Gyroscopic Investing

Hi All,

Thanks to the people in this forum I have recently moved my investments into the permanent portfolio strategy. Specifically, I am using the four ETF version of the portfolio.

My question is in what scenario is the time and hassle of owning and  storing physical gold ever going to outweigh the convenience of owning it in ETF form?

If something drastic happens to the economy and I somehow cannot sell my gold ETF, why would physical Gold be any better? If the financial system has broken down to such a degree that I can't cash out my ETF's, then where would I go to sell my physical gold if I had any?

In fact, if the entire system was broken down to that degree, shouldn't I also stock up on firearms and ammunition so that the roving bands of hooligans cannot come and take my Gold from me?  Would gold even be valuable in an apocalyptic scenario? Wouldn't potable water and food be much more important?

I can't think of a scenario where the system breaks down to the point where we can no longer access the wealth that we have stored in the stock market, but somehow physical gold will be useful.  Can anyone give me some examples where physical gold would be useful as opposed to holding a gold ETF?  Physical gold just doesn't seem to be worth the extra time and hassle - even if we degrade down to a Mad Max type scenario, food, guns, and energy would likely be far more valuable then physical gold.

Justf, welcome to the forum.

I think it's safe to say that everyone who invests in PP has asked this question at some point. I assume you've read the Gold FAQ and craigr's blog articles on the topic of gold, if not I highly recommend doing so.

To give you just one possible scenario when having some physical gold may be important: think about a situation when there's no mad men on the streets, but the financial system is hit by a less dramatic issues that affect paper gold investments: say, trader errors (JP Morgan Chase), trading platform software glitches (Knight Capital), global blackouts, financial fraud (MF Global), government sanctions... We can't predict the exact scenarios, but it's important to diversify your gold allocation. The goal should be to have some physical and some paper gold. The latter makes the rebalancing easier as one avoids the necessity to sell physical gold should their gold bucket exceed the rebalancing band. Paper gold in a taxable account also allows to do tax loss harvesting and also taxable account is a good vehicle for gold since there's no capital gains or dividends.

Justf wrote: In fact, if the entire system was broken down to that degree, shouldn't I also stock up on firearms and ammunition so that the roving bands of hooligans cannot come and take my Gold from me?  Would gold even be valuable in an apocalyptic scenario? Wouldn't potable water and food be much more important?

Absolutely, and I view those as important too! In addition, they have advantages over gold in that they're fun and useful outside of a total social collapse too. If a city water main gets busted for example, your personal store of water will come in handy while the neighbors complain that they can't cook or drink until the pipe's fixed.

Also, consider the case where the financial system is doing fine, but a the political system has implemented capital controls and is confiscating, freezing, or nationalizing peoples' paper assets. Before and during WWII, many people in Europe escaped with their physical gold after their paper assets. Basically, think of how powerful it is to be able to store so much value in such a small physical object.

IMO there is a psychological aspect to this. Every few years there is a big scare that causes people to freak out and do something that feels soothing and rational at the time, and turns out to be a huge mistake in hindsight. There is some wisdom in buying a safety blanket that helps one avoid those mistakes. At the peak of Y2K, 9/11, 2008, or Fukushima, people with no hard assets freaked out and bought them at usurious prices. But when you are sitting on a pile of physical gold, you can say "I know this probably won't be TEOTWAWKI, but if it is, I'll have my bullion to save me so no action is required." That makes it much easier to ride out these panics, thinking "no action is required." Which so far has always been the rational course of action.

The PP incorporates physical gold into a coherent portfolio, so dealing with it incurs less opportunity costs than, say, holding a stock/bond portfolio and building a fallout shelter.

There's a paradox in that adding some slack for occasional nonrational thought makes it easier to be disciplined, so planning for nonrational moments can be rational. There's a similar idea in budgeting, dieting, and exercise regimens that allow occasional exceptions. It's healthier to allow rare dalliances and keep people on the wagon, than it is to try to rely on perfect discipline.

