the deal with the PP is that if you don't own something that you really really don't like, you are probably not doing it right.
2. Gold dropped below $300 oz. back in the late 90's and the PP did exactly what it is supposed to do.  The other assets took up the slack and delivered a reasonable above inflation return.
3. Gold might drop below that level again. We don't know. If it does, my guess is that it will trigger a rebalancing. That is the genius of the PP. It forces you to buy low and sell high. In the late 90's almost nobody liked gold.. But that was actually the beginning of a  major  bull market that most investors missed.                                                                                                             

[NWODurruti]

Thanks to everyone for the response it is all very appreciated.

Pointedstick: Is there anything that would make you change your mind about the permanent portfolio (this is a question open to anyone on the thread)?

Libertarian666:  Almost all have assets have gone to zero?  Are you talking about outside the United States as well?  I would argue that the reason that gold hasn't gone to zero is because the dollar was pegged to it until the 1970's.  It has nothing like the market history of stocks, or even sovereign debt (at least in the United States). 

Cortopassi:  Why are you so confident?  Is your confidence founded on the economic "facts on the ground," or does it stem from a particular disposition/ideology?  I have noticed that there are quite a few so-called "Libertarians" in this forum, and I am curious as to whether or not everyone would be more, or less, inclined to put 25% of their wealth in gold if they had different political beliefs.

Ad Orientem: 

                      1)  If this is so, how would you propose that someone go about "doing it right" with the permanent portfolio?  Should I pretend to have confidence in the asset until it finally wins me over?  Should I substituent gold with another "hard" asset?  Or are you saying that I should look for a different investment plan altogether? 
                    2)  So, if the gold price drops dramatically in the relatively near future you think that it would be, if not because, then coterminous with, a new bull market in debt and equities comparable to what we say in the 1990's?

                    3)  How do you identify "low" and high" outside the allocation of your personal permanent portfolio?  Do you think that if your holdings in an asset drop 10% that that asset is now "low,'" more reasonably priced, not likely to go lower?


Thanks again to everyone for their comments, I find them most instructive. 

[Cortopassi]

Cortopassi:  Why are you so confident?  Is your confidence founded on the economic "facts on the ground," or does it stem from a particular disposition/ideology?  I have noticed that there are quite a few so-called "Libertarians" in this forum, and I am curious as to whether or not everyone would be more, or less, inclined to put 25% of their wealth in gold if they had different political beliefs.

I do not at all pretend to be an expert in anything except my profession (EE).  The reason I say this is more because of facts on the ground.  If I were more inclined to dig deeper, I would go and check what the monetary base and debt of the US were when gold was last $300 an ounce, and compare that to where we are now, with the understanding that if anything the dollars status in the world continues to decay.  Unless the US does an impossible about face in spending and deficit reduction!

Throw in that all miners would start shutting down at prices south of $1000, causing a shortage.

I could be wrong, however, and I will rebalance accordingly!

[MachineGhost]

I am coming up on two years of cash savings (that is, I could live for two years without working on what I have in cash).  I am thinking of going into the permanent portfolio, but the biggest concern I have is putting 25% of my money into an investment whose bottom I have no way of discerning.  With Stocks and bonds, I don't believe that their value could fall by 75% and stay down unless the zombie apocalypse was already halfway across the Atlantic.  With gold...I am not so sure (the spot price seems to me of little to no help, and price fixing seems like something that has had a more caustic effect in gold than in the other three assets).

$800 is the second major downside support.  If we break that, I think the world economy is going apocalypto, so it won't matter at that point.  Or the world economy would be doing such gangbusters that your equity is more than making up for the gold losses.  Look at the PP wholistically, not reductionist.

[MachineGhost]

Cortopassi:  Why are you so confident?  Is your confidence founded on the economic "facts on the ground," or does it stem from a particular disposition/ideology?  I have noticed that there are quite a few so-called "Libertarians" in this forum, and I am curious as to whether or not everyone would be more, or less, inclined to put 25% of their wealth in gold if they had different political beliefs.

I admit its hard to envision a left-wing Democrat wanting gold, nevermind 25%.  Gold is so anathema to their belief system of a strong central government being the be all, end all of life and reality.  The idea that government could go kablooey or run into trouble is not something you would talk about in polite Democrat company.

[Ad Orientem]

Thanks to everyone for the response it is all very appreciated...

