Do We Really Get the Premium Back?

Discussion of the Gold portion of the Permanent Portfolio

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Do We Really Get the Premium Back?

Post by dualstow » Sun May 01, 2011 8:40 pm

In ...Best Laid Plans..., Harry writes that the premium you pay on standardized coins like 1-oz American Eagles is like a deposit on bottles: you get it back when you sell the coin. And, I'm pretty sure I've seen the same written here at the forum once or twice. Is that really the case?
Perhaps I'm not sure how much I'm giving to the coin dealer for making the transaction a safe one, and how much I'm paying for standardization (a coin) rather than a chunk of unstamped gold on a scale weighed on a scale.

This is not a complaint about the premium nor about the dealer's own cut. I'm just not sure how it works. If I sold all my ETFs and then had to sell some physical coins, I'd be lucky to get something close to spot. Is that right? (I'm still green and have not yet had the pleasure of rebalancing out of some gold).

A related question: gold is kind of hot right now, to make an understatement. Does that generally cause an increase not only in spot price but in what dealers charge for their services? AJPM recently raised their shipping charge on 2-9 coins from $20 to $25. Do you think dealers also charge more of a cut (like 4.5%) when gold is popular? I know market timing is wrong, but I'm curious, and what I really want to ask is this: if gold plummeted to $500, do you think dealers would start charging something closer to 3% or 2% on top of spot?
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Re: Do We Really Get the Premium Back?

Post by MediumTex » Sun May 01, 2011 8:44 pm

A strongly rising market is going to widen spreads.

Right now is not a normal time in the PM markets.
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Re: Do We Really Get the Premium Back?

Post by KevinW » Mon May 02, 2011 12:07 am

My understanding is that coin prices vary from bullion spot prices due to two separate effects: premium and spread.  The market pays a premium for gold that's in a pre-measured package, such as a 1 oz bullion coin, since you know how much pure gold is in there without paying for assay.  Spread is the gap between prevailing buy and sell prices.  As with any kind of broker, coin dealers need to charge a spread to cover their overhead and earn a fair profit.

My impression is that premia have been relatively steady over time, so you can expect to recoup them.  But dealers charge whatever spread they can get away with, so spreads vary with the direction and volume of the coin market, competitiveness of the broker business, and the costs of business for brokers.
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Re: Do We Really Get the Premium Back?

Post by murphy_p_t » Mon May 02, 2011 1:59 am

dualstow wrote: In ...Best Laid Plans..., Harry writes that the premium you pay on standardized coins like 1-oz American Eagles is like a deposit on bottles: you get it back when you sell the coin. And, I'm pretty sure I've seen the same written here at the forum once or twice. Is that really the case?
Perhaps I'm not sure how much I'm giving to the coin dealer for making the transaction a safe one, and how much I'm paying for standardization (a coin) rather than a chunk of unstamped gold on a scale weighed on a scale.
i'm not a coin dealer...however, i think if you deal with a reputable, well established business you're best off...ie avoid shops that opened in last 2 years with bright colored awnings. kruegers, maples, eagles are the standard bullion...i'm not aware of anything to be concerned about...for the hunk of gold, good question...start with a reliable dealer.  often, gold bars will have markings, like weight, fineness, fabricator...if it weighs what it says, i think you're good to go, again dealing w/ a reliable dealer

[/quote]
This is not a complaint about the premium nor about the dealer's own cut. I'm just not sure how it works. If I sold all my ETFs and then had to sell some physical coins, I'd be lucky to get something close to spot. Is that right? (I'm still green and have not yet had the pleasure of rebalancing out of some gold).
what you get will depend on what you have...you'll get slightly more for eagles, for instance...maybe a premium over spot even? call into a local coin shop you may want to do business with to find out his current premiums / discounts...these will vary over time, depending on market conditions

[/quote]
A related question: gold is kind of hot right now, to make an understatement. Does that generally cause an increase not only in spot price but in what dealers charge for their services? AJPM recently raised their shipping charge on 2-9 coins from $20 to $25. Do you think dealers also charge more of a cut (like 4.5%) when gold is popular? I know market timing is wrong, but I'm curious, and what I really want to ask is this: if gold plummeted to $500, do you think dealers would start charging something closer to 3% or 2% on top of spot?
ultimately, think supply/demand...if everyone is trying to dump their coins, private folks will get less @ the coin shop to sell...your dealer won't want to be a long-term holder, so his premium will be adjusted to move inventory


of course, no one wants to overpay, but these questions don't seem esp. relevant for long-term holding in a PP
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Re: Do We Really Get the Premium Back?

