WC Varones

Don't lend your hand to raise no flag atop no ship of fools

Trimming gold

If you've had a responsible 5% - 10% portfolio allocation to gold and silver and the miners, it's now grown to an oversized position. I've been trimming recently where I could do so without triggering serious tax consequences. I'm only selling ETF and miner positions, of course. I'll never give up the physical.

I even bought Oct 125 GLD puts today, a little speculative bet on a pullback.

I'm probably early, but it never hurts to take a little off the table.

18 comments:

Anonymous said...

" I'll never give up the physical."
Mind if I ask how much that is? How much do you recommend regular people have?

W.C. Varones said...

I still think a 5% - 10% allocation is appropriate for most people as a hedge against inflation and many other adverse economic scenarios.

My preference would be to have all of that in physical rather than ETFs, but unfortunately I got started in ETFs and still have more in ETFs and miners than in physical.

Of course, I hope it goes without saying that you have to watch your premiums. Many major vendors are total ripoffs, and I wouldn't pay extra for rare numismatic coins. I buy the most basic bullion coins I can find and pay $50 - $70 premiums at local coin shops.

B-Daddy said...

W.C.
Nice advice. I tend to just let the physical gold in my portfolio sit there, for a rainy day, but your strategy seems sound.

Shane Atwell said...

Can I add a bit here? When I first got into gold the Austrian leaning financial advisors were recommending around 25%. Some of them have increased that recently. One even declared a few days ago that he's all in, though he didn't actually recommend it. As of a week ago, I'm 25% physical and all in on ETFs and miners. You gotta read quite a bit and be comfortable with this though.

For a regular person, I'd recommend something more like 25% physical (mostly gold with some silver for small change). Some miners and the rest in cash, for the moment. The market is really wonky right now, dominated by the high frequency traders and due for a major reset.

I like CMI for obtaining physical. Good customer service, fast turnaround, brand new merchandise. I've dealt with Tulving before too, and was happy, but the plastic cases are a bit more worn.

As for ETFs, beware of SLV and GLD. CEF and PHYS are much better. If you google all those terms you'll find articles explaining why. Basically the former aren't physically backed and the later are.

GLD is the modern equivalent of gold backed dollars just before FDR, i.e. the amount of GLD paper floating around is much greater than the actual gold backing it, and it's probably going to default just when you need it to be safe.

Shane Atwell said...

Should also say that IM NOT A FINANCIAL ADVISOR just a scientist captain!

Wrt WC's comment, 1oz gold bars had a premium of about 3% last time I bought. Premium for silver is higher, or for gold coins.

W.C. Varones said...

Shane,

Never heard of CMI or Tulving, but 3% premiums sounds great.

I completely agree on PHYS and CEF vs. GLD and SLV.

I should add also that I'm not speaking as a financial adviser, just as an opinionated guy.

W.C. Varones said...

Holy Shmokes! 10-oz minimum at CMI. Too rich for my blood.

Leucadia Blog said...

What do you think of this piece on ETFs?

http://www.businessweek.com/magazine/content/10_31/b4189050970461.htm

Shane Atwell said...

Wow. I had heard there were problems with the oil etfs (due to storage/shipping) and had heard the term 'contango' but didn't realize it was so widespread. Thanks for the link. I've asked my broker on several occasions about other commodities but never pulled the trigger. glad i didn't.

Shane Atwell said...

Here's a good article on gold/silver etfs http://www.minesite.com/fileadmin/content/pdfs/Brokers_Notes_April_10/Gold%20%26%20Resource%20Report%20April%202010.pdf

W.C. Varones said...

Leucadia Blog,

All that stuff is absolutely true about those ETFs.

Some ETFs are great, others are horrible. Particularly bad are the 2x and 3x long or short ETFs. They are fine short-term trading vehicles, but horrible long-term holds.

What Shane said about GLD and SLV is absolutely true -- they don't really have physical metal in the vaults so you better hope their counterparties don't blow up.

If you have questions about a specific ETF, I'd be happy to take a look for you.

Shane Atwell said...

Close friend of mine got screwed on a double short ETF that went rogue.

W.C. Varones said...

Shane,

As a scientist, I think you'll find this interesting.

The leveraged ETFs are essentially mathematically destined to go to zero.

Generate a random series of daily returns, representing a hypothetical return path for the underlying index.

Then multiply each daily return by 2x or 3x, and compound the returns.

You'll find that unless the return series trends strongly up or down, both the long and short leveraged ETFs tend toward zero.

It's a weird effect of compounding with daily value resets. If you look historically, you'll see that often both the long and short leveraged ETFs on the same index post very negative returns in the same year.

Huntington Hartford said...

People are making a stellar, bubble-era mistake by chasing gold. Yes, you've been right the last decade but gold is a speculation. There is no cashflow associated with it so there is no "logical" way to judge it's price level. If you want to gamble, that's fine. But gold isn't an investment.

The second richest man in the world says the best inflation hedges are consumer staples. They're actually one of the cheapest cashflowing assets to buy right now. As price levels rise, the new levels will directly be reflected in their revenues. As buffett points out, consumer staples have the lowest capital requirements, so as the price of steel, oil, etc. goes up, they need the least amount to maintain their production. It's a win-win, sweet spot... not nearly as sexy as the shiny gold stuff and nobody writes about consumer staples. GOLD IS IT, BABY! BLing BLing.

Huntington Hartford said...

I wanted to add something to my previous, anti-gold comment...

I say, with perfect hindsight, that the time to buy gold is when the gov't runs a surplus. When everybody is up in arms about the govt's problems and the debt (heck, it's given birth to a new political party!) that is the time to NOT buy gold.

A gold speculator in Canada said the best way to time gold is to buy when the miners are hedging and sell when the miners are de-hedging (as they've been doing the last few years).

If the thing you are speculating on doesn't have cashflow (i.e. gold) then you should follow some common sense: Buy low, out of favor assets. Sell high, front-page of the news assets.

W.C. Varones said...

Huntingdon,

You may well be right. I'm not buying more at these levels, and, as I said, I've been trimming.

I continue to believe in dollar devaluation and debasement. That's the unmistakable trend of all fiat currencies over all time periods in history. But I agree that equities may also old up relatively well in a dollar debasement scenario. Leveraged (mortgaged) real estate is another way to play the same thing.

That said, I would not be at all surprised to see gold hit $2000 or even $5000. It's not gold going up. It's the dollar going down.

Shane Atwell said...

@WC that's bizarre. have you actually done it? I'll have a look monday.

@Huntington I'm not trying to invest. I'm just trying to hold onto my wealth and I think that 1) the dollar is worse speculation with no cashflow 2) the market is some kind of freakshow put on by the government and the banks 3) we're not in normal times and can't use normal trends to judge. We're facing currency collapse.

I do like consumer staples, but I haven't figured out a way to invest in them physically or safely away from the above insane gov't/banks. I'd like to buy (and rent out) farmland, but its still overpriced. Were you suggesting ETFs? or General Foods or what?

W.C. Varones said...

Shane,

Here's a Google spreadsheet I set up with the basic format. You can play around with it.

The results are path-dependent. In a trending market, the 2x long and 2x short ETF will generally sum to a positive return. But in a choppy, directionless market, you'd lose money by holding an equal weight of each.

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