Ad Orientem: 

                      1)  If this is so, how would you propose that someone go about "doing it right" with the permanent portfolio?  Should I pretend to have confidence in the asset until it finally wins me over?  Should I substituent gold with another "hard" asset?  Or are you saying that I should look for a different investment plan altogether? 
                    2)  So, if the gold price drops dramatically in the relatively near future you think that it would be, if not because, then coterminous with, a new bull market in debt and equities comparable to what we say in the 1990's?

                    3)  How do you identify "low" and high" outside the allocation of your personal permanent portfolio?  Do you think that if your holdings in an asset drop 10% that that asset is now "low,'" more reasonably priced, not likely to go lower?


Thanks again to everyone for their comments, I find them most instructive.

1. I suggest buying the four assets and not tinkering with the Permanent Portfolio.
2. Not necessarily. Gold went into a long bear market after it peaked in 1981 at more than $800 oz. before finally bottoming in the late 90's. Almost no one really saw what was going on or was able to accurately predict the near term, much less the long term price. The future is unpredictable.
3. I don't worry about what is bottoming or topping. Market timing is a fools game. The PP works precisely because it is agnostic about future events.  One asset declines and the others rise.

I am concerned that you don't fully grasp one of the most important foundations of the PP. It is a passive static portfolio based on the premise that the future cannot be predicted and that the answer is a radically diversified portfolio consisting of cash and three non correlated assets that react very violently in certain economic conditions.

[Libertarian666]

Thanks to everyone for the response it is all very appreciated.

Pointedstick: Is there anything that would make you change your mind about the permanent portfolio (this is a question open to anyone on the thread)?

Libertarian666:  Almost all have assets have gone to zero?  Are you talking about outside the United States as well?  I would argue that the reason that gold hasn't gone to zero is because the dollar was pegged to it until the 1970's.  It has nothing like the market history of stocks, or even sovereign debt (at least in the United States). 

Yes, of course I am including outside the United States, since the history of the United States is a small part of the history of the world.

If the reason that gold hasn't gone to zero is because its price was fixed between the 1930's and 1970's by the US government, why has it never gone to zero at any other time or place in history? Did people in the 1500's, or in 200 BC for that matter, somehow know that some day the US government would fix the price of gold? 

(Note: the dollar was defined as a weight of gold [or silver] until the Crime of '33, so it is incorrect to say that it was "pegged" to gold before that time.)

[NWODurruti]

Cortopassi:  Thank you for the response.  I will look into the the slowing of mining operations as a limits force on the downward price of gold.  That is exactly the kind of thought I had hoped to find on this board, thank you for sharing your opinions on the matter with me.


Machine Ghost:  Thanks for the technical reading.  What was the first downside?  Did you come to the second downside through back testing?  How did you come to that number?  I am very interested in knowing, the movement of gold prices is a total mystery to me, right now. 
                                                    Thanks for the political perspective as well.  Being a Libertarian Communist who spent most of the 1930's fighting Fascists/Falangists, Priests, Trotskyists, Stalinists, Nazis, Capitalists, Liberal Democrats, , Social/Christian Democrats,and all sorts of technocrats, I am also leery of any court, vanguard, council, politburo, legislature, etc...though I recognize that oftentimes they have their uses.

Ad Orientem: 
 
1)  Your answer does not really answer my question.  I wanted to see if you could clarify what you meant by "doing" the permanent portfolio the right way.  You implied that holding one of the four assets, if I felt uncomfortable doing so, was the wrong way.  Your answer has not much to do with either my question, or your original statement.  Obviously you support buying into the permanent portfolio, that is why you are on this forum! 

2)  Except for the first sentence, which yo do not follow up on, you are just repeating the same market history you gave in your first statement so I'll skip it.

3)  Market timing may be a fools game, but I am something of a fool, (I am certainly not as serious as you), though the "timing" I am talking about is something that is measured in decades.  "The PP works precisely because it is agnostic about future events.  One asset declines and the others rise."  Interesting, you write of the permanent portfolio's "agnosticism" but that last sentence gives me the image of a devout Roman Catholic saying the rosary. 

4)  I do understand what the PP is claimed to be about.  My concern is not with the claims of the permanent portfolio's adherents by themselves, but with their accuracy.  Also, aren't all foundations "important?  That phrase appears to be an example of unnecessary redundancy, LOL.

Thank you all again for your time. 

[NWODurruti]

I responded before I had read Libertarian666's response!  I will have to return later.

