Gyroscopic Investing

I am a long term devotee of the Permanent Portfolio (at least in terms of research) but the nagging doubt I have relates to the limited back testing data which is available.

I realise that silver and gold are different in terms of their applications. However, they do appear to be broadly correlated and I thought it would be interesting to play about with the numbers.

I backtested between 1928 and 1972 and came up with the following analysis:-

Data for Gold pre-1972 cannot be obtained for reasons that we all know.

However, what about silver? It's not an exact proxy for gold but it appears to be broadly correlated.

Data was obtained from:-

https://www.macrotrends....r-prices-100-year-chart

And

http://pages.stern.nyu.e...datafile/histretSP.html



I chose the period in question because it represented the limits of available data. But critically it was a very different time in history when bonds and rates were closer to where we are now (accepting that history only rhymes rather than repeats).

Comments and guidance welcome.

Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

7upfree wrote: ↑Tue Jan 19, 2021 12:40 pm

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

But it's free floating against the dollar, which is the same as gold until 1972. So the price of silver is just the silver/gold ratio.

Xan wrote: ↑Tue Jan 19, 2021 12:44 pm

7upfree wrote: ↑Tue Jan 19, 2021 12:40 pm

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

But it's free floating against the dollar, which is the same as gold until 1972. So the price of silver is just the silver/gold ratio.

Ah. So silver was pegged to gold which in turn was pegged to the dollar?

7upfree wrote: ↑Tue Jan 19, 2021 1:00 pm

Xan wrote: ↑Tue Jan 19, 2021 12:44 pm

7upfree wrote: ↑Tue Jan 19, 2021 12:40 pm

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

But it's free floating against the dollar, which is the same as gold until 1972. So the price of silver is just the silver/gold ratio.

Ah. So silver was pegged to gold which in turn was pegged to the dollar?

No, silver was free-floating, but the dollar was pegged. So when you look at a graph of the price of silver in dollars, it's identical to the graph of the price of silver in gold.

Xan wrote: ↑Tue Jan 19, 2021 1:01 pm

7upfree wrote: ↑Tue Jan 19, 2021 1:00 pm

Xan wrote: ↑Tue Jan 19, 2021 12:44 pm

7upfree wrote: ↑Tue Jan 19, 2021 12:40 pm

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

But it's free floating against the dollar, which is the same as gold until 1972. So the price of silver is just the silver/gold ratio.

Ah. So silver was pegged to gold which in turn was pegged to the dollar?

No, silver was free-floating, but the dollar was pegged. So when you look at a graph of the price of silver in dollars, it's identical to the graph of the price of silver in gold.

Was the relationship between silver and gold fixed in some way? Apologies if I am being slow. I can see that the charts are largely identical but was trying to figure out why. Thanks for taking the time to answer.

7upfree wrote: ↑Tue Jan 19, 2021 1:13 pm

Xan wrote: ↑Tue Jan 19, 2021 1:01 pm

7upfree wrote: ↑Tue Jan 19, 2021 1:00 pm

Xan wrote: ↑Tue Jan 19, 2021 12:44 pm

7upfree wrote: ↑Tue Jan 19, 2021 12:40 pm

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

But it's free floating against the dollar, which is the same as gold until 1972. So the price of silver is just the silver/gold ratio.

Ah. So silver was pegged to gold which in turn was pegged to the dollar?

No, silver was free-floating, but the dollar was pegged. So when you look at a graph of the price of silver in dollars, it's identical to the graph of the price of silver in gold.

Was the relationship between silver and gold fixed in some way? Apologies if I am being slow. I can see that the charts are largely identical but was trying to figure out why. Thanks for taking the time to answer.

Before 1972, a "dollar" was a claim on a certain amount of gold. You can replace "dollar" with "1/x oz of gold" anywhere you see it. So a dollar and gold were not really different at all: they were the same. Comparing silver (or indeed anything) against dollars is the same as comparing it against gold.

