Do we need more protection than just the PP?

[MachineGhost]

It is better from the perspective of the insiders.  That is the whole raison d'etre for inflation.  Take the Eurozone right now.  The Eurozone banks simply do not want to mark down to a <=30% haircut (equating to a >=200% 1-year interest rate) on the Greek bonds that they royally screwed up investing in.  They want someone else to take the loss off of their books and will use every legal and illegal tactic available to them to accomplish it.

As long as depositors funds, etc. are segregated as they should be, it simply does not matter if the banks fail, liquidate or go bankrupt because their equity got wiped out and they had to take a haircut on their PIIGS bonds.  No one really cares about the banks per se, only their own deposited funds.  Like universal stupidity, the bank's audacity and arrogance about their own self-preservation is unending.  I think it is historically unrivalled only by the sheer massive scale.

MG

Its not apparent that inflation, which makes all persons suffer, is better than a haircut for investors who knowingly took a risk.  Except that the bond owners control the decision process...

[murphy_p_t]

Holding the major foreign currencies is a zero-sum game.  In the long-term, they all return the same purchasing power, so theres no net effect of buying or selling one currency over another unless you plan on trend following in the shorter term.

But, it does not make sense to not hold the currency or bonds of the world's current reserve asset.  Nothing will be "safer".  Gold is the hedge against currency snafus, not other currencies.

MG

MG, please elaborate on this post...I'm not following you. For example, if I live in USA & hold 50% of my "cash" in Euro before a US$ collapse strikes, I just largely sidestepped a huge problem.

[murphy_p_t]

Lately, I've been thinking that a solution to this concern is to hold a complete PP in another currency. Ideally, I would hold this outside my country of residence, for purposes of increased geographic diversification. One reason I'd like to do this sooner than later is the pending FATCA 30% withholding tax to liberate funds from the USA.

I'm interested. For the Newbs of us out here, how would you set this up? And can you elaborate on how you'd avoid the FATCA withholding?

I'm trying to learn how to set this up now...I'm hoping someone who's already done so will share some tips. Regards FATCA, the withholding is scheduled to begin, I recall, Jan 2013 or Jan 2014. There is no withholding presently. Somewhere else on these boards, this is discussed.

[MachineGhost]

It means in the long run, there is no net gain to holding one major currency over another as the purchasing power disparities will revert back to the mean, which is 0%.  But do note that long term is long term.  Currency moves last on average about a decade.

Holding 50% in Euro implies you would have trend following skills not to lose any purchasing power as you hold it vis a vis the dollar for less than 7-10 years.  And second, if you believe that the WORLD'S RESERVE CURRENCY can collapse 50% with no effect to other fiat currencies of the world...  I've got some swampland in Florida to sell ya!

MG

Holding the major foreign currencies is a zero-sum game.  In the long-term, they all return the same purchasing power, so theres no net effect of buying or selling one currency over another unless you plan on trend following in the shorter term.

But, it does not make sense to not hold the currency or bonds of the world's current reserve asset.  Nothing will be "safer".  Gold is the hedge against currency snafus, not other currencies.

MG

MG, please elaborate on this post...I'm not following you. For example, if I live in USA & hold 50% of my "cash" in Euro before a US$ collapse strikes, I just largely sidestepped a huge problem.

[Kshartle]

The question of the portfolio being able to hold up in very severe or runaway inflation is silly. It's 50% dollars. Kiss those goodbye in runaway inflation. Saying that US dollar runaway inflation will lead to nearly all other currencies doing the same isn't a defense for the 25% cash being in dollars. You can't say the US dollar would be safer than other currencies if the US dollar is hyper-inflated. It MIGHT turn out to be the same if other countries match the printing but at least an attempt has been made at diversifying the fixed income. It's just as accurate to say that during a dollar deflation a basket of foriegn cash may gain the same purchasing power or more. Holding foriegn cash is first and foremost for safety, not an inflation bet.

