Gyroscopic Investing

Gold is now $1807.

Cme raises margins on gold trading http://www.cnbc.com/id/44097598

Some quick observations:

Obviously I could be wrong, but having lived through the events of the late 1970s/early 1980s as a young investor, I seriously doubt gold is anywhere near a peak like that which occurred in January 1980.

The 1980 peak came AFTER the announcement in October 1979 of a MAJOR change in Federal Reserve policy and AFTER a parabolic price ascent triggerred by the onset of the Iranian Hostage crisis in early November 1979 (and President Carter's freeze of $12 billion in Iranian assets ten days later after the Iranians threatened to "attack" the US dollar) and the Soviet invasion of Afganistan in December 1979.  The Federal Reserve policy change came about in response to US public concern about generalized domestic price inflation and the falling dollar versus European currencies on international exchanges.  In hindsight, the Iranian hostage crisis and the Soviet invasion of Afganistan were serious, but significantly overblown (by the media), foreign policy challenges to the U.S.  In short, the 1980 price peak happened well AFTER a significant reversal in the economic fundamentals had occurred and AS it was becoming apparent the US was not going to be drawn into an existential military struggle.  

Today in the US we have a public that is still mainly concerned about deflating housing prices, high unemployment and protecting their claims on the national welfare/retirement system.  Most of the world's central banks are concerned about fragile financial systems and are trying to stem a strong tide of deflation brought about by deleveraging and credit defaults.  Regardless of how the inflation/deflation tug of war ultimately plays out, these conditions amount to a strong near-term prescription for continued worldwide currency debasement versus gold.  

I'm not suggesting gold prices are a one way street -- even during the 1970s there were some fairly prolonged reversals (e.g., a nearly 50% reversal during 1975 and 1976, and a very sharp correction in late 1978).  But until there is evidence of some fundamental change in the reactions of policy makers and central bankers to boom/bust credit cycles, I think long-term currency debasement is the way to bet.        
   

     

HB Reader wrote:The 1980 peak came AFTER the announcement in October 1979 of a MAJOR change in Federal Reserve policy and AFTER a parabolic price ascent triggerred by the onset the Iranian Hostage crisis in early November 1979 (and President Carter's freeze of $12 billion in Iranian assets ten days later after the Iranians threatened to "attack" the US dollar) and the Soviet invasion of Afganistan in December 1979.  The Federal Reserve policy change came about in response to US public concern about generalized domestic price inflation and the falling dollar versus European currencies on international exchanges.  In hindsight, the Iranian hostage crisis and the Soviet invasion of Afganistan were serious, but significantly overblown (by the media), foreign policy challenges to the U.S.  In short, the 1980 price peak happened well AFTER a significant reversal in the economic fundamentals had occurred and AS it was becoming apparent the US was not going to be drawn into an existential military struggle.

I found a quick list of the key dates for those interested...


EventDate[align=center]% Change in S&P [/align][align=center]Gold Price[/align]
Volcker appointed to FedNov. 3 1976[align=center]1.09[/align][align=center]$125.85[/align]
Fed announces major policy changeOct. 6, 1979[align=center]-1.25[/align][align=center]~$380 *[/align]
Soviet Union invades AfghanistanDec. 26, 1979[align=center]0.11[/align][align=center]~$500 *[/align]
Gold All Time Nominal HighJan. 21, 1980[align=center]0.92[/align][align=center]$850[/align]
Attempt to free Iranian hostages failsApr. 26, 1980[align=center]0.73[/align][align=center]~$530 *[/align]
Regan defeats CarterNov. 5, 1980[align=center]1.77[/align][align=center]$652[/align]


* Market Closed

Gumby wrote: I found a quick list of the key dates for those interested...

Gumby, I used the BLS CPI Inflation calculator (http://data.bls.gov/cgi-bin/cpicalc.pl) to show what those gold prices would be in 2011 dollars (sorry about the formatting):


EventDate[align=center]% Change in S&P [/align][align=center]Gold Price[/align]
Volcker appointed to FedNov. 3 1976[align=center]1.09[/align][align=center]$125.85 ($499.25)[/align]
Fed announces major policy changeOct. 6, 1979[align=center]-1.25[/align][align=center]~$380 * ($1181.47)[/align]
Soviet Union invades AfghanistanDec. 26, 1979[align=center]0.11[/align][align=center]~$500 * ($1554.56)[/align]
Gold All Time Nominal HighJan. 21, 1980[align=center]0.92[/align][align=center]$850 ($2328.44)[/align]
Attempt to free Iranian hostages failsApr. 26, 1980[align=center]0.73[/align][align=center]~$530 * ($1451.85)[/align]
Regan defeats CarterNov. 5, 1980[align=center]1.77[/align][align=center]$652 ($1786.05)[/align]


* Market Closed

What happens if the "Euro Zone Meltdown" is our "Soviet Union Invades Afghanistan"? It is so hard to compare historical events and peg the price level of an asset class to them.