Post by dualstow » Mon May 02, 2011 10:16 am

of course, no one wants to overpay, but these questions don't seem esp. relevant for long-term holding in a PP
True. And, as has come up before, it is entirely possible that my coins will never be sold until after they're willed to my relatives. I'm just curious about how everything works in pp managment. Much more so than what's going on with the economy or which asset someone thinks is going to rise or fall in the future.

The concept of the pp is simple. Still, I'd like to learn as much as I  can about all the different processes of buying and selling, all the fees and tax implications. Everything that actually happens on the ground.

I appreciate all the replies. Many thanks!
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Re: Do We Really Get the Premium Back?

Post by moda0306 » Mon May 02, 2011 10:34 am

My biggest fear is buying my first gold coins.  I'm much less concerned about a small premium than getting shaved, fraudulent, or (gasp) undelivered coins.  I'll just keep a few grand worth at first as I'm even in a position to keep most of my gold in ETF form in my tax-deferred accounts.  I haven't paid close enough attention to the commentary surrounding physical gold purchases and will have to do a little scouring of the FAQ and board.
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Re: Do We Really Get the Premium Back?

Post by Gumby » Mon May 02, 2011 11:34 am

moda0306 wrote: My biggest fear is buying my first gold coins.
I'll admit that I was pretty nervous as well. I wired the money and the dealer could have easily taken the money and run. But, I had some faith that it was in the best interest of the dealer to do a good job and fulfill the delivery. A few days later the mailman shows up with a small, double-boxed, and relatively heavy package full of carefully wrapped gold coins. Whew!
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Re: Do We Really Get the Premium Back?

Post by moda0306 » Mon May 02, 2011 12:08 pm

Gumby,

Does holding them change your perspective on owning gold per MT's personal observations?
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Re: Do We Really Get the Premium Back?

Post by Gumby » Mon May 02, 2011 12:39 pm

moda0306 wrote: Gumby,

Does holding them change your perspective on owning gold per MT's personal observations?
Yes. Without a doubt.

At first it was a little depressing that 25% of my entire net worth could physically fit inside a Happy Meal® box. But, that aside... Holding a Gold Eagle in my hand, I felt as if someone literally moved a mountain to forge the coin. It was beautiful, desirable and powerful. It was heavy. It was only then that I could really see and feel why gold has always been the perfect atomic element for money. I wondered if I was feeling the same emotion that every Phoenician, Mayan, Roman, Mesopotamian, Viking, and '49er felt who devoted their lives to its pursuit. In this day in age, it really is the purest currency that extends beyond any government. It's almost ironic that the US government even mints them.

I purchased 40% Krugerrands (which had a much smaller premium) and 60% Gold Eagles. The Eagles are stunning, so their awe-effect is amplified. My Krugerrands don't seem to have quite the luster that the Eagles have.

Unfortunately, I think that selling Krugerrands right now would not provide a good spread right now. Haven't really researched it though.
Last edited by Gumby on Mon May 02, 2011 1:00 pm, edited 1 time in total.
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Re: Do We Really Get the Premium Back?

Post by MediumTex » Mon May 02, 2011 12:45 pm

Both gold and silver eagle coins are quite beautiful.
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Re: Do We Really Get the Premium Back?

Post by moda0306 » Mon May 02, 2011 1:21 pm

Thanks Gumby.  It helps to hear consistent reinforcement of the psychological affect of owning physical gold, because without it I get too complacent with the ETFs.  The thing is unless gold goes absolutely bonkers having some coin will almost never result in a taxable transaction if you have a bunch of etf in tax-deferred accounts, so I shouldn't be using taxes as an excuse not to "get physical."