Justf wrote: I can't think of a scenario where the system breaks down to the point where we can no longer access the wealth that we have stored in the stock market, but somehow physical gold will be useful.  Can anyone give me some examples where physical gold would be useful as opposed to holding a gold ETF?  Physical gold just doesn't seem to be worth the extra time and hassle - even if we degrade down to a Mad Max type scenario, food, guns, and energy would likely be far more valuable then physical gold.

You're making it into a black or white situation when there are a lot of shades of grey between confiscation, gold's use in an underground economy or apocalypto.  I advocate also having water, food, guns, energy, etc. as well.  Since only about 50% of the 25% gold allocation will ever be touched for reallocation, there's certainly room for a few 1%ers of that stuff.  Also, watch this video: https://www.youtube.com/watch?v=r7U7ggUX4Qs

Thanks for your answers everyone - you've definitely given me food for thought.  I think I was indeed thinking a little too black and white - there are of course many shades of grey between things being fine and Mel Gibson in a a black leather bodysuit.

Now that I think about it, we don't even have to go to Europe in WW2 re: a serious confiscation scenario - look at what happened to the Japanese Americans right here at home with the internment...hmmm....

foglifter, you also made an interesting point about tax harvesting.  If I realize depreciated IAU or GLD, and then purchase physical gold, am I amenable to the Wash Rule?  

If the answer is no, I think we may have a new physical gold convert.

Justf wrote: If something drastic happens to the economy and I somehow cannot sell my gold ETF, why would physical Gold be any better? If the financial system has broken down to such a degree that I can't cash out my ETF's, then where would I go to sell my physical gold if I had any?

Harry Browne described physical bullion well.  He said that it was unique because it is "nobody else's paper promise to you".  Every other asset that you hold in the Permanent Portfolio (and virtually all other portfolios) is someone else's liability.

Most of the time, these promises are kept.  But when the system is under strain, promises are broken at a higher and higher rate.  Rather than try to imagine all of the ways in which financial promises can be broken, I think it's simpler to just ensure some percentage of your assets lies safely outside of this system.  This keeps you safe even against the possibilities that don't immediately occur to you.

Justf wrote: Thanks for your answers everyone - you've definitely given me food for thought.  I think I was indeed thinking a little too black and white - there are of course many shades of grey between things being fine and Mel Gibson in a a black leather bodysuit.

After much forum discussion, it was unanimously concluded that leather chaps should only be used for recreational purposes and as part of one's Variable Portfolio. 

Another reason for physical gold is that it will transfer over to the new financial system that emerges from the ashes of the old one.  Once order has been restored then you set up a new 4x25% PP by selling 75% of the physical gold.

I personally think the probability of a collapse is small, but it doesn't hurt to own a little physical just in case.

Also, you don't want to be rebalancing with physical gold since the spreads will kill you, so I'd recommend roughly a 50/50 split between ETF's and coins, but you can vary this depending on your level of paranoia pessimism.  I will never sell my coins (even for rebalancing purposes), except after a collapse and rebirth of a new system or during the withdrawal phase.

I simply am too lazy too deal with the hassle of owning physical.  I do have a shotgun, ammo, a couple of week's worth of food/water.

The risk/reward just isn't there IMO. 

Justf wrote: Can anyone give me some examples where physical gold would be useful as opposed to holding a gold ETF?  Physical gold just doesn't seem to be worth the extra time and hassle - even if we degrade down to a Mad Max type scenario, food, guns, and energy would likely be far more valuable than physical gold.

I never think twice about the Mad Max scenario. These are my only reasons for holding gold coins:
# Once the dealer's cut is paid, there is no annual fee. If you hold the coins for decades and sell your gold ETF shares when you need to rebalance, that may amount to savings.
# If, Zod forbid, my identity were to be stolen or my computer or investment accounts hacked, my gold coins would still be in my possession while I pursue compensation. Nothing to do with the Apocalypse/ Y2K/ solar flares/ preppers. Just run of the mill computer theft.
# Shiny.

Justf wrote:
If I realize depreciated IAU or GLD, and then purchase physical gold, am I amenable to the Wash Rule? 

If the answer is no, I think we may have a new physical gold convert.

I'm not an accountant, but since you are not obligated to report your gold purchase to IRS this won't be a wash sale.