The foreign cash portfolio might be more volitile in dollar terms but it's certainly safer in purchasing power terms. Stocks are for prosperity, LTT is for deflation, Gold is for inflation (but I think it's pretty good for everything except for prosperity and a soft landing). Cash is for when everything is going down (except interest rates). It's really not even neccessary unless someone wants to sacrifice a small amount of return for a small amount of decreased volitility. It's easy to measure the volitility of dollar returns, it's more difficult to measure purchasing power volitility. A basket of currencies is going to be much less volititle than a single one in terms of purchasing power. That's really the only measure that matters though. We should expect bigger returns during inflation to offset the decrease in purchasing power per dollar.

Also, the US dollar has been in a long-term decline for decades against most major currencies for very fundamental reasons. The dollar appears to have very little upside against everything other than the Euro (Maybe). Maybe that trend will be reversed but not with our consumer debt, national debt, huge dependant classes, deficit spending, trade inbalance, rock bottom interest rates etc.  Look at a chart of the USD against the Yen, Lonnie, Kiwi or Franc for the last ten years.


I am very confident that the HBPP will hold it's own even during a severe deflation. It would do well even in a great depression style crash being basically 50% currency and 25% money. Holders would be able to buy stocks for pennies on the dollar. It makes sense to possibly trade off a little of this protection to prevent destruction in the event of a Zimbabawe, Weimar or even an Icelandic event. I think the answer is global stocks and foreign ST bonds.

[Gumby]

You make it sounds like Harry Browne forgot to consider hyperinflation — it's probably the thing he thought about the most. He wrote books about it.

[align=center][/align]

During hyperinflation, domestic stocks would do this:

[align=center][/align]

...and Gold would do this:

[align=center][/align]

And if 50% of my money goes up in smoke, the gains from Gold and stocks will rise enough to preserve most of my purchasing power — provided I don't rebalance constantly into a hyperinflating currency.

I think it's going to be difficult to outwit Harry Browne on hyperinflation. He studied it for most of his lifetime.

[MachineGhost]

This seems historically inaccurate.  The British Pound was the world's reserve currency until the U.S. told them to "bugger off" in the 1940's or so during the Suez Canal crisis and then the pound collapsed virtually overnight.  Yes, indeed, it is the U.S.'s fault that the entire British Empire collapsed!  The U.S. simply refused to continue to finance their huge and maturing debt obligations.  There's a lesson to be learned here.

MG

if you believe that the WORLD'S RESERVE CURRENCY can collapse 50% with no effect to other fiat currencies of the world... 

In the run up to 1907 the GBP (i.e. whilst the GBP was a/the major reserve currency) typically bought 4.85 US Dollars for each GB Pound. By 1932 that declined to buy only 3.1 USD per GBP. A few decades later and it was down by more than a half its former level. By historical standards the decline of the GBP as a world reserve currency was one of the more tame exits.

Reserve currency's are voted in (and out) by common acceptance. Periodically those opinions change - typically when weakness and alternative strength become apparent http://www.zerohedge.com/article/histor ... eece-today "the economy of the Roman Empire from the first century C.E. through the early fourth century led to a continuous devaluation of the Roman-issued currency, causing it to become increasingly less accepted outside the Roman Empire".

Snippets from http://somehelpful.info/Money/Investing ... eserve.htm

For most of the nineteenth century the British Pound Sterling was the world reserve currency. Around 1907, the US dollar replaced it as the world reserve currency, and it has remained so since.

But there is some history concerning these two currencies that is interesting in that for 100 years there was no inflation in either of these currencies, because they were both fully backed by gold and/or silver

Then in steps between 1933 and 1971, the gold/silver backing of the US dollar was discontinued. The promises to deliver gold or silver for the certificates were broken! Since then, the dollar has lost more than 90% of its purchasing power.

The British pound followed a similar path. Unless there is a drastic reversal, both currencies will one day join the thousands of paper currencies in history which have become worth less and worth less and worth less until one day they became completely worthless (including the Continental and Confederate currencies in our country).

According to Wikipedia, "a reserve currency is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc.