I am not going to make the same mistake with gold as I made with LT bonds and sell off early based on my predictions (I learned that lesson the hard way), but gold is about 20% over its 200 day moving average. I think a pullback to the low 1600's might be in the cards if the Europeans come up with a plan in the next week or so to delay the seemingly inevitable crisis again. Again, just my humble prediction. If there is any actionable point from that, I would only say that I have chosen to do a halfway rebalance to around28/29% slightly before reaching the recommended 35% level. 

This discussion about potential similarities/differences between the gold peak in 1980 and the current bull market in gold is a good one.

Does anyone who lived through the 1980 gold peak have first-hand recollections of what the average investor's attitude towards gold was near the peak?

I know someone personally who got swept up big time into the gold mania of the the late 1970s. Switched out of stocks/bonds to go 100% into gold and gold mining stocks. Unfortunately, he went all-in at a horrible time--near the peak--and lost a ton of money riding the descent in gold's price all the way down in the following years.

I think it's emotionally-fueled people like that--people who have little to no prior experience with the asset in question but suddenly go all-in or nearly so--who stand out like neon signs that the last stage of a bona fide bubble has arrived. Surely there must have been others like him around 1979?

doodle wrote: We'll, like an idiot I sold out of 30 year bonds when the yield got below 4% and moved into a five year treasury ladder. Little did I know that we were going to spiral into the great depression part 2 a week later.

Doodle, I just have to say:  "I told you so!" 

We're all friends here, I hope, but I do believe I was warning you of the risks of chasing yield, when it is the bond price fluctuation itself that is the reason HB recommended only long dated treasuries.

When I look at all my long term treasuries - dated 2038-2039 maturity with 4.375 yield to 4.75% yield, I see the following increases:

+1.17% (purchased back in 2009 - when I first bought into PP - has paid a few coupons so far)
+18.2%
+13.12%
+13.2%
+12.33%

I would not be seeing these kind of returns in a 1-5 year treasury ladder.

Doodle, have you actually charted a standard 4x25 Permanent Portfolio in a portfolio tracking tool? It pretty much just goes in a straight line if you leave it alone. That's exactly what Harry Browne intended. He didn't want us to sit around trying to guess the direction of the individual assets or try to figure out how to juice our rebalancing bands. Doing any of those would put the PP's "gyroscope" off balance. He wanted us to live our lives and have our investments be an afterthought. That's the PP's greatest dividend. Don't waste it!

...For all we know, Gold may be headed to $3300.

Gumby,

Do you use the 15/35 rebalance bands or the more moderate 20/30 rebalance points? What about the idea of selling covered calls and puts at the rebalance points for extra income? Are there any potential dangers to this idea?

I posted this thread about that: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=1

doodle wrote:Do you use the 15/35 rebalance bands or the more moderate 20/30 rebalance points?

15/35 bands. Even if gold goes down and stocks surge, the portfolio will rebalance itself and I'll have one less taxable event. Harry Browne had no problem if people wanted to rebalance a little quicker, but the truth is that it may not matter that much when you consider the chance of a downside risk and taxes. Clive even has some data showing how avoiding rebalancing has actually helped over the years. There are so many ways to approach it, so I just stick with what HB recommends.

doodle wrote:What about the idea of selling covered calls and puts at the rebalance points for extra income?

It's not for me, if for nothing else than I'm terrible at that sort of thing. I'd definitely find a way to screw it up.

doodle wrote:Are there any potential dangers to this idea?

I'm the wrong person to ask. Sorry!

...Just think of a 4x25 Permanent Portfolio as a finely tuned gyroscope. It's best not to touch it!

Gumby wrote: [...Just think of a 4x25 Permanent Portfolio as a finely tuned gyroscope. It's best not to touch it!

Amen.