Xan wrote: ↑Tue Jan 19, 2021 1:28 pm

7upfree wrote: ↑Tue Jan 19, 2021 1:13 pm

Xan wrote: ↑Tue Jan 19, 2021 1:01 pm

7upfree wrote: ↑Tue Jan 19, 2021 1:00 pm

Xan wrote: ↑Tue Jan 19, 2021 12:44 pm

7upfree wrote: ↑Tue Jan 19, 2021 12:40 pm

Xan wrote: ↑Tue Jan 19, 2021 11:59 am Looking at silver pricing pre-1972 is the same as looking at the silver/gold ratio.

I really don't think you can go back past the gold-standard horizon and backtest the "PP". The definition of the dollar changed fundamentally, and the PP exists in the fiat money world.

Thanks. I had looked to see if silver was allowed to free float and thought that from 1935 that was the case following the abandonment of the silver standard?

But it's free floating against the dollar, which is the same as gold until 1972. So the price of silver is just the silver/gold ratio.

Ah. So silver was pegged to gold which in turn was pegged to the dollar?

No, silver was free-floating, but the dollar was pegged. So when you look at a graph of the price of silver in dollars, it's identical to the graph of the price of silver in gold.

Was the relationship between silver and gold fixed in some way? Apologies if I am being slow. I can see that the charts are largely identical but was trying to figure out why. Thanks for taking the time to answer.

Before 1972, a "dollar" was a claim on a certain amount of gold. You can replace "dollar" with "1/x oz of gold" anywhere you see it. So a dollar and gold were not really different at all: they were the same. Comparing silver (or indeed anything) against dollars is the same as comparing it against gold.

Thanks very much for the explanation. Back to the drawing board....

The typical PP fan understands the PP in terms of economic cycles, because that is how Harry Browne laid it out.

I have a different theory of its working, which I think of as "raid and stockpile."

A portfolio on this premise will contain any volatile assets and any "safe storage" assets in some percentages, and then have rebalancing bands. The net effect of the rebalancing bands is to buy the dip on the risk assets when they are down, and to shave off winnings to buy more safe stores of value when things are doing well.

The HBPP could rightly be conceived of as, stock as the risk asset, and then bonds/gold/cash as the "safe storage" assets. It is a conservative portfolio because it is 25% risk asset vs 75% safe storage.

However, the entire point of my post here is to point out that the HBPP is just one example of this type of system.

So now as to your concern - you're not sure how silver fares, and you're trying to orient yourself to a plausible role for silver in a modified PP.

Based on SLV data from 2006-2020,



I see low CAGR, effectively a price oscillating around a value.

Further, I know that silver has been seen as an exchange medium and store of value since time immemorial.

https://en.m.wikipedia.org/wiki/Silver#History

Lastly, I know that silver is a commodity you can physically own in your own hands, removing counterparty risk.

With that in mind - I do not know precisely how it will fare, but I can say with pretty high certainty that it is a stable store of value and not a growth asset, and that if you shave off stock market winnings and put it into silver, you are unlikely to regret it during a bear market or, SHTF situation.

How much silver? Dude I don't honestly know, but it will still not be a terrible idea. To determine that I'd first consider what percentage of growth-vs-storage you are looking for, then maybe look at equal ratios of all of your safety assets as a starting point, then adjusting from there.

Will it increase CAGR? That is what I assume you are backtesting to try to figure out, and IMO the answer is, "who cares?" Reason being, I would not look for CAGR improvements in the cold storage portion of your portfolio, it does not make sense. I would look for staying power and low correlation with the stock market instead.

I can't say these are HB's ideas, but they have helped me understand and orient myself when performing this kind of analysis on how to incorporate a new asset class into my investing.

I have some physical silver. Its my SHTF money. Gold is too valuable to buy food and fuel with. My silver is strictly an insurance policy. If it never pays out, my kids inherit it.

A practical reason to not use silver in the Permanent Portfolio is that the bid/ask spreads at a dealer are very steep compared to gold's. This presents issues regarding liquidity of the portfolio and makes reblancing potentially cost prohibitive.