[Kshartle]

You make it sounds like Harry Browne forgot to consider hyperinflation — it's probably the thing he thought about the most. He wrote books about it.

I've read it several times (along with all his investing books besides "The Economic Time-Bomb"). I have it right in front of me. Have you read it? He certainly didn't advocate anything resembling the permanent portfolio during a period where hyperinflation or even rising inflation was anticipated.

Here are the specific recomendations:

Rising inflation

35% Gold
15% Silver
15% Swiss Francs
10% Stocks
20% Real Estate
15% ST Bonds (this was 1981 and ST rates were double digits)
(10%) LT Bonds (this means take on debt don't buy it)

That's only 5% in fixed dollars, not 50%!

Runanway Inflation

50% Gold
10% Silver
20% Francs
5% Stocks
20% Real Estate
10% ST Bonds
(15%) LT Bonds

The only portfolio where Browne advocated more than 25% in Fixed dollars was when deflation was anticipated.

The full evolution of the PP came years later I realize that. The PP is really easy to adopt and has low volitility in dollar terms making it easy to stick to. It's extremely slanted to deal with deflation or a soft landing. It's not up to the task if we have severe inflation. Just think about what we're talking about here, trillions of dollars rolling off the presses so to speak to keep up debt and entitlement payments, pay the soldiers, police, tax collectors etc while prices rise faster and faster. Profitable economic activity will be made very difficult. It does you know good if domestic stock prices rise 50% but the dollar loses 50% of it's purchasing power. Your $1,000 becomes $1,500 but only buys what $750 used to buy.

Turn to page 164. It's chapter 12 titled "Stocks"

The first sentence is "The U.S. stock market is living evidence that inflation doesn't push all prices up together". In that chapter he explains how inflation drains the wealth from the economy and stocks. Stocks are a loser during bad inflation, look at the 70s.

I agree with you that Browne was quite an expert on inflation. His forecast on page 361 was for U.S. stocks to perform poor to medicore in rising inflation and poor in runaway inflation.

Re-read the book you might not have as much faith that 25% gold and 25% U.S. stocks will preserve your purchasing power during a real inflationary crisis. Correct me if I'm wrong but the charts show gold going up 1 trillion percent and stocks going up less than 1 billion percent. It seems the stock market lagged gold in Weimar by more than 1,000%. If gold is mearly maintaining it's value or even doubling in value then the German stock market really crashed.

I don't know why Browne advocated the PP the way he did. It seems like somewhere along the lines he developed a lot of faith in the government defending the dollar. Or maybe it was a really nice looking, easy to understand and follow, low-volitility way to set up your investments. If he was still around hosting a radio show or something I'd call him up and ask him.

[murphy_p_t]

I don't know why Browne advocated the PP the way he did. It seems like somewhere along the lines he developed a lot of faith in the government defending the dollar. Or maybe it was a really nice looking, easy to understand and follow, low-volitility way to set up your investments. If he was still around hosting a radio show or something I'd call him up and ask him.

I'm no where near as familiar w/ HBs work Kshartle...but isn't the answer to your question that he determined that he couldn't (gave up on) determine what the prevailing economic climate would be...ie his crystal ball was cracked? For instance, today many intelligent folks are pointing out the deflation we're experiencing (like housing) while other intelligent folks point to inflation (QE1).

Did he throw in the towel (on being so heavy into metal) as a result of sustaining big losses during the long decline in gold thru the 80s & 90s? Maybe he got out of metals when he saw Reagan coming into office & switched to equities?

In that book does HB discuss how to know which economic climate to anticipate? Maybe from the title, he's working off the assumption that inflation lies directly ahead?

Finally, are you following one of these investment formulas & how comfortable with your decision are you? Personally, I'm following the HB PP + VP with more metal, but feel like I'm underweight metal still. Thanks for your input Kshartle.

