PP ex gold - using hedged gold as insurance?

[Sam Brazil]

HB liked gold (and to a lesser extent junk silver) for investment purposes but also for apocalypse trading/insurance purposes.

Let's say a person loved the PP concept, but wanted to exclude gold from the portfolio...however, he also saw the apocalypse insurance benefit of gold and wanted to hold a sizable chunk in physical. You know, for massive natural disasters, nukes, zombies, etc.

The canundrum is that you can't hold it as insurance but not be invested in gold directionally...but could you? What if you simply bought some amount of physical gold, and then maintained a 1-to-1 hedge in the opposite direction? This way you'd be holding the gold in case zombies invade, but you'd be free of gold's effect on your portfolio value.

The hedge would come with a cost, but it could be minimized in a variety of ways: Using futures which only require 10% or so margin and carry no interest, using portfolio margin which only requires around 15% margin and at least now IB is charging around 1.5%/year, use options, etc.

What am I missing?

[Greg]

What is the probability of Zombie Apocalypse versus the guaranteed loss from hedging/margin costs. In this scenario, I'd rather chance getting eaten than by losing out costs on this protection. It's too high of a cost for the minimal amount of probability it is protecting against.

I see this as buying volcano insurance in an area that doesn't have a volcano just in case we mess something up and we somehow get lava there.

https://www.youtube.com/watch?v=gs6xxuBR0vI <-- Family Guy (0:54)

[Sam Brazil]

What is the probability of Zombie Apocalypse versus the guaranteed loss from hedging/margin costs. In this scenario, I'd rather chance getting eaten than by losing out costs on this protection. It's too high of a cost for the minimal amount of probability it is protecting against.

I see this as buying volcano insurance in an area that doesn't have a volcano just in case we mess something up and we somehow get lava there.

https://www.youtube.com/watch?v=gs6xxuBR0vI <-- Family Guy (0:54)

Going by that same rationale, why should any PP'er bother with holding any physical gold? What are the odds you'll need physical?

[Cortopassi]

What were they called, when I used to do individual stocks, I would occasionally buy a married put along with the stock.  I suppose you could buy puts in some ratio to your holdings and roll them as needed, but it is costly, and never worked well for me personally.  The stock would either go up and I'd be left with worthless puts, or it would go down, and I would take profits from the puts to offset the stock loss, but always too early.

I am not a good timer.  I have found without a doubt the more I traded, the more I speculated, and even times when I tried to protect myself in this fashion I always ended up poorer.

[Stewardship]

What is the probability of Zombie Apocalypse versus the guaranteed loss from hedging/margin costs. In this scenario, I'd rather chance getting eaten than by losing out costs on this protection. It's too high of a cost for the minimal amount of probability it is protecting against.

I see this as buying volcano insurance in an area that doesn't have a volcano just in case we mess something up and we somehow get lava there.

https://www.youtube.com/watch?v=gs6xxuBR0vI <-- Family Guy (0:54)

Going by that same rationale, why should any PP'er bother with holding any physical gold? What are the odds you'll need physical?

Holding physical doesn't cost more than paper.

[AnotherSwede]

Holding physical doesn't cost more than paper.

Only if you would have the guns and dogs anyway!

[Sam Brazil]

What is the probability of Zombie Apocalypse versus the guaranteed loss from hedging/margin costs. In this scenario, I'd rather chance getting eaten than by losing out costs on this protection. It's too high of a cost for the minimal amount of probability it is protecting against.

I see this as buying volcano insurance in an area that doesn't have a volcano just in case we mess something up and we somehow get lava there.

https://www.youtube.com/watch?v=gs6xxuBR0vI <-- Family Guy (0:54)

Going by that same rationale, why should any PP'er bother with holding any physical gold? What are the odds you'll need physical?

Holding physical doesn't cost more than paper.

Sure it does...higher spreads, storage, insurance and time in dealing with physical vs. clicking a button for paper.

[AnotherSwede]

Do you compare with ETF or allocated in vault? If the latter I agree, otherwise "it depends".

[goodasgold]

Holding physical doesn't cost more than paper.


Sure it does...higher spreads, storage, insurance and time in dealing with physical vs. clicking a button for paper.

The ultimate cost occurs during a crisis when you hit the keyboard to cash in your paper gold and it turns out there ain't nothing there. So in this respect, physical is far superior to ETFs, and the minor inconvenience of holding physical fades away compared to the ever-looming prospect of counterparty risk.

[ochotona]

Agreed, but gold has no SHTF value in an actual physical emergency / natural disaster. You can transport it, yes, but it will probably get taken from you at international borders. If you try to barter with 1 oz American Eagles, someone will rob you. It's only good if there are still in existence reliable metals dealers for buying your holdings and a functioning (even if unstable) currency system.