I have been surprised to have seen what could maybe be described as the same affect with my Ally 5-yr cd... unlike treasury bonds or even Ally savings accounts, you can see the daily accrual of interest.  This has made me appreciate cash more, even though one shouldn't be looking at their value daily.  I love lt-bonds right now (plus its in my roth) so I don't feel the urge to buy actual bonds (TLT is serving me fine), so this probably has its most profound affect on your least favorite assets.  I'd imagine it's easy enough now, but if one wants to be able to hold gold through decade-long losses it might be a good idea too have some on hand to remind you of its scarcity, purity, etc.
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Re: Do We Really Get the Premium Back?

Post by dualstow » Mon May 02, 2011 1:38 pm

moda0306 wrote: My biggest fear is buying my first gold coins.  I'm much less concerned about a small premium than getting shaved, fraudulent, or (gasp) undelivered coins.  I'll just keep a few grand worth at first
..
I started that way, too: small. It would have been nice if I'd bought everything at once before the price rose so much, but the first modest order kind of demystified everything. The gold actually came in the mail like it was supposed to and my fingernails eventually grew back.

I guess it's the boglehead in me that is cautious about the premium. A 4 to 4.5% fee up front is not a big deal on a few coins, but applied to 25% of my wealth- well, I'd never buy a mutual fund with such a fee, let alone one up front. Then again, as MTex has pointed out in other threads, you don't have to pay that fee year after year like you do w/ GTU and PHYS. The expense ratio on my treasury money market is comparable to the interest, and it's not like that's going to go up in value.

All in all, holding physical coins is a positive experience once you get the transaction done.
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Re: Do We Really Get the Premium Back?

Post by Tortoise » Tue May 03, 2011 1:29 am

Gumby wrote: I purchased 40% Krugerrands (which had a much smaller premium) and 60% Gold Eagles. The Eagles are stunning, so their awe-effect is amplified. My Krugerrands don't seem to have quite the luster that the Eagles have.
For an even more striking difference in appearance, buy a Canadian Maple Leaf, Austrian Philharmonic, or Gold Buffalo sometime.  Those coins are 99.99% gold, as compared to the 92% gold content in Krugerrands and Eagles.  The difference in appearance is not subtle at all; pure gold is strikingly yellow compared to the 92% gold coins.  Absolutely beautiful.  The main drawback is that the pure gold coins scratch easily.
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Re: Do We Really Get the Premium Back?

Post by AgAuMoney » Tue May 03, 2011 6:49 pm

Tortoise wrote:buy a Canadian Maple Leaf, Austrian Philharmonic, or Gold Buffalo sometime.  Those coins are 99.99% gold, as compared to the 92% gold content in Krugerrands and Eagles.  The difference in appearance is not subtle at all; pure gold is strikingly yellow compared to the 92% gold coins.  Absolutely beautiful.  The main drawback is that the pure gold coins scratch easily.
Agreed.  And BTW, those little scratches can really bring down the premium.  I don't think you should count on getting back the premium in any case.  Since 2006 I've found that when there are more sellers the premium to buy is lower and when more buyers then the premium is higher.  Spread changes also, but here I'm talking premium over spot, not buy-sell spread.  I've purchased 'new' appearing krugs for a $5 premium but usually I'd buy any condition krug under $10 over.  I've also picked up a few as much as $30 over and lately the premium has been much higher.  (I've found the same rules apply to CEF also.)

BTW, my benchmark price is ColoradoGold.  I expect to beat his price by shopping locally and almost always I do, and even better once his S&H is added in.  Plus buying locally means I usually can buy one at a time.  Most of mine I've purchased one at a time at a local coin shop, buying whatever had the lowest premium.  So far that has never been a buffalo except when that was the only thing available.  It has been krugerrand about 5x as often as gold eagle, and maple leaf almost 2x as often as krug.

Another note on difference in gold coins...  I usually see a color difference between a gold eagle and a typical krug.  The gold eagle is alloyed with more silver giving it a brighter appearance, while the krug has added more copper giving it a bronze or even reddish tinge.  I have noticed a more subtle difference between krugs as well.  Some of them are more yellow than others.  I think they don't concern themselves as much with the exact composition of the alloy -- 22k gold and 2k of whatever else happens to be in the melt that day.
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Re: Do We Really Get the Premium Back?

