% of gold asset in ETF or CEF for rebalancing purposes

Discussion of the Gold portion of the Permanent Portfolio

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LittleDinghy
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% of gold asset in ETF or CEF for rebalancing purposes

Post by LittleDinghy » Thu Jun 13, 2019 9:01 am

I'm currently rearranging our full retirement nest egg investments around to implement the Permanent Portfolio, but actually more like the Golden Butterfly. I am 3-1/2 years from retirement and my wife is 8-1/2 years away. Right now I'm thinking about how to implement the gold asset. On page 159 of Rowland & Lawson's book "The Permanent Portfolio" is written, "Investors who want to use a gold ETF are usually better off using a hybrid approach, with some physical gold in their possession and some in a gold fund for easy re-balancing of the whole portfolio." Also, I've seen mention in this Gold section of this bulletin board that people hold some gold in ETF's for rebalancing. My question is how should one decide what percentage of one's gold asset should be held in either ETFs or closed end funds (CEFs) for rebalancing purposes?
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by pmward » Thu Jun 13, 2019 10:20 am

LittleDinghy wrote:
Thu Jun 13, 2019 9:01 am
I'm currently rearranging our full retirement nest egg investments around to implement the Permanent Portfolio, but actually more like the Golden Butterfly. I am 3-1/2 years from retirement and my wife is 8-1/2 years away. Right now I'm thinking about how to implement the gold asset. On page 159 of Rowland & Lawson's book "The Permanent Portfolio" is written, "Investors who want to use a gold ETF are usually better off using a hybrid approach, with some physical gold in their possession and some in a gold fund for easy re-balancing of the whole portfolio." Also, I've seen mention in this Gold section of this bulletin board that people hold some gold in ETF's for rebalancing. My question is how should one decide what percentage of one's gold asset should be held in either ETFs or closed end funds (CEFs) for rebalancing purposes?
I think this is a highly personal thing. I think each person here has kind of reached their own conclusion on this. Some people are even full on ETF's (the AAAU ETF in particular is compelling because it is actually backed by allocated physical gold and shares can be exchanged in kind with the Perth Mint for only a $30 delivery fee). I personally have a set number in physical gold I am slowly building up to that I plan to never sell, and once I reach that the rest will stay in ETF's. The amount I will be holding physical will be relatively small in comparison, the majority of my gold allocation is and will stay in AAAU and IAU (I use IAU for DCA purposes just because it's commission free at Fidelity, but occasionally, when the tax situation allows it, I swap it over for AAAU or physical).
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by Pet Hog » Thu Jun 13, 2019 11:16 am

LittleDinghy wrote:
Thu Jun 13, 2019 9:01 am
My question is how should one decide what percentage of one's gold asset should be held in either ETFs or closed end funds (CEFs) for rebalancing purposes?
If you're using the 35/15 rebalancing bands, then you could have 71.4% of your gold assets in physical when you rebalance out of gold for the first time. That's because you'd be selling off 10/35 (28.6%) of the total gold value (in, for example, ETFs) and keeping 25/35 (71.4%). After that, if you had to rebalance a second time out of gold, then you'd have to sell physical. To avoid that scenario, you might want 71.4% of what's left from the first rebalance to be physical. So 71.4% of 71.4%, or 51.0% physical. That means that today if you have half of your gold assets in physical, you could rebalance twice out of gold and sell only your ETFs. If you rebalance three times out of gold, you could have (0.714)^3 in physical, or 36.4%. I believe it has happened historically that a single asset has reached the 35% rebalancing band three times in a row, so that's my final answer: 36.4% in physical, 63.6% in ETFs.

These numbers apply to each of the assets, so you could say the same thing, for example, for "deep cash." I remember it as the "911" rule, because you can keep 9.11% (36.44%/4) of your total PP in assets that never have to be sold (at least until an unlikely fourth consecutive rebalance).
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by stuper1 » Thu Jun 13, 2019 1:22 pm

Not sure on your math for the 911 rule. It seems like if 36.4% of each asset is in a deep never-to-be-sold condition, then 36.4% of my PP is also in that state, not 36/4.
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by Pet Hog » Thu Jun 13, 2019 4:43 pm

stuper1 wrote:
Thu Jun 13, 2019 1:22 pm
Not sure on your math for the 911 rule. It seems like if 36.4% of each asset is in a deep never-to-be-sold condition, then 36.4% of my PP is also in that state, not 36/4.
Yes, poorly worded on my part. I meant 9.11% of total PP value in each asset class. So, for a $100,000 portfolio, $9110 in physical gold, $9111 in deep cash, etc.
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by stuper1 » Thu Jun 13, 2019 8:01 pm

Ok, that makes more sense. I should have realized what you were saying.
LittleDinghy
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by LittleDinghy » Fri Jun 14, 2019 12:22 am

Pet Hog wrote:
Thu Jun 13, 2019 11:16 am
LittleDinghy wrote:
Thu Jun 13, 2019 9:01 am
My question is how should one decide what percentage of one's gold asset should be held in either ETFs or closed end funds (CEFs) for rebalancing purposes?
I believe it has happened historically that a single asset has reached the 35% rebalancing band three times in a row,
Thank you for a great method for deciding the percentage. It is especially useful to hear that historically a single asset has reached the 35% rebalancing band three times in a row (at most, I presume).