MT discussed the wash sale rule in general a couple of months ago, he might be able to give you a more informed answer.

Justf wrote: Now that I think about it, we don't even have to go to Europe in WW2 re: a serious confiscation scenario - look at what happened to the Japanese right here at home...hmmm....

Look at what happened to the Americans right here at home in the 1930s when FDR decided it would be a good idea to confiscate everyone's gold.

I'll take a crack at this whole post, since he raises a lot of good points.

Justf wrote: Hi All,

Thanks to the people in this forum I have recently moved my investments into the permanent portfolio strategy. Specifically, I am using the four ETF version of the portfolio.

My question is in what scenario is the time and hassle of owning and  storing physical gold ever going to outweigh the convenience of owning it in ETF form?

In general, these ETFs are very new products and are designed more as trading vehicles than long term investments (IMHO).  A pile of gold sitting in a safe doesn't rack up any management fees, taxable sales or counterparty risk.

If something drastic happens to the economy and I somehow cannot sell my gold ETF, why would physical Gold be any better? If the financial system has broken down to such a degree that I can't cash out my ETF's, then where would I go to sell my physical gold if I had any?

When you look at history you see that calamity tends to be regional, and the key is to relocate before things get too crazy where you live.  There is always a safer place to go if you have the resources to do so.

In fact, if the entire system was broken down to that degree, shouldn't I also stock up on firearms and ammunition so that the roving bands of hooligans cannot come and take my Gold from me?  Would gold even be valuable in an apocalyptic scenario? Wouldn't potable water and food be much more important?

Again, calamity tends to be regional.  You will need food and water, of course, but you will also need resources to get you to a safer location and resources to support you when you get there.

I can't think of a scenario where the system breaks down to the point where we can no longer access the wealth that we have stored in the stock market, but somehow physical gold will be useful.  Can anyone give me some examples where physical gold would be useful as opposed to holding a gold ETF?  Physical gold just doesn't seem to be worth the extra time and hassle - even if we degrade down to a Mad Max type scenario, food, guns, and energy would likely be far more valuable then physical gold.

You might go to south Florida and ask some old Cuban refugees about what happened to their wealth when Castro came to power.

Or you could ask a farmer in Zimbabwe about life under Mugabe.

Or you could ask someone of Lebanese descent how things were in Lebanon before and after their civil war.

You could, of course, ask a German Jew from the WW2 era about what happened to his investments.

We are spoiled in the U.S. because we have relatively strong private property protections in place.  History shows, however, that such protections can disappear very quickly under the right circumstances.

Think about it like this: Do you have car insurance because you think you are going to get in a wreck today, OR because you know that you will probably get in a wreck at some point during your driving career?  I think that gold provides a similar type of protection--you hope you never need it, but it's there if you do.

I just really, really like having things "outside the system."

If you are committed to the Permanent Portfolio concept for the long term, the expense ratio of the ETFs becomes noticeable. Far cheaper to just hold coins over the long term.

Another inconvenience with ETFs is the annual tax reporting and cost-basis adjustment (oddly, nobody ever seems to mention this). With gold coins, you don't have to do anything. With gold ETFs, you have to pay taxes on the gold that the fund sold to keep the ETF running each year. While the tax is minimal, it can take some time to run the calculations each year if you want to make sure your cost basis is accurate and the taxes are paid properly. And the calculations change with every transaction you make on any given day of the year...

http://www.spdrgoldshares.com/media/GLD ... n-2011.pdf
http://us.ishares.com/content/en_us/rep ... r_2011.pdf

Hope you like math! Gold coins are less hassle over the long term.

I forgot who said it on this forum but I really liked it. It was something along the lines of once you get a gold coin in your hands, that you get it. I very much felt that way. It's very liberating to feel you have so much wealth in such a small volume that if ever anything goes terribly bad, I can leave the area I'm in with a large amount of wealth in tow.

Aaaand It's Gone: This Is Why You Always Demand Physical

(Be sure to watch the excellent clip from South Park at the end of the article).

Thanks for the additional input guys and gals - all really great food for thought.  I'm really starting to lean towards physical gold now.

