You may have missed it – today I added a new category to the opening list of price increases/decreases that I open each Daily with. It is Gold – 1 year ago today. For me, this is important to know because it is too easy to get caught up in the daily moves of gold and silver and miss the big picture. Gold has been meandering around $1,200 for a while and I bet most of you, if asked, would be surprised that one year ago today, gold was $926.70. Gold has been hanging around the “up $300” area for some time now. If gold “mirrors” last year’s performance, it will finish this year around $1,400.
Personally, I think that number will prove to be too low. But then, that’s just a guess. No one can see the future with certainty except Jim Sinclair and he stands firm with his prediction that gold will hit $1,650 by the middle of February, 2011. Ah, to have a clone of Sinclair’s crystal ball – that would be wonderful. Do not read any sarcasm into the previous sentence. I have nothing but the highest respect for Jim Sinclair and would not, myself, bet against his prediction.
In the next few weeks we are going to try and shorten the newsletter by offering you a brief opening comment on the articles I would like you to read and then, we will direct you to a link that will have the entire story. That way, you can read as much as you like and the Daily, itself, will be much shorter. We are working on a few “production” issues that have we have to resolve before we can implement the change, but it is coming. We are also almost done with our Twitter, Facebook, and blog updates. We are excited to introduce new ways of reading our reports, please stay tuned.
I spent the last three days in Washington DC with my son Andy, his wife Zhanna and my wife Susan. We were there to celebrate a friend’s 50th birthday. This is just the second time that I have been in DC and the other time was a year ago on a brief business trip that took me to Georgetown and I never got to see the city at all. We visited all of the Monuments and a couple of the museums and it is an impressive city – and hot and humid too.
There were so many things to be impressed by, but the one thing that I can’t get out of my mind is the size and scope of our big government. There are miles and miles of large sprawling white limestone buildings filled with “Civil Servants.” There are around 460,000 people here in Minneapolis. The last time I checked, it was the 16th largest city in America. My estimate is that there are nearly that many Federal Government Employees in Washington, DC alone. Based on the 2008 Census the population of Washington DC, the city, not the surrounding area, is 591,883. When I asked “Answers.com” what the actual number of Federal Government Employees in Washington DC the reply was TOO MANY. Honestly, that was the answer. We have created a monster and it is out of control!
Harry Browne’s Permanent Portfolio
Back in the 1980’s the late libertarian economist and perennial presidential candidate Harry Browne caused a small sensation when he (the goldest of gold bugs) told people it was time to start scaling back on gold and diversify their portfolios. Shortly after he wrote a book that has since been reprinted many times called “Fail Safe Investing.” Thus was born the concept of the Permanent Portfolio.
The basic premise of Harry’s Permanent Portfolio is that you divide your money into two parts. That which you can afford to take losses on (discretionary investing) and that which you really can’t afford any significant losses on (retirement money etc.). The money you want to be safe but still appreciating in value should be placed in a portfolio divided equally into four asset classes.
25% Long Term High End Investment Grade Bonds
25% Precious Metals (He favored physical over paper metal.)
25% Cash or Near Equivalent
The theory is that if the static allocations were maintained through frequent rebalancing the investor would have an all weather portfolio that will keep his money safe while providing a moderate return. Bonds will perform well in a bear market recession when equities generally lag. And cash and bonds will do well in a deflationary environment while gold and equities will protect you from inflation. This is not a path to quick wealth. But it is not a bad plan for investing that part of your money where your risk tolerances are low.
I have been told that Harry’s Permanent Portfolio has returned 15% per year for the last 15 years. That is pretty impressive.
The reason I bring this up is because our friend, in Washington DC, is a strong advocate of Harry’s Permanent Portfolio. We discussed it over dinner on Tuesday. The key thing about this investment philosophy is that it is very safe and conservative. But for me, it is taking two steps forward and one step back because all four categories will not be moving up in lock step. Then again, neither will they be moving down at the same time either and that is the reason for this diversification.
