An Inflation Survival Kit

Well, I’m beginning to get clients seeking my investment recommendations. I think a lot of the investment advisory business is driven by what advisers can profitably sell, and not necessarily what’s most lucrative or best for the client. When you’ve got your country’s central bank working hand-in-hand with your government to inflate your money supply by trillions of dollars in high-powered money (this year alone), holding physical gold and silver becomes a must.

There are many investment vehicles available for purchase that allow you to participate in the appreciation of the Comex gold price, but they also all involve some form of counter-party risk. The beauty of gold ownership? It’s a form of wealth that isn’t someone else’s liability. This is important, and lose when purchasing gold through an intermediary. Part of the reason most never bother to learn investing or money management is that it’s made artificially complicated by the profession of accounting, as well as the pseudoscience that is Economics. The average person wanting to learn about money is bombarded with terms they don’t understand and notions that make little sense; my favorite among them being that the Fed is there to protect the value of the US Dollar by making it gradually worth a bit less each year so that, as a nation, we may prosper. Such bizarre statements defy rational explanation because they just don’t make sense, which in turn confuses people who are ready to soon seek comfort in the blind belief there are experts out there who do understand this arcane esoterica, and they’re better off just placing their faith in them.

Of course, they would be mistaken. The foundation of the modern American financial system rests securely upon this ill-placed faith in experts being able to manage what we as individuals cannot begin to fathom, and soon don’t even want to try. Knowledgeable central bankers manage the currency so as to allow smart, capable CEOs to grow the bottom line while accountants and regulators ensure that everyone’s playing by the rules. Every era has a mythology that holds it firmly together; this view of our financial system seems to be ours. The trouble (for those in power, that is) seems to be that in recent times, these myths are being exposed for being just that: myths.

Central bankers under Greenspan and Bernanke have been revealed to really be one-trick-ponies when it comes to real financial crises: whatever ails the economy, inflation is the cure! Strangely enough, this includes those issues brought on by inflation itself, which soon creates a cyclical nightmare. Meanwhile, CEOs have shown themselves to be brilliant when it comes to padding their own bank accounts, but tragically incompetent and short-sighted when expected to increase long-term shareholder value. The accountants and regulators have also demonstrated precious little ability to protect us against these financial shenanigans — even in the most famous case of Bernie Madoff, where they were repeatedly tipped-off that something was rotten. Hardly encouraging.

Bullion ownership, on the other hand, is an excellent way for people to take charge of their own financial destinies, and, like anything, has its own set of risks. Primarily, theft, fire, and price fluctuations in the underlying asset. The simple truth is that all assets have some risk of loss and gold and silver bullion are no exception. However, unlike when a stock becomes worthless because the government fails to bail out a business run into the ground by poor management, the risk factors involved in bullion ownership are ones over which you have more control. And, if you’re really worried about theft or fire, you can always buy a safe and take out an insurance policy. If you aren’t, well, then you don’t have to. Having a level of control over your own financial destiny gives more power to the individual and can help to ameliorate feelings of anxiety that are often brought on by such powerlessness.

While I don’t recommend people use gold and silver bullion as their primary investment vehicle, I do feel it’s an excellent place to start. Conventional investment advice suggests keeping 6 months’ worth of your expenses in cash; and while I agree with keeping 6 months’ worth of living expenses close at hand, I don’t favor cash as an asset. With trillions of dollars in government debt to be monetized by our central bank, I just can’t recommend cash as an asset to anyone at this point. Instead, I prefer people take the cash equivalent of 6 to 9 months’ worth of living expenses and make what I call an “inflation survival kit” which should allow you to keep your assets liquid and close at hand with a minimum of counter-party risk.

Since liquidity is a primary goal of this kit, a sizable chunk of your investment portfolio (at least equivalent to 3 months’ living expenses) should be in a brokerage account with check-writing privileges. Being a goldbug at heart, I’d recommend you place your money in an exchange traded fund (ETF) like GLD, but that’s just me. Yes, we’re introducing some element of counter-party risk by using both a brokerage and an ETF, but the added liquidity of being able to immediately sell off a portion of your investment, not to mention write checks, is, in my opinion, well worth it. Besides, if we see a failure of either a brokerage account (which is government-insured, remember) or a gold ETF, then it would dramatically increase the value of what I recommend the rest of your survival kit be: physical gold and silver. I feel there’s no real replacement for having a portion of your wealth in it.

The Comex spot price of silver took quite a hit last year, but that of physical coins has held up just fine. So, the question becomes: how much to hold? Again, I recommend 6 months’ worth of living expenses to be kept in bullion coins, divided evenly: 3 in gold, 3 in silver. I do also think it’s a good idea to buy a safe to contain these coins, especially since they seem to be rather inexpensive these days. (For example, the Dean Safe Company is currently offering a fire safe for under $200 fire safe for under $200.) Once you’ve got 9 months’ worth of living expenses in highly liquid, protected assets like those I’ve recommended, I think you can then look at making longer term investments again.

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