Golden Butterfly Portfolio

A place to talk about speculative investing ideas for the optional Variable Portfolio

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buddtholomew
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Re: Golden Butterfly Portfolio

Post by buddtholomew » Wed Mar 15, 2017 7:02 pm

mathjak107 wrote:what a crazy day today . with assets lately acting more correlated than uncorrelated it was a hell of a day for the butterfly , except to the upside for a change .
my portfolio moved far greater than even a 100% equity model i track . with the exception of a downward move my portfolio made pre butterfly during brexit this was the 2nd biggest move ever dollar wise that i had . at one point the butterfly was up more than 30k in this one afternoon .

great when all assets act correlated and move upward for you but it gives you an idea of the downside damage that it can inflict as well under these new conditions of correlation for all the assets that we seem to have lately . .
One day does not make a trend.
Is 30K a lot or a little? We usually use percentages to communicate gains or losses.
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Re: Golden Butterfly Portfolio

Post by mathjak107 » Wed Mar 15, 2017 7:51 pm

funny you should talk about percentages . after a while percentages mean little . the reason is a move when you are just accumulating money is very different from the same move 30 years later when fuel tanks are full .

30 years ago a 7% move may have represented a years ira contribution . today a 7% move represents 9 years of maxing out my 401k at catch up not even regular max's .

so the dollars really are what become an emotional big deal eventually not the percentage move . moving up or down a year or two withdrawals in a few sessions can be quite an experience .

part of my toning down my portfolio through the years is about volatility in dollars not percentages . today's move was 1.15% which at this stage is a pretty big move for a retirement oriented portfolio if you want to the number and that is for a portfolio 20% in cash that is really designed to have something going up -or down on those big up or down days ... as they say if on those big up days nothing else is going down you are not diversified enough .

but the last few months opposing asset classes have become more bed fellows than not . so the flip side is that today these supposedly low volatility portfolio's are really not turning out to be that low. i don't consider any of my portfolio's low volatility when the can add or subtract 30-35,000.00 bucks in an afternoon from my portfolio .
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Re: Golden Butterfly Portfolio

Post by buddtholomew » Wed Mar 15, 2017 8:06 pm

speaking in percentages enables the reader to assess impact to their individual portfolio. So, your portfolio is slightly under 3M for the portion allocated to the GB. Seems reasonable to have 30K fluctuations with that amount invested. My 70/30 allocation moved around 50K.
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Re: Golden Butterfly Portfolio

Post by mathjak107 » Thu Mar 16, 2017 2:53 am

the models i used previously , my insight models were a mix of the conservative income and capital and preservation model with a beta of .38 and the growth and income model with a beta of .70 .

returns were very good but swings were much less than now . the swings i see since the correlations seem to move together are more on par with their growth model which is 100% equity.

not exactly the change i was hoping for , so i guess that is more my point . i hope things uncorrelate again as that is the reason i made the switch .

if i wanted 100% equity action in retirement i would have just stayed in the growth model and had excellent returns , but that is not my goal . that model has returned 11% a year cagr since i started using their models in 1987 . even the growth model saw less of a swing yesterday at .91% on the day
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Re: Golden Butterfly Portfolio

Post by Smith1776 » Wed May 17, 2017 10:47 am

As a purely philosophical aside, I've come to the conclusion that the Golden Butterfly Portfolio and the traditional Permanent Portfolio aren't really two different portfolios. During my recent read through of Why the Best Laid Plans..., I came across a section where Harry Browne actually does allow for adjustments to the weightings of the various asset classes, so as long as it is not too extreme. In addition, the Golden Butterfly's greater weighting to equity can be considered to be part of a Variable Portfolio. Since the rationale behind the Golden Butterfly is that prosperity is the most common of the economic conditions, this would also be in keeping with Browne's logic that the Variable Portfolio is good for any non-neutral outlooks that the investor has in mind.
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Re: Golden Butterfly Portfolio

Post by ochotona » Mon May 29, 2017 10:45 am

Desert wrote:Tyler, I've been thinking more about your GB portfolio. The more I look at it, the more I like it. The 20% gold & 40% equity combination have performed really well throughout many varying periods since 1970. I believe you decided to go with the GB for your entire ERE portfolio, is that correct?

While messing around with some spreadsheets this morning (it's dangerous, I know), I tried a variation of the GB with 40% ITT rather than 20/20 LTT/Cash (bullet vs. barbell). The past performance appears just a tiny bit better, but roughly equivalent. Then I substituted TBM for the treasuries, and the max drawdown was a bit worse (as expected), but the performance was still very similar. This could be useful for some with a 401k that doesn't provide a good LTT or ITT fund.