I personally have followed a different philosophy and it works for me. I call it “The Jean Pierre Louvet Asset Class Philosophy.” Eight or nine years ago, I spent time with the Swiss-French-Canadian economist and newsletter writer, Jean Pierre Louvet. Louvet writes a highly respected financial newsletter and was the “father” of the Swiss annuity industry that gained some traction here in the US in the ’90s. We spent several delightful evenings together in Bal Harbour, FL where he had an ocean side condo, and spent the winter working on a book, which I don’t know if he ever finished or published. His theory is that “diversification of asset classes is the wrong way to invest.” He would not approve of Harry’s Permanent Portfolio allocation at all. Louvet’s premise is that you find a single asset class – stocks, bonds, cash or gold – that is in THE EARLY STAGES OF A PRIMARY BULL MARKET and you invest all of your funds in that single asset class and DIVERSIFY IN THAT ASSET CLASS. Sure, there is risk involved, because you have to pick the right asset class and have a feel for when it is time to switch out and into a different asset class.
Looking back, if you followed his plan, you would have been in gold in the 70s, in bonds in the 80s and in stocks in the 90s. Starting in 2002, you would be out of stocks (except for mining shares) and into commodities, especially gold and silver. Your diversification would take place in this asset class only.
Well, that is pretty much what I did. I was certain that gold was entering into a long-term generational bull market and if ever there was a time to benefit from Louvet’s philosophy, this was it. Now as impressive as a 15% annual return from Harry Browne’s Permanent Portfolio for the past 15 years is – I have done MUCH better myself in the past 10 years by following Louvet’s advice. Using just the price of gold, starting at $250 in 2001, and compounding it at 15% per year through 2010, the price would rise to $1.011. That is the same as Browne’s 15% per year for a decade. But gold is $1,200, some 20% ahead of the Permanent Portfolio.
And silver, which must surely be the most manipulated metal on the planet rose from under $5 to its current price of $18.35 in the same time frame. Compounding at 15%, silver would have hit $17.54, but it has outdone Harry’s portfolio by about 5% over the past decade.
Top notch gold and silver mining shares did better, much better than the metals in the same time frame.
The HUI Gold Bugs Index has returned a solid 347% for the decade, while the Dow Jones, S&P 500, and the NASDAQ all show a significant loss.
Even when compared to physical commodities, which have done very well during this bull market, gold mining stocks outperform. Gold and oil have experienced a respective 206% and 270% price increase in the last ten years, while the HUI Index is up nearly 350%.
But this is looking backwards and it is more important to look ahead. That is what this Daily is all about. And looking ahead, I feel strongly that this gold and silver and mining share sector has a tremendous upside left. We are nowhere near the third stage of this on-going bull market and that is where the big money will be made. In dollar terms (as opposed to percentage terms), gold’s increase, since 2001 is around $1,000. How high will gold go? I don’t know, but you can ask me again when it tops $3,000. Silver will sell for at least $50 or $60 an ounce with a gold price of $3,000. My view is that precious metals are THE asset class to be invested in 3 to 5 years.
If Jim Sinclair is to be believed, this time, when gold tops out, IT WILL NOT FALL BACK! Gold will be fixed at a very high level and used to back a new Dollar or global reserve currency. This will not be like 1980 when gold peaked and then proceeded to fall for the next 20 years. This makes perfect sense to me.
The human race is still evolving. My dad was born only 30 years after the end of slavery. Only four years before I was born (1920) women in the US finally received the right to vote. When I was 25, if a black man was seen holding hands with a white girl, he would be attacked and possibly lynched. I remember when Jackie Robinson was introduced to baseball. People were amazed. It created a sensation. I remember how thrilled I was when Cleveland’s great black back, Marion Motley, would charge forward literally carrying the whole opposing team on his back. Then came John Browne. Jesse Owens, “the Buckeye Bullet,” was one of my childhood heroes. Jesse never received the credit he deserved for his incredible Olympic performance.
Prior to 1967, a Jew could not buy a home in La Jolla. Twenty years ago, if a woman was seen alone at a fashionable hotel bar, she would be asked to leave — or be considered to be a prostitute. When I was 20, if a man was in analysis or therapy, he kept it a secret, because he would be considered to be “crazy” and an employment risk.
Civilization moves on, slowly, and I mean very slowly.
Richard Russell, July 14