[FarmerD]

I've been looking at diversifying some cash into short term foreign bonds.  ETF's like BWX, IGOV, ISHG. etc seem to concentrate on Western Europe and Japan which I'm not so sure is a good idea.  One ETF that intrigues me is a new startup etf, Wisdom Tree Australia/New Zealand Bond ETF (AUNZ).  This fund is denominated in foreign currency, yields 3.70, has an average matturity and duration of 4.4 and 4.2 years.  I haven't found much historical data on Australian govt bond returns though I did find this:

http://www.tradingeconomics.com/austral ... bond-yield

Even though Australia is a commodity/export based economy, their long bonds shot up much like US long treasuries in 2008.  Their Debt to GDP ration is approximately 21%.  Supposedly they expect to run budget surplusses the next couple years. 

Obviously you don't want to concentrate your overseas cash in just one country/currency so perhaps an allocation of say 50% to BWX and 50% to AUNZ might make sense. 

Thoughts anyone?

[stone]

FarmerD, did the drop in long bond yields for the Australian $ make up for the fact that the exchange rate to the USD suffered very badly in 2008? Is the duration of the bonds within that etf enough to get that kind of bond price volatility? I'd also be scared of the current Australian housing bubble. Don't they have the least affordable housing in the world? Might it make sense to have your foriegn currency as two blocks. One block could be "risk off" eg Japanese Yen and one block "risk on" eg Australian/emerging market (in their own currency). Having something like Italian bonds would be a whole different world or weirdness. It would just be a gamble on how the euro-crisis pans out. They could go either way- give you a windfall or blow up.
I'm just hoping for myself that the gold part of the PP covers all of this.

[Gumby]

I've read it several times (along with all his investing books besides "The Economic Time-Bomb"). I have it right in front of me. Have you read it? He certainly didn't advocate anything resembling the permanent portfolio during a period where hyperinflation or even rising inflation was anticipated.

Here are the specific recomendations:

Rising inflation

35% Gold
15% Silver
15% Swiss Francs
10% Stocks
20% Real Estate
15% ST Bonds (this was 1981 and ST rates were double digits)
(10%) LT Bonds (this means take on debt don't buy it)

This is basically PRPFX with less stocks and more metal. It's a huge speculation.

The 4x25 PP isn't speculative about what economic condition is coming around the corner. That's why we like it. Why should we give inflation more attention than deflation? During a deflation, I want dollar assets.

[FarmerD]

Stone,
I haven't been able to find historical Australian bond returns in US dollars.  There's two ETF's out there (AUD and AUNZ) but they've only been around since 2009. 

Couldn't a 50/50 mix of AUNZ and BWX could be thought of as a risk on/risk off currency diversification?  I'd certainly entertain the idea of using  other short term foreign bond etfs but I can't find anthing else interesting.

Too bad there isn't a Scandinavian/Singapore/Swiss/Australian short term govt bond fund

[Kshartle]

Why should we give inflation more attention than deflation? During a deflation, I want dollar assets.

I guess my criticsm of the HBPP is that it provides huge protection during deflation and very little during an inflationary crash / currency crisis. This thread is titled "Do we need more protection than just the PP?" I think the answer is a resounding yes. I fully understand if you don't. I just think tying up half your wealth in one currency that can be run off the printing press at will by people who have pushed interest rates to nothing, have run up massive debts and deficits, have promised more than they can deliver and have inflated for decades seems like a huge gamble.

We all know that any fiat currency is at risk of dropping to worthlessness. Do you really think there is a possibility that a basket of yen, francs, loonies, krones, and Aussie dollars can drop in any significant way against the dollar? We've had a large shake up in equity markets this year and a rush into bonds and yet a portfolio of these five has matched the dollar this year while being up 11% in 2010 and 10% in '09.

It's just less risky, that's all. You might sacrifice a couple % in a severe deflation vs saving 15-25% in a severe inflation by diversifying your cash.

That's my thoughts on the subject. It seems very obvious to me. I would argue diversifying the long bonds as well if a good alternative to 30 year treasuries was out there. As it stands we've still got 25% of our wealth in the fixed income of one currency.

To that end does anyone know of a good way for Americans to get their hands on long-term foriegn bonds directly?

[moda0306]

To say the PP doesn't provide much "currency crisis" protection is a stretch, IMO.