Post by MediumTex » Wed May 04, 2011 8:55 am

AgAuMoney,

In the absence of a welcome center, can you tell us a little about yourself and your views on the permanent portfolio strategy?

Welcome to the site.
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Re: Do We Really Get the Premium Back?

Post by dualstow » Wed May 04, 2011 9:37 am

AgAuMoney wrote: ...
Agreed.  And BTW, those little scratches can really bring down the premium.  I don't think you should count on getting back the premium in any case.  Since 2006 I've found that when there are more sellers the premium to buy is lower and when more buyers then the premium is higher.  Spread changes also, but here I'm talking premium over spot, not buy-sell spread.  I've purchased 'new' appearing krugs for a $5 premium but usually I'd buy any condition krug under $10 over.  I've also picked up a few as much as $30 over and lately the premium has been much higher.  (I've found the same rules apply to CEF also.)

BTW, my benchmark price is ColoradoGold.  I expect to beat his price by shopping locally and almost always I do, and even better once his S&H is added in.  Plus buying locally means I usually can buy one at a time.  Most of mine I've purchased one at a time at a local coin shop, buying whatever had the lowest premium.  So far that has never been a buffalo except when that was the only thing available.  It has been krugerrand about 5x as often as gold eagle, and maple leaf almost 2x as often as krug.

Another note on difference in gold coins...  I usually see a color difference between a gold eagle and a typical krug.  The gold eagle is alloyed with more silver giving it a brighter appearance, while the krug has added more copper giving it a bronze or even reddish tinge.  I have noticed a more subtle difference between krugs as well.  Some of them are more yellow than others.  I think they don't concern themselves as much with the exact composition of the alloy -- 22k gold and 2k of whatever else happens to be in the melt that day.
Good information, thanks. I have often thought about buying from local dealers -- they are walking distance -- so that I can buy one coin at a time in the future.
Regarding silver content: I think krugerrands have zero.
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Re: Do We Really Get the Premium Back?

Post by AgAuMoney » Wed May 04, 2011 7:06 pm

MediumTex wrote: AgAuMoney,

In the absence of a welcome center, can you tell us a little about yourself and your views on the permanent portfolio strategy?

Welcome to the site.
Thanks...  Here is good?  If not let me know and I'll post it elsewhere and edit this one away.

Married with children.  I've been a software engineer for over 20 years and have been in the stock market for about 20 years.  I remember the 1987 crash because my landlady at the time lost a bunch then went out and bought a new Cadillac where the depreciation is known and the reward is immediate.

I've been fortunate but after getting hurt by the tech crash I started doing a lot of self-education and research.  My investing philosophy has since been focused primarily on strong dividend-growing stocks but I still try to pick a good growth stock every now and then.  I've had a lot of small losses and a few good wins.  Currently I'm hoping TTM and SLW keep up their record of the past 3 years and make me rich!  ;)

My nick...  I have always considered silver and gold to be money, specifically I consider them as a foreign currency cash equivalent holding.  I've been long silver since 1989 and started watching silver and gold more closely in 1998 or so.  I was a few years late, but finally realized a bull market had started ca. 2001 and so for several years I have been trickling more in that direction.

As for the Permanent Portfolio...  I came across PRPFX some years ago, liked the record, did not like the expense ratio, and of course did not like the active management and it was too complex to do it myself so I ignored it.  I just discovered the current simplified version a few months ago and really like the idea.  Late February I did a 401k rollover into an IRA and immediately put it all (about 40% of my assets) into a slightly modified PP.

Everybody has a challenge implementing the HBPP, right?  My obstacle is the long-term treasuries.  I have no problem with stocks, gold or cash and years ago I was converted to rebalancing.  But I don't like bonds and consider my dividend stocks a better bond replacement.  As of last weekend I have only about 9% in LTT (yeah, the LTT in my IRA rollover are the only bonds in my entire portfolio).  If I moved some assets from stock and silver holdings into LTT then I'd essentially be 100% in the PP.  But I just cannot do that, at least right now.

