Making Money in Troubled Times with Gold


". . .given our experience in 2008, it is critical that investors hold actual physical bullion and not a paper proxy or derivative."

The topic at this 15th Annual Investment Outlook is "Making Money in Troubled Times." This may be quite a challenge in 2009 if investors continue to do what they've always done. However, there is always a bull market somewhere and making money in troubled times is possible if you correctly identify the dominant trends and adjust your portfolios accordingly.

Throughout the financial turmoil of the past year, gold preserved investor wealth and outperformed all other asset classes except bonds. Over the past five years, gold has been the best-performing asset. To understand why this is the case, it is crucial to realize that gold is primarily a monetary asset, and not simply a commodity like copper or zinc.

That's why central banks hold over $792 billion as part of their currency reserves. That's why the turnover of physical bullion in London is over $20 billion a day. That's why precious metals trade on the currency desks of most banks rather than the commodity desks. That's why gold should be compared to other currencies—not commodities.

At an increase of 5% in U.S. dollars for 2008, gold performed extremely well, considering the Dow lost 38%. Gold's performance was somewhat muted in U.S. dollars, largely because of the extraordinary demand for dollars caused by deleveraging.

Gold's performance against other major currencies was even more pronounced. As global equity markets lost between 30%–70%, Gold rose:
  • 9% in Euros
  • 45% in British Pounds
  • 25% in Russian Rubles
  • 38% in Brazilian Reals
Gold increased by 31% in Canadian dollars, while the Toronto Stock Exchange lost 35% of its value. Only the Japanese yen rose against gold, due to the exceptional demand for yen produced by the unwinding of the Yen Carry Trade.

From the time gold became freely traded in 1971 to 1981, precious metals soared:
  • Gold rose 2,300%
  • Silver rose 2,400%
  • Platinum rose 900%
For investors, the takeaway from all this is that while a "buy and hold" strategy may work during a bull market, it doesn't work during a bear market. During these uncertain times, the question investors should be asking is: What percentage of my portfolio should be in precious metals bullion?

The exact allocation will vary with each investor. However, Ibbotson Associates recommends 7%–16% just for proper diversification, while Wainwright Economics recommends 18%–47% in order to immunize portfolios against inflation.

To make money in these troubled times, you will need an even higher allocation in precious metals than those recommended by Ibbotson and Wainwright. Furthermore, given our experience in 2008, it is critical that investors hold actual physical bullion and not a paper proxy or derivative. Physical bullion is the only asset that is not someone else's liability.

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