He’s made these comments over the years but I think he misses the point or doesn’t want to get the point. Gold is just one asset in a diversified portfolio. It is not the only thing an investor should own. Gold should be used to diversify the unique risks that affect stocks and bonds. That risk is high inflation. Gold is unequaled in its ability to resist high inflation.
Gold offers powerful diversification against currency problems. You don’t need the end of the world for gold to provide diversification in a stock/bond portfolio. The stock market had essentially no real returns for the decade of the 1970s after inflation. Yet, gold helped provide real returns in a portfolio over this time and it didn’t require removing the Cosmoline from your buried AK-47 to battle roaming biker gangs.
People who are used to making up their own reality through force of personality are often bewildered by things like gold that exist outside the worlds they are accustomed to manipulating.
Gold sits there quietly as the world works through its dramas and intrigues, like the proverbial clock in a thunderstorm.
Rick Ferri's relationship with gold is a bit like the man and the bird in Poe's "The Raven."
Imagine a raven wearing a Mr. T-style pile of gold chains sitting over Rick Ferri's door. After every Rick Ferri anti-gold rant, the bird would look at him blankly and say "Nevermore."
Here's a taste:
But the raven, sitting lonely on the placid bust, spoke only,
That one word, as if his soul in that one word he did outpour.
Nothing further then he uttered - not a feather then he fluttered -
Till I scarcely more than muttered `When it comes to value I find gold to be a very poor store -
On the morrow I'm going to an anti-gold rally; leave me now bling-bird, you are a terrible bore.'
Then the bird said, `Nevermore.'
Last edited by MediumTex on Fri Nov 05, 2010 4:41 pm, edited 1 time in total.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
Rick Ferri is a smart guy and I'm sure I'd agree with him on 90% of his positions, but this bee he has in his bonnet about gold is really something else. This is a good dissection of the problems with his positions (as well as a good supplemental reminder on the special role gold has in its portfolio.)
He comes dangerously close to making a good point about the limits of instruments like GLD versus physical gold, but he manages at the last minute to avoid doing so. He implies yet again that gold is worthless in any scenario short of "Mad Max Beyond Thunderdome". This sounds like nonsense if you are from (or have heard of) Iceland, Argentina, etc.
Basically, as you said in the article, all the reasons he gives are reasons not to pour every last penny into gold. It's a tool that performs a specific task. There's no sense freaking out that your nail gun won't help you tighten bolts. Presumably you've got a "diversified" tool belt for whatever arises.
His point on GLD is well taken. Certainly Browne and I have both said that ETFs are not the ideal choice unless you have no other options logistically. But segregated bank storage overseas is very difficult for most people to do now-a-days. Some of the new gold storage services may be better, but I have no experience with them. The ETFs are regulated by so many banking and securities laws that fraud happening in them would be difficult. But if there was a serious crisis could you access the assets? I don't know.
But if you can hold some physical gold securely yourself that's all the better. The gold provides inflation protection, but also is for extreme events that impact the entire banking system. The less pieces of paper between you and that asset the better.
I don't disagree with Rick Ferri on many things overall. I think his position on gold is inconsistent with his other advice. I also do not agree with his position on holding junk bonds and emerging market debt. I see nothing but problems with both of those assets. A better approach would be to hold more stocks if you want to risk higher returns. The payoff is better if the bet goes your way. Low quality bonds give you the worst of both worlds. You get the performance of bonds (and taxes) with the risk of stocks. Yuck.
Last edited by craigr on Sat Nov 06, 2010 12:42 pm, edited 1 time in total.
Glad to be of help. I talk about this portfolio because it has helped me a lot in dealing with managing my own savings in a safer way.
re: AK47
If you have the weapons buried next to your gold stash you need to keep it from rusting, right? A seized up AK bolt is no good when the zombie hordes come to eat your brains.
One of the neat things about the PP is that it provides a safe way of owning stocks, bonds and gold.
Especially when it comes to gold, I think that the PP is one of the few truly safe and non-speculative ways of owning a significant gold allocation.
It's ironic that there are probably countless investors right now who have decided to increase their gold allocation in a conventional portfolio to 10%-15% and are likely sweating bullets hoping they didn't buy at the top. Meanwhile, there are these PP investors with double that amount of gold in their PPs and they're doing the investing equivalent of laying around napping like a roomful of 17 year old cats.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
MediumTex wrote:
Desert makes some great points above.
One of the neat things about the PP is that it provides a safe way of owning stocks, bonds and gold.
I agree. The portfolio was designed to work with these volatile assets. It was not a bolted on after-thought. I see how some people are jumping into gold without a plan and it makes me cringe. I think the Permanent Portfolio gives investors a plan that they can take advantage of gold if it goes up to protect their savings. But also gives them protection in case it goes down if the fear of inflation subsides.
Personally, I think Rick Ferris, like many investors, can't bring themselves to look at stocks adjusted for inflation. The real rate of return on stocks -- after adjusting for inflation -- can be quite poor, depending on your timeline. He doesn't seem to acknowledge the issue, or have a coherent strategy to deal with it, as far as I can tell.
