I repeat: you should be sitting down before viewing the following graph.
While the general idea of dividing your portfolio between long-term and speculative capital (the latter is only the money you can afford to lose) is not a particularly new one, the inclusion of the insurance part in the portfolio may make it more robust to financial blow-ups. We will now focus on that - gold and silver as insurance against severe financial turmoil.
Gold may be perceived as insurance if you believe that, because of psychological reasons, it appeals to investors as a wealth-preservation vehicle. In case of financial turmoil they turn to precious metals, the increased demand causes an increase in the price and gold and silver deliver on their promise to provide an alternative to government bonds.
There is also another dimension to it: in the past gold and silver were used as money. As a matter of fact, gold had been indirectly used as money up to 1971 when U.S. president Richard Nixon officially announced that the U.S. government would cease to adhere to its promise to redeem the greenback in gold. Since that moment money has been only paper and a promise of the government to accept payments in it...
Some investors fear that excessive deficits as seen in the U.S. will result in money being printed on a large scale (which actually is already the case: open-ended QE) or even in the implosion of the dollar. The bigger the deficits, the more likely such a scenario seems. This is shown on the chart below.
...since 2000 increases in the U.S. debt have been accompanied by increases in the price of gold. This might reflect investors' fear that the U.S. government will eventually default and their belief that gold may be a safe haven in case of such a development.
The abovementioned points may lead to the conclusion that gold may in fact skyrocket if things get out of hand in the U.S. or in the European Union. The main problem here is that nobody knows when (if at all) the paper currencies will begin to visibly deteriorate or disappear completely. Precisely because of that, we suggest holding on to gold and silver at all times with a part of your portfolio.
We call this part of your portfolio "Insurance," because by holding on to gold and silver even during corrections you accept small losses in hope of enormous gains should serious economic turmoil materialize. Economic crises have the inherent quality of catching most investors off-guard. We don't want you to be among them.
If you believe that government can continue to increase its debt -- which already amounts to 550 percent of GDP (all the goods and services produced in a year) -- then by all means, ignore the advice.
Because if you believe that, you're obviously a Democrat and an Obama supporter, in which you can fend for yourself after the inevitable reboot.
Hat tip: BadBlue.com/Money.
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