How does Gold function in a non-US PP

[Hal]

I have finished reading a book called Meltdown regarding the Icelandic financial crash.

It appeared that if you are in a small country, the best you can hope from gold is that it will preserve the purchasing power of 25% of your local PP. Now if there was a loss of confidence in the USD, I could see a rush into gold as a response thus driving up the price.

So.....

Other than holding a US PP if you live in a small country, are there any other options?

Sure, you could hold a version in a large regional currency, such as the Singapore Dollar, but then you could just as easily set up a US PP.

OK, pretend you are living in Tonga (and I was surprised it even had a reserve bank ! ) what would you do?
http://www.xe.com/currency/top-tongan-pa'anga

And, what population would a country need before you would consider setting up a local PP ? New Zealand? the post Brexit Britain?

Hal

[LazyInvestor]

It's a tradition in crappy economies to just convert whatever you have in USD and keep it outside of the country if at all possible.

For the countries where it might sound reasonable to implement a PP, I'd still not go that route exactly because of what you are pointing out. HB has pointed out that the world reserve currency is not gold but USD. Money flows into USD for most of the world crisis and not into gold. This includes crisis in the regions where your country might be. Only when there is a potential crisis with USD, USD flows into gold. A potential crisis in USD might or might not correspond to a crisis in your region. As such, there is no direct correlation between your local currency and gold, while there is stronger correlation between your currency and USD along the crisis reasoning for which gold is included in US PP. Thus, if I were in any other country but US, I'd either go with US PP or a Bogleheads portfolio if I want to keep fixed income part in my local currency. For most such places a Bogleheads portfolio (e.g., 40% local government fixed income / 60% total world market) would be a better option than US PP. Of course, you can add in 5-10% gold (or even better USD) in such a Boglehead's portfolio.

[Hal]

Thanks for your thoughts.

So if you live in a "dodgy" country (eg. Zimbabwe) then run a US P.P.

If in a good non US economy (eg. Singapore) then run a Bogle portfolio.

Seems reasonable to me...

On the extra gold or USD, is that included in the 40% fixed interest portion, or is it separate from the bonds and shares?

Hal

[LazyInvestor]

If in a "dodgy" country you can run US PP or any other reasonable Bogleheads portfolio such as US, European, Singaporean, and so on. This decision should be driven by, for example, which currency/government you trust more with your fixed income or maybe long term planning needs or a correlation between your country and the region you're investing in. Someone from a poor Eastern European country might prefer German fixed income due to the regional proximity or familiarity with German government. In such case he can go with European Bogleheads portfolio. Equity side makes no big difference as you should probably aim for the total world market.

[barrett]

I have finished reading a book called Meltdown regarding the Icelandic financial crash.

It appeared that if you are in a small country, the best you can hope from gold is that it will preserve the purchasing power of 25% of your local PP. Now if there was a loss of confidence in the USD, I could see a rush into gold as a response thus driving up the price.

Correct me if I am misremembering the Icelandic meltdown details but didn't an Icelandic PP get hammered in dollar terms but hold its value in Krona? That is my recollection. In other words, an Icelander buying stuff in their own country would have still been OK.

Looks like the ISK went from about 60 to one USD before the crash to 155 to one USD after.

[ochotona]

How about Icelander Heida Reed? (Born Heiða Rún Sigurðardóttir, Actress in Poldark) WOW

[Hal]

For your reading pleasure

https://mises.org/search/site/iceland

and click on pdf for Deep Freeze

Enjoy
Hal