[MachineGhost]

Machine Ghost:  Thanks for the technical reading.  What was the first downside?  Did you come to the second downside through back testing?  How did you come to that number?  I am very interested in knowing, the movement of gold prices is a total mystery to me, right now.

First major support is 1000.  They are based on very long term trendlines.  For whatever reason, trendlines act as support and resistance.

[Pointedstick]

Thanks to everyone for the response it is all very appreciated.

Pointedstick: Is there anything that would make you change your mind about the permanent portfolio (this is a question open to anyone on the thread)?

Absolutely. I think about it a lot. I invest using the PP because I think it achieves my aims, but if it ever starts failing to do so over a period of many years or a better one comes along, I'd drop it like a hot potato. In fact, I don't even keep 100% of my assets in the PP; I maintain about 20% in a 50/50 Boglehead-style portfolio that's full of stocks and corporate bonds. It's been doing great recently! If for some reason I had to keep all of my assets in a single portfolio I might have it be a modified PP-ish thing that was like 30% stocks (domestic and international), 30% bonds (long treasuries and corporates), 25% cash, and 15% gold.

If 30-year bond yields go down to 1%, I think I would sell them all and put the money in cash or other instruments. At that low a level, the risk to reward ratio just doesn't seem to be there, even if it reduces volatility.

I am a libertarian-minded person who did not own any gold before using the PP. It doesn't really appeal all that much to me. I would definitely never have more than 25% in it. Even 25% is waaaaay at the upper bound of my tolerance.

[MediumTex]

Thanks to everyone for the response it is all very appreciated.

You should consider buying the PP book advertised in the banner above.

It will equip you to make an informed decision about whether the PP is right for you.

You are the kind of person the book was written for.

[NWODurruti]

Thanks to everyone for the response it is all very appreciated.

You should consider buying the PP book advertised in the banner above.

It will equip you to make an informed decision about whether the PP is right for you.

You are the kind of person the book was written for.

Thank you MediumTex.  I start studying for the GMAT next month, but the next opportunity I have I will.  Do you recommend a particular avenue for purchasing the book, or will Amazon do?

Thanks again for your time. 

[rickb]

Thanks to everyone for the response it is all very appreciated.

You should consider buying the PP book advertised in the banner above.

It will equip you to make an informed decision about whether the PP is right for you.

You are the kind of person the book was written for.

Thank you MediumTex.  I start studying for the GMAT next month, but the next opportunity I have I will.  Do you recommend a particular avenue for purchasing the book, or will Amazon do?

Thanks again for your time.

MediumTex is one of the authors if you haven't picked up on this by now.  By clicking the link at the top of any page on the forum and buying the book from Amazon after following this link, Amazon gives a small portion of the purchase price to fund this forum.

[NWODurruti]

Rickb:  Okay, that's what I'll do then.

[Larshus]

Look at gold this way in the PP. Its a hedge against really, REALLY bad things happening. That's why its so important to hold it in the physical sense. Its the only asset that has no counter-party liability. Ie if things completely blow up, its the currency of last resort. There has never, EVER been a government that hasn't either self destructed, dissolved, or been acquired by another government. Seriously. Think about that for a moment. When that event happens, gold is the most valuable asset at that point.

During normalcy, gold is simply a negative correlation to the cash, stocks and bonds in the portfolio. Its not all the exciting as it yields no dividend. It does have its super cycles that were observed on its run to 800, and then its run to 1900. During those times its a great sell (which the PP forces you to do) and then its a great buy when it drops (like now, which the PP is forcing you to do). I was not in the PP for the 800, but I was for the 1900 run up. Its returns, for me, have been very lucrative. I'm excited that the PP is making me load up on it again down here.

[ochotona]

Looking at historical charts in retrospect, it seems that flattish parts of the bottoms in gold last 6 - 12 months, so laying in a buy program to buy every month for 12 months could be a good idea, starting soon if not now, which would protect against this being a head fake before a lower low. Picking bottoms is pretty hard if not impossible.

[mathjak107]

you get another chance to pick  the bottom today . it looks like  asia is down 12 bucks this morning.

if these buying opportunity's don't stop presenting themselves pretty soon even if it  rises 50%  many will still be at a loss.

[ochotona]

Interesting how gold did not really react at all like a safe haven during the latest Greek news, but it did recently react to China... which when you look at the GDP ratio of China:Greece, that sure makes sense.