Too much info, I know.  But I tend to be thorough.  :)  I think it's the software engineering...
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Re: Do We Really Get the Premium Back?

Post by MediumTex » Wed May 04, 2011 7:36 pm

AgAuMoney wrote: Everybody has a challenge implementing the HBPP, right?  My obstacle is the long-term treasuries.  I have no problem with stocks, gold or cash and years ago I was converted to rebalancing.  But I don't like bonds and consider my dividend stocks a better bond replacement.  As of last weekend I have only about 9% in LTT (yeah, the LTT in my IRA rollover are the only bonds in my entire portfolio).  If I moved some assets from stock and silver holdings into LTT then I'd essentially be 100% in the PP.  But I just cannot do that, at least right now.
Long term treasuries' performance in 2008 wasn't enough to win you over to their role in the PP?

What would it take to make you buy long term treasuries right now as part of the PP strategy?

I'm interested in hearing your thoughts on this matter.  Your objections are not uncommon, but everyone seems to have a slightly different rationale for underweighting one of the PP assets.

The PP asset I don't like right now is stocks, but I still hold the prescribed amount.
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Re: Do We Really Get the Premium Back?

Post by AdamA » Wed May 04, 2011 10:45 pm

AgAuMoney wrote: 
I have always considered silver and gold to be money, specifically I consider them as a foreign currency cash equivalent holding. 
This is not really how gold is viewed/utilized in the context of the PP.  Have you changed your thinking since starting your PP?
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Re: Do We Really Get the Premium Back?

Post by Storm » Wed May 04, 2011 11:07 pm

AgAu, welcome!  I can see where you're coming from.  The last 10 years have really been a bull market for precious metals.  Of course, they have also been a bull market for bonds, however, at this point I can see why you might think interest rates have nowhere to go but up.  I'm still of the same mindset, however, I found myself buying 4.625% LTTs just a week ago because it was the lowest asset in my portfolio.  In hindsight, it's already made me some money, as the yield has only pushed itself lower, but at the time I purchased, I felt like I was throwing good money after bad, if you know what I mean... ;) 

This, in my mind, is the beauty of the PP.  I get about $900 deposited every 2 weeks into my brokerage linked 401k and I just buy the lowest asset.  I remove all emotion from the picture, say "oh, LTT is only 22.08% while everything else is higher, time to buy more LTTs..."  And then I proceed to purchase some more bonds in the 25-30 year maturity and the best yield I can find.  My emotional lizard brain is saying "Silver is up 30% in the last few weeks, buy some silver instead!!"  But I ignore that emotional lizard brain and buy long term treasuries instead.

Net result - 1 week later and my treasuries are up, meanwhile silver is down more than 10%.

The biggest thing the PP has taught me is that I'm usually wrong in my predictions.  This is fine, because the PP doesn't need me to predict the future, it only needs me to buy the lowest asset like an automaton and the rest will work itself out just fine.
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Re: Do We Really Get the Premium Back?

Post by AgAuMoney » Sat May 07, 2011 1:38 am

Adam1226 wrote:
AgAuMoney wrote: 
I have always considered silver and gold to be money, specifically I consider them as a foreign currency cash equivalent holding. 
This is not really how gold is viewed/utilized in the context of the PP.  Have you changed your thinking since starting your PP?
How is gold utilized in the context of the PP?  Inflation or anticipation of inflation?  Any good foreign currency (like the Swiss Franc 40 years ago) would do as well.  (Now days it is hard to find a foreign currency that doesn't just inflate to match the dollar, more or less, except for gold.)  Insurance against the catastrophic breakdown of your society?  Any good foreign currency...  As the "anti-asset" opposed to the stock market?  Any currency might do as well...

So I don't know for certain, but gold and my perspective both feel comfortable to me in the PP and didn't require me to stretch near as much as those darn LTTs! ;)
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Re: Do We Really Get the Premium Back?