Of course, since I'm doing something more like the Golden Butterfly (GB) rather than the PP, there are two big differences important to re-balancing:
1) Re-balancing bands for GB that are equivalent to the PP's 35-25-15 would be, I think 28-20-12.
2) I have to divide the portfolio into 5 parts rather than 4 at each re-balancing.

Now the next thing to research is what sort(s) of fund(s) in which I should buy, ETFs or closed end funds.
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sophie
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by sophie » Fri Jun 14, 2019 7:48 am

Just be aware of the tax implications of selling gold. Most of us keep ETFs in tax-advantaged accounts for future rebalancing purposes. You can use closed end funds in taxable to qualify for cap gains rates, but it's really a pain - you have to file a paper form every year, which means you not only have to deal with the headache of an additional form, but you can't file electronically.

I agree that AAAU really changed the game. Still, I like keeping my taxable gold holdings off the radar as much as possible, just because I can.
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by LittleDinghy » Fri Jun 14, 2019 9:31 am

Pet Hog wrote:
Thu Jun 13, 2019 11:16 am
that's my final answer: 36.4% in physical, 63.6% in ETFs.
[/quote]
AND
sophie wrote:
Fri Jun 14, 2019 7:48 am
Just be aware of the tax implications of selling gold. Most of us keep ETFs in tax-advantaged accounts for future rebalancing purposes. You can use closed end funds in taxable to qualify for cap gains rates, but it's really a pain - you have to file a paper form every year, which means you not only have to deal with the headache of an additional form, but you can't file electronically.

I agree that AAAU really changed the game. Still, I like keeping my taxable gold holdings off the radar as much as possible, just because I can.
So, it sounds like for the PP, the recommendation is to keep about 36% in physical gold in a taxable account, and a corresponding 64% in one or more ETFs in tax advantaged accounts. And from reading other posts in the gold forum, given that my wife and I are getting close to retiring (8-1/2 & 3-1/2 yrs away, respectively), the best type of tax advantaged account for us to use for the ETFs are our Roth accounts. Am I reading the advice correctly?

Of course the percentages above need to be modified a bit since we've decided to use more of a GB than a PP.
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by Pet Hog » Fri Jun 14, 2019 11:57 am

I think 36% physical gold in taxable and 64% ETF gold in a Roth account would be a very tax-efficient strategy. One thing to consider is if/when you sell your gold ETFs to withdraw from the Roth you would be increasing your percentage of physical gold. May or may not be a concern.

I'm not sure what the "official" rebalancing bands are for the Golden Butterfly, but 28/12 seems reasonable. In that case, when rebalancing out of gold you would be selling 8/28 (28.6%) of your gold holdings and keeping 20/28 (71.4%). So, yes, the same percentages as for 35/15 PP.
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ochotona
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by ochotona » Fri Jun 14, 2019 3:01 pm

ETF vs Physical - I wish AAAU had come out long before I opened my GoldStar IRA account. After a number of years go by, I'll decide whether to fold up GoldStar and bring it home to Schwab as AAAU. I don't think you get much more secure than they will deliver metal to do if you desire, and it's in a decent country.

Hey, there's a Class A timing accident for you! Option B did not exist when Option A was selected.
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Re: % of gold asset in ETF or CEF for rebalancing purposes

Post by pmward » Fri Jun 14, 2019 3:17 pm

ochotona wrote:
Fri Jun 14, 2019 3:01 pm
ETF vs Physical - I wish AAAU had come out long before I opened my GoldStar IRA account. After a number of years go by, I'll decide whether to fold up GoldStar and bring it home to Schwab as AAAU. I don't think you get much more secure than they will deliver metal to do if you desire, and it's in a decent country.

Hey, there's a Class A timing accident for you! Option B did not exist when Option A was selected.
Yep, the very meaning of the term "good as gold". It's also completely backed by the government as well. With a .18% ER, what more could one ask for in a gold ETF? I honestly would feel safe even if all my gold were in AAAU.
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