CHISWICK, WEST LONDON – Greetings from my childhood home in England…
It’s time for our Friday mailbag edition, where I answer the latest questions you’ve sent in.
On readers’ minds this week is my mother’s house, which we decided to buy after she passed… “toxic” air in London… and one reader suggests our gold portfolio is impractical.
All this and more below, so let’s get to it…
Reader question: I bought my first ever gold via St. Gaudens back in 2014 and agree with your analysis. Things that have in the past accelerated gold’s dollar price have essentially been ineffective in the past 12 months. Why? What has changed?
Seemingly, the unending mountain of stimulus cash has forestalled what heretofore would have been a historic collapse. What is on the horizon in the next year that gives us any pragmatic expectation that gold is even going to reach $2,100 (given a pandemic, market crash, and historic unemployment didn’t do it)?
Thanks, but increasingly frustrated as 1%-ish on 65% of our portfolio over the past year is not very practical for the next 2,5,7 years. There is a “lost opportunity” factor that mere mortals/retirees with a limited time horizon need to factor.
Gold was at $1,770 an ounce this time last year. And it’s at $1,770 an ounce today. So it’s unchanged over the last 12 months. Meanwhile, the S&P 500 is up 38% and many individual stocks are up far more. Inflation is heating up. And they’ve also been printing record amounts of dollars.
Gold should be at all-time highs by now… yet it’s unchanged. What gives?
The obvious answer is that interest rates and the dollar have been rising. Others would say bitcoin has stolen market share from gold.
I’d say that gold does best when there’s turmoil. And in the last year, things got less tumultuous, so gold didn’t rise. Also, gold got a bit “overbought” last August and needed a breather.
Hang in there.
The real magic will happen in gold when the great credit bubble bursts… the Federal Reserve isn’t able to run its printing press anymore… and there’s a big stagflation (meaning inflation combined with economic stagnation).
I expect this to play out in the next five to 10 years.
In the meantime, we’re doing our best to generate returns through our investments in shipping, and this worked out very well in the last year.
The shipping stocks I recommended to my Tom’s Portfolio subscribers last December are up as much as 163%, 179%, and 204%.
Reader question: I’ve been buying gold and silver for the past 15 years (if I could only get that gold price now!). I keep hearing about keeping 10- 20% of your portfolio in precious metals. Sometimes I think I’m overweight and have about 35% of my portfolio in precious metals. What ratio do you have since I know you say you have most of your savings in precious metals?
I don’t know the exact number since I try to forget about our gold and pretend it doesn’t exist so it doesn’t tempt me to sell it.
But when I’ve finished buying my mother’s house, gold will represent about 85% of our investment assets. (I’m not including property or life insurance.)
The ideal portfolio weighting for gold, in my opinion, is about 65%.
Reader question: Please would you give Postcards readers your thoughts on Basel III, in particular how you see it affecting the gold price present and future?
This is a good question. I’ve seen the discussion online about this, and some are saying that it’s going to cause the gold price to soar – or even that it’ll mark the end of gold bullion banking and the paper gold market.
For some background…
Basel III is a series of rules for bankers they enacted after the great financial crisis of 2008. It says how much unencumbered cash banks must hold and what counts as cash, i.e., bonds, gold, deposits, etc.
They’ve made some big changes to these rules. One of them is that gold now counts as a reserve asset. Those changes came into effect in Europe a few days ago. And they’ll come into effect in the U.K. in 2022.
Going back to your question…
I’m not sure what effect they’ll have, if any. I’ve heard so many goldbug conspiracy theories over the years, I kinda tune them out now. I’ll be happy if the new Basel III regulations cause gold to soar, though…
Reader question: As I’ve been reading all the financial opinions around, I’ve become a bit confused about staying in gold instead of cash, until the crash. With gold going down, isn’t this the same as losing purchasing power in the dollar? Does the Dow-to-Gold ratio factor in the difference?
The only measure of return from your investments – be it cash or gold or the Dow – that really matters is purchasing power.
You’re going to spend your savings one day, right? So the power they grant you to consume food, vacations, energy, housing, luxuries, etc. in the future is the ultimate measuring stick of return.
But it’s not easy to generalize about the cost of living. We each consume hundreds of different commodities every day.
One way to do it is by using the Bureau of Labor’s measure, which they call the Consumer Price Index (CPI).
