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We are content to pay for house insurance for most of our lives yet very few of us have actually experienced a fire or a major disaster where we had to use the insurance. We are comfortable with paying the premiums every year in order to avoid a catastrophic loss. Well, owning gold is tantamount to owning an insurance policy on your investment portfolio.
The above comments, and those below, have been edited by munKNEE.com (Your Key to Making Money!) for the sake of clarity [] and brevity (…) to provide a fast and easy read and have been excerpted from an article* by Nick Barisheff (bmgbullionbars.com) originally entitled Avoid a Catastrophic Loss; How Gold is Like Insurance for Your Portfolio and which can be read in its unabridged format HERE.
Gold is like a portfolio insurance policy with no premiums to pay
Depending on how you hold it, you may not have to pay premiums and unlike cash, in the long term it increases in purchasing power. The capital appreciation is many times greater than the minimal storage costs. Gold is like an insurance policy that allows you to put the premiums in your own pocket. Most insurance policies are expenses, and unlike precious metals, are dependent on the insurance company staying in business. How much of your money has been spent in premiums for your car and house insurance over your lifetime – and what is there to show for it if you’ve never made a claim? Gold is like a portfolio insurance policy with no premiums to pay.
Gold is the least correlated asset to traditional financial assets like stocks and bonds
The reason gold acts like insurance in a portfolio is that, historically, it is the least correlated asset to traditional financial assets like stocks and bonds. This means that it tends to move in the opposite direction to stocks and bonds. While gold has an excellent record as portfolio insurance, it is not 100% guaranteed to protect against short-term equity downturns. It is, however, ideal as long-term (three years or more) protection.
Gold is a monetary asset
Gold is complex and has many attributes. Gold is a coveted precious metal, because it is scarce, and difficult and expensive to mine. Chemically, it is stable, portable and easily divisible. The fact that it is scarce, collectable and easy to split into various denominations means that it makes sense to consider it as money, rather than a commodity. It has been used as money for 5,000 years, with the first gold coins being struck around 550 BC…
While some people believe gold is no longer money but an archaic relic, they fail to comprehend that: central banks list it on their balance sheets as a monetary asset; it is traded on the currency desks of all the major banks and brokerage houses, not on their commodity desks; and it is referred to as honest money throughout the bible and in most religions.
Now is not the time to sell gold
…I don’t believe you can trade gold effectively. If you are going to trade in gold, then trade paper gold (derivatives, puts and calls), and hold your physical bullion. In fact, now is not the time to sell gold, even if you wanted to use it for trading on the markets. Gold has been in a correction for the past three years against stocks and bonds, but that trend is poised to reverse.
The stock market is dangerously overvalued, policy-driven low interest rates are coming to a close, the Eurozone, the UK, Japan and even China are struggling, and any of a number of black swan events could change the global economic landscape at any moment.
- Artificially low interest rates have kept bond yields (and junk bond risk) high, but with no further room for interest rate reductions, the bond bull market is coming to an end.
- While the Fed has been busy inflating the latest bubble, investors have been blindly following mainstream momentum, and borrowing record levels of margin debt into the overvalued stock market.
- Evidence of stock market overvaluation is clearly illustrated using The Buffet Indicator – the total market values relative to US GDP…During the dot-com bubble, the Market Cap to GDP ratio spiked to almost 160%, during the 2008 market collapse it spiked to almost 120%, and today it sits at around 132%.
- The bond market is also highly overvalued. Central banks have pressed investors into the high-risk bond market with low to negative interest rates on more stable, long-term bonds… The investor who gambles in this market is ignoring liquidity risk, and the risks associated with unsecured debt…
What will you do when a massive correction occurs?
When that correction happens, gold will go up as financial assets come down. If you hold physical bullion in your portfolio, even just 10% to 20%, you can reduce your risk significantly and improve returns. This is the time to re-balance your portfolio by reducing equity holdings and fixed income holdings, and increasing gold holdings.