With the numerous examples everyone has given in this post its clear that there have been many many non Mad Max scenarios where gold would likely have been useful as a convenient transportable form of wealth when other stores of wealth may have been inaccessible or confiscated.  Medium Tex made an excellent point about the regional nature of calamities.

Others posters have pointed out that there is monetary incentive to hold physical gold as well - i.e. tax savings and savings on expense ratios. Of course all of these savings are amplified the larger your PP becomes.

These are all very good reasons to hold physical gold indeed.  If I do take the physical gold plunge (and I think  I'm getting close to doing it!), I'll share my experience and let other physical gold skeptics know what its like.

Full disclosure.. I have 60% physical and 40% ETF. But, now I wish I was 100% physical. Gold has risen so much since I purchased it, my understanding is that I would have to take a large tax bite to sell my gold ETFs and buy into all physical.

You might find this useful re swapping into physical from other various forms of paper metal http://solari.com/articles/Tax_Issues_r ... s_Holdings

1NV35T0R wrote: I forgot who said it on this forum but I really liked it. It was something along the lines of once you get a gold coin in your hands, that you get it. I very much felt that way. It's very liberating to feel you have so much wealth in such a small volume that if ever anything goes terribly bad, I can leave the area I'm in with a large amount of wealth in tow.

I did not have an epiphany when I held my first gold coin.  All I could think was, "Geeze, it sure isn't shiny for how much it cost."  But it seems I'm not prone to get emotionally attached to objects.  I guess I am grimly resigned to do whatever it takes to survive financially.  There's no hubba bubba.

Gumby wrote:
Aaaand It's Gone: This Is Why You Always Demand Physical

(Be sure to watch the excellent clip from South Park at the end of the article).

That's funny.  I first bought gold right after 09/11 in what turned out to be a long-running investment scam.  I estimate that if it had been legitimate, each $10K gold-denominated account would now be worth about $64K not counting the 3% interest per month reinvested along the way.  No point in calculating that!

It took me a long time to get over it.  The timing was right, but the execution was fatally flawed.

bronsuchecki wrote: You might find this useful re swapping into physical from other various forms of paper metal http://solari.com/articles/Tax_Issues_r ... s_Holdings

Thanks for the link - very interesting.  More than I ever wanted to know about taxation of gold! Can the IRS make nothing simple?

Gumby wrote: Full disclosure.. I have 60% physical and 40% ETF. But, now I wish I was 100% physical. Gold has risen so much since I purchased it, my understanding is that I would have to take a large tax bite to sell my gold ETFs and buy into all physical.

bronsuchecki wrote: You might find this useful re swapping into physical from other various forms of paper metal http://solari.com/articles/Tax_Issues_r ... s_Holdings

Thank you, bronsuchecki!  It is great to have an industry insider on the forum.  As it happens I had the exact same question.  The document took a bit of time to plow through, but indeed it looks as though Gumby can exchange the ETF shares for bullion with no immediate tax consequences.  The caveats are that you would have to buy the bullion within 180 days of selling the ETFs (or by April 15), and there would be tax consequences for any differences in price during the interim period.  For example, if you bought the bullion at a lower price than the ETF sale price, you'd have to pay taxes on the difference minus sale costs.

I'm not a tax professional however, so getting an opinion from a tax accountant might be wise.

Setting aside the arguments for gold as an inflation hedge the question seems to be why physical? Physical gold is the financial equivalent to catastrophic health insurance. Most people on this forum don't expect a major SHTF scenario. But we are all aware that such things have happened and can do so again. In a catastrophic eventuality where financial markets may cease to operate for a period of time, or there is a major currency crisis, or banks are closed or a political crisis makes it advisable to expatriate yourself and your family (all of these things have happened in major countries within living memory), having a stash of physical gold somewhere safe can be what keeps a roof over your head and food on your table until some semblance of normalcy is restored.

One doesn't have to be a paranoid end of the world "prepper" to realize that having a stash of the world's oldest and most universally accepted store of value is just a prudent policy. Bottom Line: It's disaster insurance. Most likely you will never need it. But if you do, you will thank God you have it.