We are the world's reserve currency... if stuff starts to hit the fan with the dollar, gold is going to go absolutely nuts.  In my opinion, well-beyond real returns.

Also, let's not forget that stocks are "ok" protection against inflation, and cash should at least keep you only losing a few percent real.

Yes, I agree you don't lose much by doing a little diversifying into other cash/stocks/bonds, but if the world's reserve currency begins to collapse don't think gold is just going to keep up with CPI.

[MediumTex]

Do you really think there is a possibility that a basket of yen, francs, loonies, krones, and Aussie dollars can drop in any significant way against the dollar?

Here is what three of them did against the U.S. dollar in the second half of 2008 when deflation fears began to get traction around the world:

Swiss franc dropped 20% (see FXF)

Aussie dollar dropped 33% (see FXA)

Canadian dollar dropped 20% (see FXC)

I would not have wanted to live through those declines.  Over that period the yen did well (+20% or so) and I don't know what the krone did.  Overall, this approach sounds like a pretty wild ride to me.

To answer your question, I would say "yes" I do think there is a possibility that a basket of other currencies can decline against the dollar, especially during a liquidity crisis.

There is also the matter of politically-driven attempts at devaluation, as we saw with the Swiss franc earlier this year, and as we have seen (with less success) with the yen for years.

[FarmerD]

Thanks Clive/Tex

I'm surprised the Swiss Franc declined by that much in 2008.  I'd always assumed the Franc was the best safe haven currency out there along with the US dollar. Wasn't that the reason Harry Browne had the swiss franc in the PRPFX fund?

I learn something new every time I come to this board

[MediumTex]

Thanks Clive/Tex

I'm surprised the Swiss Franc declined by that much in 2008.  I'd always assumed the Franc was the best safe haven currency out there along with the US dollar. Wasn't that the reason Harry Browne had the swiss franc in the PRPFX fund?

I learn something new every time I come to this board

Switzerland was on a quasi-gold standard until 2000.  After that, it has just been another paper currency.  When Harry Browne was recommending it it was an entirely different kind of asset than it is today.

In today's world, no one wants a strong currency.  Among other things, it hurts domestic exporters.

[craigr]

The Swiss Franc isn't want it use to be. As Tex pointed out, they came off any semblance of a gold link in the early 2000s. Recently the Swiss  central bank talked of effectively pegging it to the Euro to help their exports which were being damaged by rising Swiss Franc price. They haven't acted much on the threat yet I've been told, but it does exist. All these countries are in a race to the bottom.

As bad as the dollar is, it's still better than most alternatives.

[Kshartle]

Thanks Clive/Tex

I'm surprised the Swiss Franc declined by that much in 2008.  I'd always assumed the Franc was the best safe haven currency out there along with the US dollar. Wasn't that the reason Harry Browne had the swiss franc in the PRPFX fund?

I learn something new every time I come to this board

The Franc gained about 4% against the dollar in 2008. Clive is I believe taking the currency from it's height in dollars to it's low in 2008. This is again measuring everything in dollar terms and not in purchasing power. If the franc drops in dollar terms and the dollar gains purchasing power against things we actually want (we don't want paper people we want what that paper can buy) we're not really losing. Everything that isn't dollars is volitile in dollar terms. To the swiss the franc in not volitile and the dollar is.

I like your style Clive and I want to comment fully on the charts posted by you but I'm temporarily distracted by the girlfriend and Belgian beer. I'm glad for this board to. There are some many threads that no one can ever be bored on this board

[MachineGhost]

It is just a bad idea to buy and pray with foreign currencies instead of gold.  Like at the yuan renimbi.  For years the mainstream ballyhoo was about how undervalued it was.  Now, it has traded seven days in a row at the lower limit of its government-decreed bands because capital is fleeing China's impending implosion.

If one wants to speculate (and it is most certainly speculation because all currencies are tenous fiat), then I suggest using the Max Yield Strategy and do it in the Variable Portfolio.  The risk and reward over time will be 1:1.

