Gyroscopic Investing

Hi,
While my US counterparts have seen the SP go up up up, the TSX is up only 5% since I bought in to the PP in October. In the news, it says that the TSX has not been doing as well as the S&P because gold and oil are down (and they feature heavily in the TSX, presumably). This suggests a correlation between gold/oil prices and the TSX.

I'm really hoping one of you can tell me that the news article is wrong, and that there is no correlation between gold/oil prices and the TSX. Because if there is, then Canadian PP can't work! Historical prices suggest there is no correlation, but I want to make sure I'm not missing any salient peice of info.

christina wrote: Hi,
While my US counterparts have seen the SP go up up up, the TSX is up only 5% since I bought in to the PP in October. In the news, it says that the TSX has not been doing as well as the S&P because gold and oil are down (and they feature heavily in the TSX, presumably). This suggests a correlation between gold/oil prices and the TSX.

I'm really hoping one of you can tell me that the news article is wrong, and that there is no correlation between gold/oil prices and the TSX. Because if there is, then Canadian PP can't work! Historical prices suggest there is no correlation, but I want to make sure I'm not missing any salient peice of info.

Hi Christina,

Lets say the Chinese economy collapses and Canada is no longer shipping them all of our resources.  This will cause the TSX to fall, and yes it will fall more than the S&P 500.  But then this will cause people to flee into the safety of Canadian government bonds and cause them to rise.  This will also hurt the Canadian Dollar, which will then cause gold to rise in CAD as well.  Now the PP theory is that the long bonds and gold will be enough to counteract the falling TSX.

So the Permanent Portfolio theory still applies to the Canadian market, the same way the US PP applies to the US market.

This is what the Canadian PP has done since Oct 1 (not including dividends or interest):
Stocks: +5.4%
Bonds: +1.3%
Gold: -7.3%
Cash: -1.1%

Overall it appears to be flat.

Have a look at this post below on the Canadian PP, it also contains links to other threads that have plenty of back-testing to show that the Canadian PP has worked as expected in the past. You might want a little US assets, especially if it helps calm the nerves.

http://gyroscopicinvesting.com/forum/ht ... 153#p30153

The Canadian PP works just find, based on the backtested results that can be found on this forum.  It won't track the US PP exactly, which means there will be times where it out performs and others where it underperforms.  That is just a fact, you'll have to accept. 

christina wrote: Hi,
While my US counterparts have seen the SP go up up up, the TSX is up only 5% since I bought in to the PP in October. In the news, it says that the TSX has not been doing as well as the S&P because gold and oil are down (and they feature heavily in the TSX, presumably). This suggests a correlation between gold/oil prices and the TSX.

I'm really hoping one of you can tell me that the news article is wrong, and that there is no correlation between gold/oil prices and the TSX. Because if there is, then Canadian PP can't work! Historical prices suggest there is no correlation, but I want to make sure I'm not missing any salient peice of info.

Clacy is right, you cannot expect the exact same annual/monthly/weekly/daily results as the US PP.

Also, I noticed that TLT is down ~7% since Oct 1, while ZFL is up ~1%.  So that takes some of the sting out of the S&P out-performance over the TSX.

As for the TSX being tied directly to gold and oil, I'm not sure, but there must be some weak correlation.  Could you provide a link to the article?  Just keep in mind that oil and gold have opposite effects on mining companies, since oil impacts the costs, while gold impacts the revenue.  If both oil and gold go down, then this may result in the profits remaining somewhat consistent for the mining companies.  This is the main reason why most miners have not kept pace with gold over the past decade.  Another thought is that if gold and oil drop, then so will the CAD, this means that Canada will become much more attractive to international businesses, and we will receive higher value currencies for our exports (this happened during the 90's).  There are then probably a hundred other things that will happen, which I cannot even begin to wrap my brain around.

Another thought, how would both oil and gold simultaneously drop at the same time?  The only way I can think of is if interest rates are raised significantly.  This would crash the economy/housing which is bad for oil, and then higher real interest rates on cash would hurt gold.  This would be painful for any Permanent Portfolio, but the only way to protect yourself from this is short-term bonds.  If this unlikely scenario keeps you up at night, then create a VP that holds only cash.

Hi Christina,

I understand your mixed feelings.

I started our CA PP in mid-Jan 2012 and have seen our portfolio decrease over 1.3%.

It may not seem like alot, but it is all relative to one's portfolio's size.

I am hoping this is just a bump in the road and that the CA PP will weather this downturn and I won't regret my decision.

Patience is a virtue.

I would say the PP is fine in Canada with your allocation, and agree with the comments. 

Although, one thing of note is that the canadian stock index does have a lot of gold companies, so if gold does go down in price (as it has done a bit over the past little while), the index may also do so... unless there are strong gains in the other components of the index.  As a result, in the short term, even with the PP, you may see small decreases in the value of your portfolio.  But it has been my experience, so far, that these are short lived.

(I use this in Canada too)

thank-you.
Yes, I will stay the course with the PP as it seems to make logical sense.
I think the key for me is to not look at my portfolio, which I haven't done in about 2 weeks now (go me!).
I can't find the original article, but I think it was in the Financial Post.