*http://bmgbullionbars.com/avoid-a-catastrophic-loss-how-gold-is-like-insurance-for-your-portfolio/
Related Articles from the munKNEE Vault:
1. Protect Your Portfolio By Including 15% Gold Bullion – Here’s Why
Only about 2% of ‘investors’ actually have gold in their portfolios and those that have done so have insufficient quantities to offset the future impact of inflation and to maximize their portfolio returns. New research, however, has determined a specific percentage to accomplish such objectives. Words: 1063
2. Gold & Silver, Not Cash, Are the Ultimate Risk-free Investment Class – Here’s Why
Instead of gold, people commonly think of paper money as the only medium of exchange and as a store of value; cash is after all their unit of account. They see the gold price rising when they should be seeing the value of paper money falling.
3. What Is Gold’s Role In An Investment Portfolio – If Any?
There is a plethora of information available in all sorts of media that is negative about gold – gold is risky, volatile, a barbarous relic, and so on – but these arguments miss the point entirely, because they treat gold as an investment. To fully understand gold’s role in an investment portfolio, we need a new mindset—a gold mindset – [and HERE it is].
4. Gold – Is It A Commodity, A Currency, Neither or Both?
To answer the question “what drives the prices of gold” we have to determine the nature of gold. Is it a commodity, a currency, neither or both? This article does just that. Read on.
5. A Look At Gold’s Surprising Performance Over the Years
This article takes a look back at the history of gold’s performance as an investment over the years.
6. The 6 Most Commonly Held Anti-Gold Beliefs That Don’t Hold Water
…Many in the investment community swear by the old myths about gold, but is there any truth in them? If investors examined the facts, they would find that the most commonly held anti-gold beliefs do not hold water and, once the general public realizes that these beliefs are not valid, the price of gold will be much higher.
7. Noonan: Why Buy Gold & Silver? Here’s Why
Here’s the best reason to buy and hold gold and silver, at any price, and especially at these artificially suppressed prices.
8. Gold & Silver, Not Cash, Are the Ultimate Risk-free Investment Class – Here’s Why
Instead of gold, people commonly think of paper money as the only medium of exchange and as a store of value; cash is after all their unit of account. They see the gold price rising when they should be seeing the value of paper money falling.
9. Gold Measurements “Troy” & “Karat”: What Do They Mean?
You have no doubt read countless articles on the price of gold costing x dollars per “troy ounce” or perhaps just x dollars per “ounce” but the difference between the two measurements is significant. For that matter, what’s the difference between a 24 karat gold ring and an 18 karat gold ring? Let me explain.
Let us compare owning Insurance to owning PM’s*
or
Can PM’s Act As Financial Insurance And If So, How?
1.) The Global “Economy” is now but a biased shadow of what it was a decade ago as the Central Banks continue to print money overtime and enable their countries Ultra Wealthy to sell Gold using naked shorts, which has the effect of scaring small to medium investors into selling their PM’s because of fear and/or need.
As the numbers of those with money to spend continually decline, thanks to current monetary practices, the “Global Economy” will continue to collapse, which at some point in the near future cause the current fiscal version of the fiscal-musical chairs game to end with those only holding flat money left out of PM’s recovery!
I view PM’s, like I do insurance, you purchase it because if something unexpected happens, you don’t want to pay the entire bill for it yourself. Yes, until that something happens you are paying for your insurance (think not making any money from the money invested in PM’s), but that amount is small compared to what you might lose should disaster strike (dramatic loss in value of flat money) which would then require you to accept a huge reduction in the value of your portfolio.
What percentage of your income do you spend on Insurance?
2.) Let us compare insurance to PM’s.
You purchase insurance because if something unexpected happens, you don’t want to pay the entire bill for it yourself. Yes, until that something happens you are paying for your insurance (you do not make any money from the money invested in PM’s while you hold it), but that amount is small compared to what you might lose should disaster strike (consider a dramatic loss in value of flat money) which would then require you to accept a huge reduction in the value of your net worth ( loss to your portfolio because you have no gains in the value of your PM’s to offset the loses to your flat money.
What percentage of your income do you spend yearly to “own” Insurance?
Perhaps the same percentage should be used for your PM holdings in your portfolio!
Because how many readers consider having no insurance as prudent?
*DISCLAIMER: Stocks/Bonds and PM’s Are NOT Insurance, since their values are completely variable and can go downward quickly instead of being “fixed” (no pun intended) like an insurance policy or annuity that may be variable but their value cannot go down.
Excerpts from a previous post: http://www.peakprosperity.com/blog/85064/screaming-fundamentals-owning-gold#comment-165511