Then finally, just for fun I looked at 80% Wellesley and 20% gold, and it has performed very similarly as well. That darn Wellesley fund has been awesome. :)

Just random thoughts on a Memorial Day.
It's kinda fun to see how many moving parts you can remove from the machine before it stops working. I think there is much to be said for a 40/60 allocation, but then swap some of the bonds for gold.
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Re: Golden Butterfly Portfolio

Post by eufo » Mon May 29, 2017 12:30 pm

ochotona wrote:It's kinda fun to see how many moving parts you can remove from the machine before it stops working.
It is. I've tried countless allocations on Tyler's site, just to see how they might have performed. They all kind of lead into the same direction of something very similar to PP, but with minor tweaks to get more equity exposure. It's surprising how well the PP has performed past its creation. I do worry that fine tuning to the past will end up being detrimental in the future.
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Re: Golden Butterfly Portfolio

Post by barrett » Mon May 29, 2017 1:05 pm

eufo wrote:I do worry that fine tuning to the past will end up being detrimental in the future.
Me too! But about the only negative thing I can think to say about the GB is that it would seem to have a higher sequence of returns risk than the PP. The following is deliberately cherry picked to illustrate my point. Say, for example, that a person retired at the beginning of 2000 with a GB allocation. It would have lagged the PP for quite a few years because the 2000s were such a mediocre decade for stocks. Of course it's very tempting to enter the GB now because the stock market just keeps churning out gains.

Desert, one of the things I liked that you said a while back about your own allocation is that you found it relatively easy/convenient to hold 10% of your wealth in physical gold. A lot of the 'gold' that I have currently is in ETFs in my retirement accounts. It's not ideal but so far it's the only way that I can get close to a 4 X 25.

Lastly, Desert, what would we call your portfolio if you abandon it? POFKAD? Portfolio Formerly Known As Desert?
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Re: Golden Butterfly Portfolio

Post by barrett » Mon May 29, 2017 8:53 pm

Thanks for all that, Desert. My wife and I are so close to retirement that I'm hoping not to fiddle with percentages too much. But, gosh, it sure is tempting sometimes. One of the things that I DO like about holding, say, 10% in a gold ETF in retirement accounts, is that it should help smooth out how much one can withdraw from those accounts. Make sense?

Desert, I have a question for you. I get what you are saying about the 1970s but to what do you attribute gold's outperformance in the 2000s? The USD was clearly weaker during that period but I'm not sure if that accounts for a seven-fold rise in gold's price. It's not a trick question... it just seems to be something that people on this forum skirt around quite a bit. I remember (I hope correctly!) that Medium Tex felt gold had gone up so much during that decade because people's expectation was for high inflation. I get how that could push the price up but I don't find that answer totally satisfying. The gain was too sustained and dramatic for that to be the only factor. Any ideas? Thanks.
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Re: Golden Butterfly Portfolio

Post by Tyler » Mon May 29, 2017 9:36 pm

Desert wrote:Tyler, I've been thinking more about your GB portfolio. The more I look at it, the more I like it. The 20% gold & 40% equity combination have performed really well throughout many varying periods since 1970. I believe you decided to go with the GB for your entire ERE portfolio, is that correct?
Yes, although I personally went with small cap blend instead of small cap value. I went back and forth on that for a while and eventually decided on the more "neutral" approach to evenly fill out the Morningstar 3x3 grid using VTI and VB. Either way, the results are pretty similar.

Good point about bullets vs barbells, as that's definitely a reasonable iteration for those with limited bond options. And it's funny -- I also ran the numbers for 80% VWINX and 20% gold a while back and really liked it!
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Re: Golden Butterfly Portfolio

Post by Tyler » Mon May 29, 2017 9:44 pm

barrett wrote: Desert, I have a question for you. I get what you are saying about the 1970s but to what do you attribute gold's outperformance in the 2000s? The USD was clearly weaker during that period but I'm not sure if that accounts for a seven-fold rise in gold's price. It's not a trick question... it just seems to be something that people on this forum skirt around quite a bit. I remember (I hope correctly!) that Medium Tex felt gold had gone up so much during that decade because people's expectation was for high inflation. I get how that could push the price up but I don't find that answer totally satisfying. The gain was too sustained and dramatic for that to be the only factor. Any ideas? Thanks.
IMHO, the simple answer is that gold is negatively correlated to US stocks. Read the example in the middle of this article, and pay particular attention to the side-by-side heat maps. https://portfoliocharts.com/2016/01/25/ ... at-a-time/
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Re: Golden Butterfly Portfolio

