gold exposure to the masses via ETFs (not available when HB developed the PP)

[murphy_p_t]

http://online.wsj.com/article/SB1000142 ... 14506.html


thank you for maintaining this site.

are there any articles which consider how gold may perform its role in the PP, considering the easy exposure investors can gain thru ETFs. i ask this question as ETFs were not available when HB developed the PP. one concern, as the article points out, is that the gold price could be much more volatile due to the ease of selling ETFs. what impact will the rise of ETF's have on the role of gold in the PP?

[craigr]

http://online.wsj.com/article/SB1000142 ... 14506.html


thank you for maintaining this site.

are there any articles which consider how gold may perform its role in the PP, considering the easy exposure investors can gain thru ETFs. i ask this question as ETFs were not available when HB developed the PP. one concern, as the article points out, is that the gold price could be much more volatile due to the ease of selling ETFs. what impact will the rise of ETF's have on the role of gold in the PP?

This is a fair question. Have gold ETFs ruined the gold market? I don't think so.

Gold ETFs were actually around when Harry Browne was still alive so their use in the Permanent Portfolio was considered. They are not the preferred way to hold gold in the Permanent Portfolio however.

But to the question. Yes, gold is more accessible now but it's not likely to impact the results because people are still buying it for the same reasons they did when it was less accessible: protection against possible inflation.

I think blaming a gold ETF for the rise in gold prices is a bit of a stretch. It completely ignores the market reactions to overseas and domestic spending (welfare and warfare) which has historically been inflationary. It also ignores the unprecedented actions of the Fed after the housing bust to dump dollars into the falling market. This is not saying inflation is coming because there are good arguments for deflation. It's just saying that the market's reaction and jittery nature with buying gold is not totally unjustified given the past few years of market turmoil, banking failures, government spending, etc. This is hardly the fault of the Gold ETFs and I suspect gold prices would have gone up anyway even without an ETF around based on these incidents.

But this is an issue brought up by Rick Ferri in the Podcast I had with him. He made the same point about gold ETFs. My point is why doesn't this apply to value stock investing strategies? Or how about just the stock market in general? The emergence of cheap stock index funds and ETFs has not ruined the markets has it?

If the gold prices plunge it's not going to be because of a gold ETF. It's going to be because the markets think that money is better invested somewhere else (stocks, bonds, T-bills, etc.). The gold ETF will be the poster boy for the fallout, but blaming it doesn't make much sense. Even before the ETF existed gold purchases were routinely done by large institutional players and indivuduals. So gold trading is not a new phenomena for the markets and they carried on through ups and downs just fine.

But does a gold ETF impact the portfolio ideas and diversification? I don't think so. Buy, hold and rebalance the assets. I don't worry about a gold ETF affecting gold prices any more than I do a stock ETF affecting stock prices. Yes it made the asset more accessible, but that doesn't mean the reasons people are buying it have changed.

If people want gold they want gold. If they want it in an ETF or a gold bar in safe deposit box it doesn't matter any more than whether a stock investor wants a stock ETF or physical certificate in their filing cabinet. And ETF or no, the investors are going to buy that asset. In fact, these investment products exist and are popular because that's what the markets wanted. Besides, gold has been popular in the past and in fact it had a much higher inflation adjusted price in the late 1970s/early 1980s (over $2200 in today's dollars) when there was no gold ETF around at all. If ETFs are driving gold prices then how do we explain that?

Gold has always been a volatile asset. Same for stocks. Same for long term bonds. Nothing has changed. For a Permanent Portfolio investor it doesn't matter anyway because we hold all the assets all the time and rebalance when needed. Gold prices in the portfolio have dropped almost 50% in the past with minimal impact on overall value. The following years the other assets more than made up for the losses. On the opposite side of the coin (pardon the pun), gold investors have been rewarded for holding the asset when stock investors have been severely beaten about the past decade. Every asset has its day in the sun and day in the dog house. This is why investors shouldn't try to time the market and hold all the assets all the time no matter what they think may happen.

EDIT: This is a good question. I posted my opinion in my blog as well:

https://web.archive.org/web/20160324133 ... set-class/

Thanks for the link.