“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about seven Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”
– Warren Buffet
The old man has a point. I must admit, among all the asset classes I currently own, I had the longest struggle with gold.
The reason is because when I started my investment journey with the Permanent Portfolio, it mandates that I maintain an allocation of 25% in stocks, bonds, cash and gold.
As I looked on as my SPDR STI ETF and 30-year government bonds go up in value and paying dividends along the way… gold is just sitting there — fluctuating its value. In fact, most of the gold that I’ve bought, with the exception of my first coin and the SPDR GLD ETF which kicked started my portfolio, will barely break even if I were to sell them at today’s spot price.
Yes, sometimes stocks and bonds do have their dog days. However the dividends and coupons they’ve paid, when reinvested, lowers the average cost per unit, resulting in not much real loss. In fact, when they rise again, they will be even stronger than before.
In fact, with low interest rates from the banks, I had a similar problem with 25% of my cash just sitting around in my bank account, earning measly interests and not even appreciating in value. I’ve since managed to figure out how to bend the rules slightly and found several uses for it. But gold doesn’t even pay interests!
The struggle is very real.
Yet, the fundamentals behind the teachings of Craig Rowland in his book The Permanent Portfolio was that each of the 4 asset classes has their corresponding strengths during any of the 4 possible economic “seasons” known to man. Therefore, protecting the investor from big losses as one of the assets should be able to outshine the rest to make up for their losses. These economic “seasons” usually occur in cycles.
This got me interested in finding out more about the economic scenarios mentioned in the book and whether the coverage is complete. Although the book already provided a lot of substantiation for the permanent portfolio, I needed a third opinion. Then I chanced upon the “All Weather Portfolio” — which sounds suspiciously synonymous with seasons — as proposed by Ray Dalio. Ray is the founder of one of the world’s largest hedge funds, so I suppose his opinions should carry some weight. Eventually, it led me to his video about economic cycles.
The video gives a fantastic and light-hearted introduction to economic cycles with 4 major takeaways:
- People tend to borrow and spend more than they earn and when the time comes to repay, results in the downturn of the short term debt cycle.
- The long term debt cycle is the result of short term memory and greed leading to too much credit in the system eventually facing repayment difficulties, causing the entire system to implode and crash.
- The creation of credit to facilitate borrowing is the underlying cause of these cycles.
- Central banks create credit, which spends like cash, from nothing.
The last point was of particular interest.
You mean there is actually an organization that creates “money” out of thin air and here I am working my a** off for it? Where can I sign up?
As shallow as it sounds, I became interested in money — not so much as how to get more of it, but how it came about to be what it is today. In my journey for answers, I realised today’s “money” is actually really currency, used to facilitate the transfer of promised value, but really backed by nothing other than faith of the people using it. It can be created without restraint by governments and banks, diluting the value of every single unit in the pool each time it happens, unlike tangible and limited resources like gold, silver or other precious metals. I chanced upon the YouTube channel of a user called Paul Grignon, who produced a series explaining the fundamental problems of the current debt-based monetary system.
The material is so fundamentally important for everyone’s knowledge that it makes one wonder why isn’t such information made available as part of public education? Perhaps it’s not in the best interest for the people who benefit the most from it to educate the masses. I will suggest exploring this resource if you have not done so. It is time to wake up.
Regardless, my findings have given me closure to some of the longest unanswered questions in my mind, such as:
- With today’s better technology and efficiency, why are we working just as much, or even more than our predecessors?
- Why are banks paying so little interest on deposits?
- Is a cashless society really to deter terrorism?Why is the wealth gap widening in every modern society today?
- How is constant growth possible?
So is Mr Buffet correct on gold? In his lifetime? Maybe. However beyond that, the current fiat monetary system is definitely heading towards a fiery end. We are running a mathematically impossible debt-based economy where every single dollar, backed by nothing, is borrowed into existence — minus the interest. In order to repay the interest, someone has to borrow that into existence as well, which in turn comes with its own interests. As all cash and credit in existence comes from debt, if we ever pay down all our debts, we will end up with no more currency in the system… and yet, we still owe interests! If you’ve saved some currency in your bank, or used some to buy paper investments like stocks and bonds, what do you think their values would be when the world starts having problems repaying their debts, start defaulting and wiping off credit? Everything will deflate rapidly or pop.
The reason why investors like Warren Buffet hate gold, is they need more credit in the system to drive up their share prices and keep the musical chairs going. Any form of saving removes currency from the monetary system. But saving in physical gold removes currency from the system and locks it in a tangible form. This prevents the value of gold from being diluted with the creation of more credit. Companies need to work harder to make up for such loss credits by encouraging more borrowing so more credit can be created for those who have first-hand access to buy and drive up the value of their paper assets.
Gold may be nice to look at and seem to do nothing… but throughout history, it has managed to account for all the value that has been produced and purchased with empty promises. Although it doesn’t revalue itself dramatically in real time, but it always does so with great accuracy in times of great crisis. It seems that it is long overdue for one.
In fact, today my gold holdings can break even at spot prices is due to the 3-4% premium that was paid during purchase. Which means that they have already appreciated that amount, making my stocks and bonds look sheepish from the recent market rout.
What should we do if the whole thing comes crashing down?
My thoughts on gold then?
I believe gold has proven to be a reliable store of value for more than 5,000 years. Why? It is hard to explain until you’ve actually held an ounce of it in your hand. You will understand why wars have been fought over it. With so much “promises” being made on real tangible goods and services, every time someone signs on the line for a loan, whether to get a car, a house or simply making a purchase with a credit card, gold does its silent accounting, just waiting for the day to balance its books.
Am I going to move everything into gold? Not unless I am certain that the economy will collapse by the end of next week.
The problem is, I don’t know when its going to happen. Just like insurance, do you put all you have into it because you know with absolute certainty that you’re going to be struck by a terminal illness in the near future? Perhaps not. However, you will assess facts such as family history and your lifestyle, and I’m sure the insurance company does so too and adjust the premiums accordingly or rejects you if it is clear that you’re right. You get to manage your risks when things are going well and purchase whatever you can reasonably afford. so you don’t want to end up at the losing side of the bet. Hence, if we assess the history of fiat currencies and what’s happening with the world debt crisis today, we can conclude with a high level of certainty that it will fail. It’s not an “if”, but a “when”.
As such, I shall follow the rules of the permanent portfolio and try to capture any potential gains from the other assets classes and lock them into gold. For my variable portfolio, its probably time to work out an allocation strategy that includes precious metals and start accumulating.