Post by AgAuMoney » Sat May 07, 2011 1:41 am

btw, did anybody else notice the premium (or rather DISCOUNT) on CEF a day or so ago?  Really illustrates the "buying pressure increases the premium and selling pressure decreases the premium" concept I pointed out earler.

Unfortunately I didn't notice until after the market had closed, but I was able to pick up a bit today at a pretty good deal by selling some IAU and SLV.  I think the premium on CEF will recover...  If not hopefully it won't go quite so negative again when it is time for me to sell!
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Re: Do We Really Get the Premium Back?

Post by AgAuMoney » Sat May 07, 2011 2:00 am

MediumTex wrote:
AgAuMoney wrote: My obstacle is the long-term treasuries. ...  As of last weekend I have only about 9% in LTT (yeah, the LTT in my IRA rollover are the only bonds in my entire portfolio).  If I moved some assets from stock and silver holdings into LTT then I'd essentially be 100% in the PP.  But I just cannot do that, at least right now.
Long term treasuries' performance in 2008 wasn't enough to win you over to their role in the PP?

What would it take to make you buy long term treasuries right now as part of the PP strategy?

I'm interested in hearing your thoughts on this matter.  Your objections are not uncommon, but everyone seems to have a slightly different rationale for underweighting one of the PP assets.

The PP asset I don't like right now is stocks, but I still hold the prescribed amount.
I'm sitting just under 38% stocks right now.  Probably by June I'll be rebalancing some out unless they keep going down...  Precious metals were approaching 35%, until last week!

LTTs have had a 30 year bull run.  I just cannot get past that fact and convince myself the bull is going to continue.  As for 2008 and LTTs, it looked like an anomaly to me.  It came, it went.  Maybe it was the peak of the bull?  Granted, if I had had 25% of my portfolio in LTTs ca. July 2008, and rebalanced in 1st quarter 2009 then likely I might have not lost ground or at least would have recovered in less than the 12 months it took.

Right now I don't know what it would take to get me to put another 15% of my entire portfolio into LTTs.  I did put 25% of the one account into LTTs, almost 10% of my entire portfolio at the time.  But I just haven't been able to talk myself into buying more in other accounts.

So for now, that 9% of LTTs establishes the size of my PP.  The other 64% of my assets I have to consider as a variable portfolio, since three legs of a PP isn't a PP.  :-\
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Re: Do We Really Get the Premium Back?

Post by Storm » Sat May 07, 2011 7:22 am

AgAuMoney wrote: How is gold utilized in the context of the PP?  Inflation or anticipation of inflation?  Any good foreign currency (like the Swiss Franc 40 years ago) would do as well.  (Now days it is hard to find a foreign currency that doesn't just inflate to match the dollar, more or less, except for gold.)  Insurance against the catastrophic breakdown of your society?  Any good foreign currency...  As the "anti-asset" opposed to the stock market?  Any currency might do as well...
Foreign currency is not adequate inflation protection compared to gold.  Gold has a multiplier effect, almost like being leveraged against inflation.  In an inflationary scenario, where the dollar is devalued against a foreign currency, the currency would increase roughly the amount of value the dollar lost, where gold would increase many, many times that, and be able to carry the portfolio.
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Re: Do We Really Get the Premium Back?

Post by MediumTex » Sat May 07, 2011 11:13 am

Storm wrote:
AgAuMoney wrote: How is gold utilized in the context of the PP?  Inflation or anticipation of inflation?  Any good foreign currency (like the Swiss Franc 40 years ago) would do as well.  (Now days it is hard to find a foreign currency that doesn't just inflate to match the dollar, more or less, except for gold.)  Insurance against the catastrophic breakdown of your society?  Any good foreign currency...  As the "anti-asset" opposed to the stock market?  Any currency might do as well...
Foreign currency is not adequate inflation protection compared to gold.  Gold has a multiplier effect, almost like being leveraged against inflation.  In an inflationary scenario, where the dollar is devalued against a foreign currency, the currency would increase roughly the amount of value the dollar lost, where gold would increase many, many times that, and be able to carry the portfolio.
Harry Browne talked about this in the context of the 1970s, where the Swiss franc tripled against the dollar and gold went up 20 times against the dollar.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
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