Post by mathjak107 » Tue May 30, 2017 2:39 am

a shift to small cap growth now may be a good idea . it looks like value peaked out after it's big run up .
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Re: Golden Butterfly Portfolio

Post by Tyler » Tue May 30, 2017 11:12 am

Desert wrote: One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).
I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio.
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Re: Golden Butterfly Portfolio

Post by Tyler » Tue May 30, 2017 8:20 pm

Good info, Desert.
Desert wrote:I start in '75 since that was the first year gold was legal to own in the U.S.
I just wanted to point out that this is only partially true. 1975 was the first year that Americans could own or trade physical gold, but gold certificates were legal for individual investors since 1964. People just couldn't personally redeem those certificates for the physical product. Think of it as a simple version of modern gold ETFs.

https://en.wikipedia.org/wiki/Gold_Reserve_Act

UPDATE: It turns out that I was wrong on this point. I later learned that the legalization of gold certificates was about them as collectibles rather than any relationship with physical gold. So Desert is correct that gold was illegal to hold in the US from 1934-1975.
Last edited by Tyler on Thu Jun 17, 2021 11:07 pm, edited 1 time in total.
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Re: Golden Butterfly Portfolio

Post by barrett » Wed May 31, 2017 7:53 am

Desert wrote:Barrett, if I remember correctly, you and I are at somewhat similar points in life, though your daughter is much closer to college than my son. But you and I might end up retiring around the same time (hopefully soon!). I've been studying up on the best ways to cash flow retirement, pre-SS. Tyler probably knows far more about this than I do, since he's already doing it and much earlier than me. Due to some odd past opportunities to stash money in pre-tax accounts, we have an unusually high percentage of our savings in traditional IRA's. So my focus on cash flow is getting funds out of those accounts with zero penalties and very low income taxes. It's going to be interesting. Anyway, back to your first point regarding gold ETF's in the IRA ... I agree that some gold in the IRA should reduce volatility/drawdowns of those accounts. I still always try to look at my entire portfolio as one, so I personally don't care that much about the volatility of any single account. Does that make sense?

Regarding gold's performance in the 2000's, I need to geek out on Tyler's article on correlation and then reply later.
Desert, You remember correctly. I will be 59 in September (still have the body of a 57-year-old!) and our daughter just finished her first year of college. Semi-retirement/part time work is already here for me through a combination of factors. And, yes, it does make sense what you are saying about looking at your portfolio as a whole. In our situation, my wife and I will hit retirement with a fairly even split between tIRAs and taxable (but with a very high cost basis on the taxable). Adding to the confusion is that we both have Roth accounts which we intend to let grow until age 70.5 (early 2029 for me and 2037 for her). Plus we have a big (for us) stash of savings bonds that are keepers until maturity. Maybe this is TMI but I just lay it all out because, for us, almost as important as how much we have saved is what order we draw from the accounts. My plan is to draw from taxable and tIRAs first to avoid the worst of RMD consequences and then, starting in 2029, withdraw from my Roth while starting to collect SS.

That's all a long way of saying that I'd like for our tIRAs and taxable accounts to perform more or less the same so that I don't have to be concerned about "selling low" in either of them. But maybe I am just over thinking things.

And I get what you are saying about gold's price from 1972 through 1980. We can never know for sure how much of the run up was due to depegging, how much was due to speculation and how much was due to financial uncertainty/inflation. To Tyler's credit, his site has the start-date sensitivity info so we can discount the 1970s if we want to. But the run up during the 2000s can't be ignored. In general, people who seem to have strong feelings about the 1970s, seem to be less sure about how to frame gold's performance during the 2000s. I think understanding that period beyond Tyler's "lack of correlation to stocks" is important for those of us who want to hold a chunk of gold. Maybe it's all been hashed out on here in other threads before I arrived in early 2014. I just haven't seen a satisfying discussion of it.

I think I got a little over-caffeinated this morning. Sorry about that!
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Re: Golden Butterfly Portfolio

Post by sophie » Wed May 31, 2017 10:07 am

dualstow wrote:My main struggle is whether to make the pp a larger part of my total, which effectively means a bet on gold, buying more gold. What if I load up the truck and gold doesn't come back in my lifetime? What if I don't load up, and merely break even when gold soars once again?
This is from the other gold thread (the one where I was hoping kick off a discussion of the wisdom of holding a ton of gold in ETFs), but it better belongs here I think.