I prefer to use the gold price. It’s simpler and more accurate, in my opinion. So to understand the returns I’m getting or expecting from an investment strategy, expressed in purchasing power, I always pit them against gold.
When I study the stock market, I pit it against gold to get its true return. When I study my savings, I look at them in terms of gold to see how I’m doing. When I look at the dollars in my pocket, I think about them in terms of gold. I even think about the purchase price of my mother’s house in terms of gold.
If London property prices beat gold, I’ll know I made a good decision in future purchasing power terms by buying Mum’s house. If they don’t, I would have been better off selling the house and holding onto gold instead.
As to your question about gold or cash while waiting for the stock market to crash… Well, which path ends up with you having greater purchasing power?
I’d guess gold, but only if the crash is “stagflationary.” If the crash is deflationary, cash will probably do better.
Reader comment: You have not shown your audience how your mother’s estate has to be directed as a result of U.K. death duties, and the allowance for the house when having to split it with your brother. Perhaps just give him some gold at current prices!
We paid inheritance tax last week. After the allowances, we paid a 30% tax rate on Mum’s estate. In order to keep the house, I must now buy out my brother. We haven’t agreed exactly how we’re going to do it, but it’ll probably end up being a mixture of gold, cash, and debt.
Reader comment: I suppose you’ve seen this: Mayor of London Sadiq Khan said: “We have made real progress in London to clean up our air, but we still have a long way to go because toxic air pollution in our city is still leading to thousands of premature deaths every year and is stunting the growth of children’s lungs.”
I hadn’t seen this. Seems a bit melodramatic to me. The air here seems fine…
Reader comment: I love your thinking about shorting the bubble, but I recall John Maynard Keynes’ observation about the duration of one’s solvency.
Keynes said, “The market can stay irrational longer than you can remain solvent.” A very wise insight.
So the correct way to short the bubble, in my opinion, is via instruments that allow me to be patient… and limit the amount of money I can lose.
I’ve been thinking about this for some time (I wrote about this in more detail here and here). And I’m coming around to the fact that the best way to short the bubble is by shorting junk bonds.
With yields below 4%, they have almost no room to keep rising, but so much room to fall. And the carrying cost of the bet is low because yields are so low. More to come on this…
Reader comment: My daughter works in “Molly’s,” which is the restaurant within the Museum of the Home, which you visited last week! I gave her the “heads up” that you were going to visit the museum!
I wish we’d known! We loved Molly’s and had a great lunch there. The service was excellent and so was the food.
Reader question: Any thoughts about when/if some of yours become “rebellious teenagers,” like 15-17 years old?
I was a very rebellious teenager and I liked to smoke and drink and be rude to my teachers. I can’t imagine my kids acting like that, though, because they don’t go to school and don’t have to fit into the social hierarchy that you find in school.
I’m reading Ham on Rye by Charles Bukowski at the moment. He does a good job of explaining the impulse to be rebellious and tough in that book. That impulse just isn’t present in our children’s upbringing…
Reader comment: While homeschooling has been a good experience for your family, it may also be of value to enroll the kids in a more traditional educational environment. Just as not every teacher is a good fit as one goes through school, the experience of having to work with those who aren’t a good fit is every bit as helpful in the long run.
Frustration and hardship and needing to get along are learning tools – though never anyone’s favorite! If nothing else, exposure to a wider variety of kids and teachers will help your own children value and appreciate the wonderful ones they’ll meet.
All this background is of value when they enter the working world to support themselves. And if you and your wife happen to work outside the home as they go to school outside the home? It will increase their understanding on how most of their adult friends and acquaintances have grown up!
You make a good point. Adversity is undoubtedly very helpful for turning children into strong, independent adults. But won’t life throw up plenty of challenges without us having to manufacture extra ones, don’t you think?
And anyway, we love homeschooling. The kids love it. Kate and I love it. So I don’t think we’ll take you up on your suggestion yet.
Reader question: I recall a while back that you mentioned putting together a book about your travels including the places that you stayed at and the websites that you used in your adventures. I would be interested in this when you publish it and I am sure other readers would as well.
I haven’t started it yet, but I’ll finish it eventually. I haven’t forgotten. Stay tuned…
And that’s all we have time for today! As always, don’t hesitate to send me your questions and comments to [email protected].
I love reading your notes, and I’ll respond to as many as I can in future Friday mailbag editions.
– Tom Dyson
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