Gold = Tulip Bulbs

[TripleB]

I skim through several financial forums on occasion. This morning, I read where one poster asked about keeping some gold coins as part of his portfolio. Another posted attacked him, claiming gold never even matches inflation and compared gold to tulip bulbs, claiming gold will reach the same status some day.

For those not away of tulip mania, here's a link
http://en.wikipedia.org/wiki/Tulip_mania

I won't post a direct link to the other forum I'm referring to, because I'm not trying to besmirch the forum nor the poster. I'm writing this to highlight why there's such objection towards the PP.

A lot of people hate gold. On a similar vein, a lot of other people hate stocks and view the PP as too risky because it holds any amount of stocks. People who like stocks typically hate long-term bonds due to "interest rate risk."

The hard part of getting people to trust in the PP is to get them to realize the parts work together and not in isolation. I tried for the last few years to convince a close relative to transition to the PP from a 100% cash portfolio. He doesn't trust stocks or gold. He doesn't understand bonds. His objection is "if something is always going to go down, how can you possibly make money?"

[Storm]

I tried for the last few years to convince a close relative to transition to the PP from a 100% cash portfolio. He doesn't trust stocks or gold. He doesn't understand bonds. His objection is "if something is always going to go down, how can you possibly make money?"

TripleB, I think that person is probably a lost cause.  If they don't understand how cash loses it's purchasing power over time, and obviously don't understand simple math (1+1-1 = 2) they are either willfully ignorant or have no desire to learn.

I think it's fully valid to make the decision to stay 100% in cash, as long as you understand you are trading market volatility for steady erosion of your purchasing power over time.  For those already retired, this may be fine:  Example - 70 year old person with $2 million - they can stay in cash and probably won't live long enough to spend it all.  But, this is taking a calculated risk and a loss understanding that they won't be around to spend any gains in their portfolio.

[Greg]

So no one else here keeps tulips bulbs in their tax-advantaged accounts? I figure they can only go up and I'm keeping them in my tax-advantaged accounts since I don't want to pay all of the capital gains tax I'll be getting when the price shoots to the moon.

[craigr]

I skim through several financial forums on occasion. This morning, I read where one poster asked about keeping some gold coins as part of his portfolio. Another posted attacked him, claiming gold never even matches inflation and compared gold to tulip bulbs, claiming gold will reach the same status some day.

It's just kind of common because they read it elsewhere and just parrot the responses. Explaining Modern Portfolio Theory and diversification to them usually means just stocks and bonds. If they believe they understand the topic, then they will say you can diversify by just splitting up the stock allocation and don't need gold. When I hear this reply I immediately know they actually don't understand the topic!

I find it's not worth debating the topic with them any more. People that get it and have been burned by stocks and bonds alone appreciate the distinction.

Then again, gold bugs hate the Permanent Portfolio as well. The idea of holding stocks and bonds will drive them to seizure.

The hard part of getting people to trust in the PP is to get them to realize the parts work together and not in isolation. I tried for the last few years to convince a close relative to transition to the PP from a 100% cash portfolio. He doesn't trust stocks or gold. He doesn't understand bonds. His objection is "if something is always going to go down, how can you possibly make money?"

The thing is really if he's in all cash and it works for him then that's probably the right choice. If we get bad inflation there could be a lesson learned, but then again short-term cash reserves can often pace inflation so the damage won't be nearly as bad as most investment strategies I've come across in terms of lost purchasing power. I would just add that current market rates are near 0% for cash and inflation is -2.96% as of last year so he's losing almost -3% a year for certain at this point.

[Lone Wolf]

The thing is really if he's in all cash and it works for him then that's probably the right choice. If we get bad inflation there could be a lesson learned, but then again short-term cash reserves can often pace inflation so the damage won't be nearly as bad as most investment strategies I've come across in terms of lost purchasing power. I would just add that current market rates are near 0% for cash and inflation is -2.96% as of last year so he's losing almost -3% a year for certain at this point.

I completely agree.  Cash may be free of nominal risk but your purchasing power can suffer constant erosion with a 100% cash portfolio.

With the Fed declaring that they want 0% interest rates into 2014, it seems likely that these risks will only continue.  We've had positive inflation nearly every year in spite of all the deleveraging and unemployment we see today.  Positive inflation along with a ZIRP policy from the Fed makes me wary of all-cash portfolios.  It is better than taking crazy risks, though.

[Ad Orientem]

When tulip bulbs have been used as currency for 6000 years then someone please drop me a line.

[AdamA]

Explaining Modern Portfolio Theory and diversification to them usually means just stocks and bonds. If they believe they understand the topic, then they will say you can diversify by just splitting up the stock allocation and don't need gold. When I hear this reply I immediately know they actually don't understand the topic!

I will never understand why this is.  I was so happy when I first read a clear explanation of Modern Portfolio Theory, b/c it is so intellectually pleasing.  I was even happier when I saw how the PP used it.  I didn't have to worry about inflation vs deflation doomsday scenarios anymore.  It was great.  I don't know why people stop at stocks and bonds and then turn their investment blinders on.

 

[Tyler]

I was so happy when I first read a clear explanation of Modern Portfolio Theory, b/c it is so intellectually pleasing. 

So I've seen this referenced on the forum many times.  Any recommendations for books / websites / blogs to best explain this to an economic layman?

[AdamA]

I was so happy when I first read a clear explanation of Modern Portfolio Theory, b/c it is so intellectually pleasing.

So I've seen this referenced on the forum many times.  Any recommendations for books / websites / blogs to best explain this to an economic layman?

Bernstein--"The Intelligent Asset Allocator".  The first 4-5 chapters are enough.  It's about an hour of reading.

[jackely]

Gold has a longer antiquity than tulips...

"And a river went out of Eden to water the garden; and from thence it was parted, and became into four heads. The name of the first is Pison: that is it which compasseth the whole land of Havilah, where there is gold; And the gold of that land is good: "

From early in the 2nd chapter of Genesis.

And you can go all the way through the rest of the Bible from the furnishings of the tabernacle of Moses to King Solomon's temple to the book of Revelation where it describes a heavenly vision of a city with a street of pure gold.

My point is not about whether the Bible has divine origins or not but about the antiquity of gold as a precious metal in human history. Tulips do not share this.

[Lone Wolf]

"And a river went out of Eden to water the garden; and from thence it was parted, and became into four heads. The name of the first is Pison: that is it which compasseth the whole land of Havilah, where there is gold; And the gold of that land is good: "

And think of the permanence this implies.  The gold of Havilah existed long before this planet, any of us, or any Dutch tulip bulbs.  It'll still be around (with not a trace of degradation or tarnish) long after we're all gone.