It's a really good question. You could of course ask the exact same question about any other asset. Stocks can be down or flat for periods up to 20 years, which can qualify as "lifetime" for some of us. And let's not even start about bonds! You own gold and bonds because you don't want to bet on stocks - right? It's like buying insurance against market downturns. I guess if you're not worried about downturns (i.e. if 2009 happened again you'd sleep just fine at night) you don't need them.

Anyway, I continue to be curious why people want to discount the gold runups of the 1970s and late 2000's, as the gold performance in those periods is exactly what one would expect given what was happening at the time: stagflation in the 1970s, and market uncertainty in the late 2000s. Looked at another way, if you think gold's performance in the 1970s was entirely due to relaxing restrictions on ownership, then you are saying that Harry Browne's view of the role of gold is completely wrong. If he made that big an error, then you probably don't want to get anywhere near the PP, as presumably that wouldn't have been his only mistake.

Also, I'm not sure the backtests about the returns of intermediate treasuries being a good enough substitute for gold are valid going forward. Rates were a lot higher in the past, and for long periods cash beat inflation - which it is not now, and may not for a long time. Incidentally, I also think that this is a big reason for the runup in stocks. People are buying stocks because the S&P 500 dividend yield beats CD interest rates, and gets better tax treatment. I wonder what's going to happen when interest rates rise and that's no longer the case.

Anyway just some (also over-caffeinated) thoughts....
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Re: Golden Butterfly Portfolio

Post by dualstow » Wed May 31, 2017 10:26 am

You and barrett drinking a lot of covfefe today, eh?
Anyway, I continue to be curious why people want to discount the gold runups of the 1970s and late 2000's
Well, you're so right, Sophie.
I would start by saying that I don't think Harry Browne made an error. There are smart people who like gold and smart people who don't like it. When you're playing with your own money, it leads to a lot more hand-wringing than merely reading a book and thinking, hmm, gold looks neat.

And while it's true that you could say the same about other assets, I suppose this has something to do with herd mentality. It's hard to shake the feeling that 10,000 Bogle fans can't be wrong. All those 60/40 portfolios that completely avoid gold and seem to be fine. (Yes, they might experience some pain in the future. One never knows). How many people have the converse, have gold and neither stocks nor bonds? Well, there's our Libertarian666. (sound of crickets)...and...a handful of people who aren't on the internet.

Let's say I did somebody wrong and my punishment is to sell everything and start a portfolio of pure treasuries. No problem. I could do that today, even knowing that inflation would probably ruin my plans. Same scenario, all stocks: hmm, a little bit harder, but I'd probably thank whoever's forcing me to do this in the long run. Like that movie in which Bette Midler's character thanks her captors for kidnapping her, because she finally lost weight exercising while chained up in their basement. All gold: yikes. I don't know.

(Could you answer my t-bill question now? :-)
Never mind, Tyler got it.)
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Re: Golden Butterfly Portfolio

Post by Cortopassi » Wed May 31, 2017 11:03 am

I only post this as informative in nature, please don't draw any conclusions...

One other aspect of gold, if held in physical form, not GLD at a broker, is it is effectively off the grid as much as you are willing to take it. I have yet to have any local coin dealer fill out forms when buying or selling gold.
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Re: Golden Butterfly Portfolio

Post by stuper1 » Wed May 31, 2017 11:44 am

Exactly, so if there is a solar flare or electromagnetic weapon in the next war that knocks out the power for months, or some kind of financial shenanigans or hacker that erases everybody's brokerage accounts, you still have your physical gold. The calculations above show that you can hold as much as 20% physical gold and still get almost the same CAGR as somebody who holds no gold, plus it lowers the volatility of returns. I sure feel better holding physical gold and having insurance against the possible black swan events.
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Re: Golden Butterfly Portfolio

Post by Tyler » Wed May 31, 2017 4:29 pm

Desert wrote: Note: If one backtests starting in 1970, the conclusion will be that gold improves the portfolio significantly. If the backtesting starts in 1980, the opposite conclusion would be reached.
The way I look at it, you can always find a better or worse choice over a specific timeframe but gold improves the consistency of a portfolio across all economic environments.
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Re: Golden Butterfly Portfolio

Post by Tyler » Wed May 31, 2017 9:02 pm

Desert wrote: I suspect that's true, but I wonder how we can quantify it. I would think it would show up in the max withdrawal rate, which is essentially a measure of the consistency and level of CAGR.
Yes, SWRs are a pretty good indicator.