The ultimate cost occurs during a crisis when you hit the keyboard to cash in your paper gold and it turns out there ain't nothing there. So in this respect, physical is far superior to ETFs, and the minor inconvenience of holding physical fades away compared to the ever-looming prospect of counterparty risk.

[Sam Brazil]

Agreed, but gold has no SHTF value in an actual physical emergency / natural disaster. You can transport it, yes, but it will probably get taken from you at international borders. If you try to barter with 1 oz American Eagles, someone will rob you. It's only good if there are still in existence reliable metals dealers for buying your holdings and a functioning (even if unstable) currency system.

The ultimate cost occurs during a crisis when you hit the keyboard to cash in your paper gold and it turns out there ain't nothing there. So in this respect, physical is far superior to ETFs, and the minor inconvenience of holding physical fades away compared to the ever-looming prospect of counterparty risk.

I'm not an SHTF expert (fortunately), but I think the idea is that you'd retain your physical gold, buried in the backyard, until the crisis was over and a normal economy resumed.  At that point, your gold would be worth something, while paper assets would not.

Right, and so going back to the original question, if you have physical gold, but hedge away any future changes in value...and then SHTF, your hedge won't work because it'll be nuked or whatever, but that's fine because if things get so bad your hedge disappears then gold is skyrocketing in value anyway. In the event the S doesn't HTF, then your hedge is effective at neutralizing any moves in the value of your physical.

[mukramesh]

Agreed, but gold has no SHTF value in an actual physical emergency / natural disaster.

Why does this keep coming up? I don't think the PP is meant to protect against these scenarios.

But in the 2000's (not a SHTF scenario), gold did very well. In 2008, there Money Market Funds that went bust. Who's to say a Gold ETF couldn't also go bust? Physical bullion is safe from this.

[AnotherSwede]

I think the idea is that you'd retain your physical gold, buried in the backyard, until the crisis was over and a normal economy resumed.

17 steps East of the large oak.

If you're greek today, having physical gold  should feel good. Having a small part physical  today is good exercise if I should need aquiring a large amount in the future.

[Stewardship]

Sure it does...higher spreads, storage, insurance and time in dealing with physical vs. clicking a button for paper.

vs. ETF expense ratio.  Not to mention less... ahem... privacy.

Right, and so going back to the original question, if you have physical gold, but hedge away any future changes in value...and then SHTF, your hedge won't work because it'll be nuked or whatever, but that's fine because if things get so bad your hedge disappears then gold is skyrocketing in value anyway. In the event the S doesn't HTF, then your hedge is effective at neutralizing any moves in the value of your physical.

Which brings us back to the original answer,

It's too high of a cost for the minimal amount of probability it is protecting against.

AKA a cost/benefit analysis.

[Sam Brazil]

Agreed, but gold has no SHTF value in an actual physical emergency / natural disaster.

Why does this keep coming up? I don't think the PP is meant to protect against these scenarios.

HB absolutely envisioned gold in the PP to protect against emergencies, disasters and all manner of other black swans. That's why he advocated not only keeping physical gold, but keeping it out of the country in a foreign vault. That's a whole lot of trouble to go through merely to capture the price movement in gold as an investment.

Now HB wasn't omniscient or infallible, but given this is the PP forum, PP orthodoxy does accept that a significant role of gold's value in your portfolio is to protect you against SHTF scenarios. So I think it's completely valid to discuss gold's utility as a SHTF protector, apart from its value as an asset in normal times to protect against inflation.

Then, HB was a staunch liberatarian, and an unstated benefit of physical gold, and expecially holding anything out of the country, is...ahem...privacy from certain govt agencies who tend to want your money..so connect the dots...not sure to what extent PP gold SHTF orthodoxy is all doublespeak for certain tax planning strategies.

[mukramesh]

Agreed, but gold has no SHTF value in an actual physical emergency / natural disaster.

Why does this keep coming up? I don't think the PP is meant to protect against these scenarios.

HB absolutely envisioned gold in the PP to protect against emergencies, disasters and all manner of other black swans. That's why he advocated not only keeping physical gold, but keeping it out of the country in a foreign vault. That's a whole lot of trouble to go through merely to capture the price movement in gold as an investment.

Fair enough. I think most people here have no geographical diversification, though, and thus lose many of the SHTF benefits. Then those using ETFs have a different types of protection; it can't be stolen, affected by natural disasters, etc. but there is some counter party risk vs. holding physical.

It's all a question of what you are trying to protect against, I guess.