MG

I've been looking at diversifying some cash into short term foreign bonds.  ETF's like BWX, IGOV, ISHG. etc seem to concentrate on Western Europe and Japan which I'm not so sure is a good idea.  One ETF that intrigues me is a new startup etf, Wisdom Tree Australia/New Zealand Bond ETF (AUNZ).  This fund is denominated in foreign currency, yields 3.70, has an average matturity and duration of 4.4 and 4.2 years.  I haven't found much historical data on Australian govt bond returns though I did find this:

http://www.tradingeconomics.com/austral ... bond-yield

Even though Australia is a commodity/export based economy, their long bonds shot up much like US long treasuries in 2008.  Their Debt to GDP ration is approximately 21%.  Supposedly they expect to run budget surplusses the next couple years. 

Obviously you don't want to concentrate your overseas cash in just one country/currency so perhaps an allocation of say 50% to BWX and 50% to AUNZ might make sense. 

Thoughts anyone?

[Gumby]

I guess my criticsm of the HBPP is that it provides huge protection during deflation and very little during an inflationary crash / currency crisis.

Where did you get the idea that the PP provides "huge" protection during deflation. Clive has often argued that the PP doesn't offer enough protection from a prolonged Japan-style deflation.

This thread is titled "Do we need more protection than just the PP?" I think the answer is a resounding yes. I fully understand if you don't. I just think tying up half your wealth in one currency that can be run off the printing press at will by people who have pushed interest rates to nothing, have run up massive debts and deficits, have promised more than they can deliver and have inflated for decades seems like a huge gamble.

You could say the same thing about almost every currency on the planet. When measured in gold, all currencies are being debased at relatively the same rate. No country wants a strong currency anymore:

[align=center][/align]

[align=center][/align]

[align=center][/align]

See more currencies measured in Gold here: http://www.goldchartsrus.com/

Do you really think there is a possibility that a basket of yen, francs, loonies, krones, and Aussie dollars can drop in any significant way against the dollar?

Of course they can. US Dollars are the world's reserve currency. By definition, every currency has the potential to tank against the dollar during a crisis.

It's just less risky, that's all. You might sacrifice a couple % in a severe deflation vs saving 15-25% in a severe inflation by diversifying your cash.

"Risk" is often defined as a measure of volatility. If your cash is suddenly volatile, your PP will be much more volatile. One of the PP's greatest dividends is its low volatility. Trying to reduce risk, by tweaking the PP, only adds more volatility/risk. It's a paradox.

That's my thoughts on the subject. It seems very obvious to me. I would argue diversifying the long bonds as well if a good alternative to 30 year treasuries was out there.

How did you come to this "obvious" conclusion that US Dollars are on the verge of experiencing severe inflation?

[MachineGhost]

Correction: 75% of your wealth is tied up in one currency.  The stocks are valued in the currency also.

I think there is merit for a Global PP though.  But the risk/reward would be entirely different and probably worse.

MG

Why should we give inflation more attention than deflation? During a deflation, I want dollar assets.

I guess my criticsm of the HBPP is that it provides huge protection during deflation and very little during an inflationary crash / currency crisis. This thread is titled "Do we need more protection than just the PP?" I think the answer is a resounding yes. I fully understand if you don't. I just think tying up half your wealth in one currency that can be run off the printing press at will by people who have pushed interest rates to nothing, have run up massive debts and deficits, have promised more than they can deliver and have inflated for decades seems like a huge gamble.

We all know that any fiat currency is at risk of dropping to worthlessness. Do you really think there is a possibility that a basket of yen, francs, loonies, krones, and Aussie dollars can drop in any significant way against the dollar? We've had a large shake up in equity markets this year and a rush into bonds and yet a portfolio of these five has matched the dollar this year while being up 11% in 2010 and 10% in '09.

It's just less risky, that's all. You might sacrifice a couple % in a severe deflation vs saving 15-25% in a severe inflation by diversifying your cash.