Lots of charts on the site illustrate it from different perspectives. But if you're looking for a single way to quantify it, play around with the Start Date Sensitivity calculator with and without gold. Here's a walkthrough that includes an example directly relevant to this conversation: https://portfoliocharts.com/2016/05/15/ ... an-others/
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Re: Golden Butterfly Portfolio

Post by sophie » Thu Jun 01, 2017 7:23 am

The problem with backtesting is that the results are going to be skewed depending on the prevalence of the different economic environments. If you started in 1980, you skipped past the inflation of the 1970s and are looking at mostly prosperity with a few years of deflation, plus a long, slow run-down in bond interest rates in the 1980s that could be regarded as an aftereffect of the 1970s inflation. So your backtesting won't be valid if another inflation comes along. Also, you could regard the 1980s hyper-prosperity as an artifact of post-inflation and thus not likely to be repeated. Bottom line, I don't trust backtests anymore.

It's true that there's not much you can turn to for advice on gold. Most writings are a mix of cherry-picked back-tests and highly biased opinion. Which is true of this little missive also, I guess :-). I arrived at my conclusions by examining the long history of gold and its function as an internationally and cross-culturally recognized store of value. I also spent time watching daily market movements of gold, long bonds, and stocks. Whenever stocks went down, either gold or long bonds (sometimes both) would go up. The opposite would happen when stocks went up. Despite the existence of other asset classes, gold and Treasury bonds are fundamental assets that are the main recipients of money that doesn't go into stocks or cash. Other asset classes can be regarded as linear combinations of the fundamental assets. For example, I tested corporate bonds against stocks and cash, and found that they track stocks so closely that I decided they're not worth holding as they provide no actual diversification.

There's also quite a lot of intelligent discussion about gold in the epic PP thread on the Bogleheads forum. It's worth reading through if you haven't already. Maybe it would be worth putting it into one long document and posting somewhere!
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Re: Golden Butterfly Portfolio

Post by Tyler » Thu Jun 01, 2017 10:57 am

Desert wrote: Just to clear up a couple things: I actually really like gold. Somehow I tend to get on the anti-gold side of discussions around here at times, I think because I'm continually testing my own views on gold as an investment component. But I always end up choosing to continue to hold gold, even though I may not have the conviction to heartily recommend it to someone else.
Those who think critically of their investments and who question their own assumptions are the best types of investors! I always fully respect when a decision is well thought out and not simply an act of faith. Your points about the early performance of gold are all true and something worth considering. I just believe that even with those timeframes excluded portfolios with gold are appealing for their demonstrable consistency.
sophie wrote:The problem with backtesting is that the results are going to be skewed depending on the prevalence of the different economic environments. If you started in 1980, you skipped past the inflation of the 1970s and are looking at mostly prosperity with a few years of deflation, plus a long, slow run-down in bond interest rates in the 1980s that could be regarded as an aftereffect of the 1970s inflation. So your backtesting won't be valid if another inflation comes along. Also, you could regard the 1980s hyper-prosperity as an artifact of post-inflation and thus not likely to be repeated. Bottom line, I don't trust backtests anymore.
IMHO, a wise investor should seek two pieces of information: 1) how a portfolio worked and will continue to work, and 2) evidence that it really did perform as advertised even in the least favorable timeframe. I think backtesting has developed a bad name because too many people cherry-pick data either intentionally or not and simply don't understand how uncertainty and sequence of returns works. But with the right mindset and the right tools, it doesn't have to be that way. I can't force people to think differently, but at least I can contribute to the tool chest.
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Re: Golden Butterfly Portfolio

Post by sophie » Fri Jun 02, 2017 7:48 am

Agree, backtesting helps you prove that a portfolio worked as it should during a given economic condition. I remember once toying around with inventing a way to backtest fairly by setting up a fictitious timeline with all economic conditions equally represented, using results from years in which each condition dominated. Or, set up multiple tests each focusing on one economic condition.

One thing that has always struck me is how every portfolio that doesn't hold gold got hammered in the 1970s. Since my goal is to preserve my assets even during the drawdown phase, I got very interested in this time period as the ultimate test of a portfolio's staying power in difficult long-term conditions. I tested to see if lowering gold to 10% would be enough to keep a portfolio afloat, and it's not. The minimum is just over 20%. If Desert is right and gold gains were artificially increased in the 1970s by relaxing of ownership rules, then you'd need even more. So it's not that I'm taking gold on blind faith.

Desert, great guess - it is indeed Marie Curie. Is your avatar Ben Franklin?
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Re: Golden Butterfly Portfolio

Post by Kbg » Sat Jun 03, 2017 10:20 pm

I think Desert is exactly right. While the term bubble is probably overused, gold in 78-79 was absolutely bubbleiscious...way, way, way beyond any fundamental reasons.
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