That's my thoughts on the subject. It seems very obvious to me. I would argue diversifying the long bonds as well if a good alternative to 30 year treasuries was out there. As it stands we've still got 25% of our wealth in the fixed income of one currency.

To that end does anyone know of a good way for Americans to get their hands on long-term foriegn bonds directly?

[Kshartle]

1. Where did you get the idea that the PP provides "huge" protection during deflation. Clive has often argued that the PP doesn't offer enough protection from a prolonged Japan-style deflation.

2. When measured in gold, all currencies are being debased at relatively the same rate. No country wants a strong currency anymore:

Do you really think there is a possibility that a basket of yen, francs, loonies, krones, and Aussie dollars can drop in any significant way against the dollar?

3. Of course they can. US Dollars are the world's reserve currency. By definition, every currency has the potential to tank against the dollar during a crisis.

4. "Risk" is often defined as a measure of volatility. If your cash is suddenly volatile, your PP will be much more volatile. One of the PP's greatest dividends is its low volatility. Trying to reduce risk, by tweaking the PP, only adds more volatility/risk. It's a paradox.

That's my thoughts on the subject. It seems very obvious to me. I would argue diversifying the long bonds as well if a good alternative to 30 year treasuries was out there.

5. How did you come to this "obvious" conclusion that US Dollars are on the verge of experiencing severe inflation?

1. The HBPP is 25% cash, 25% gold and 25% LTT, of course it will do well in deflationary crash or long-term deflation. Have the Japanese lost purchasing power holding a standard Japanese PP or gained? I thought consumer prices have been dropping there for years. You have to think in terms of purchasing power not in total dollars/Yen. If all I owned was one ounce of gold and we had hyperinflation and gold went to 1 trillion dollars an ouce then I'd be a trillionaire. It wouldn't do me much good though.

2. That's a good argument for not holding currencies, but not for holding just U.S. dollars vs many currencies.

3. Yes anything can happen. It's just less likely that a group of currencies would all fail vs one currency failing. Nations like Russia and China have been calling for an alternate world reserve currency. The dollar will not maintain that status forever and when it loses it all those dollars are going to come home to roost here. It won't be pretty. Even with reserve currency status and the built-in demand for dollars it has been in steady decline for decades with only brief pullbacks in the downtrend. I would argue that now looks like an opportune time to switch out some dollars for foriegn cash after this little rally in the greenback these last few months.

4. I disagree. We're not talking about Chinese internet stocks here. We're talking about Yen, Francs, Loonies and Aussie dollars in 25% of your portfolio. It's not much more volitile and when it is that volitility is likely to be with the upside. Also we're still talking about nominal dollar volitility and not purchasing power volitility. If your portfolio stays flat over the year and dollar loses 10% of it's purchasing power you suffered a loss. You just have to look a little harder to see it.

5. I didn't come to that conclusion. I believe I said I think it's obvious that we need more protection than the permanent portfolio. It will not protect investors if the government turns to massive inflation to pay it's debts and entiltments. Stocks will do poorly and your dollar assets (which are double the gold component) with lose a lot of purchasing power. Again, you've got to think about purchasing power not the final dollar figure. A Zimbabwae PP would have had huge gains because of gold and stocks. But they would still be broke. 25% gold is not enough protection against this and if you're rebalancing forget it you'll go belly up.

Look, globaly diversified stocks and global diversified bonds might not save your wealth either. Maybe when it's all said and done only gold, silver, possibly land (if you can protect it) and other real things would survive a scenario I'm envisioning. That being said, diversifying has to be safer.

[Kshartle]

A quick note about the gold charts........They are only during the last decade where the price of gold has exploded upward. If you took them from '81 or so they'd look very different. Also, fiat currencies should be expected to lose purchasing power to gold over time. They pay interest which really changes the equation. If they were fully backed by gold then gold would be a useless investment since it doesn't pay interest. We're talking about holding ST bonds here not literal cash. I suspect T-bills have beaten gold for the last 30 years. I really suspect Short-term Francs and Yen have beaten gold. I still love gold though.

Could anyone look into that or post the dollar's 40 year decline against other currencies?