Gold As Insurance

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(Following is the third installment in a series of articles by Chuck Cohen, a seasoned and highly successful investment consultant who lives in New York City. We will be featuring Chuck’s thoughts regularly at Rick’s Picks in order to expand our coverage, in particular, of junior mining shares, a core area of his expertise. In the coming weeks, Chuck will take up the topics of gold as a core investment, and gold as a speculative vehicle. Today he tackles gold’s usefulness as insurance against financial calamity“. RA)

 No One-Size-Fits-All Strategy

In spite of the sharp drop in shares over the past nine years or so, most investors remain firmly committed to common stocks. Mutual fund statistics show that very few holders have pulled their money out of their funds. And the recent “Big Money Poll” in Barron’s shows that the big guys are even surer than  they were even at the very top.  It is clear that investors have been stirred, but far from shaken, by the decade’s decline and by our faltering economy.

And gold? To many investors and even professionals, buying gold is like traveling to Myanmar or northern Pakistan: Few dare to venture there. The truth is, that to our Ivy League and Keynesian educated financial community, gold is viewed as a superstitious relic.

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I don’t seek to persuade you to sell everything you own, put it all into gold and gold shares, and then buy guns and ammo before retreating to a barricaded cabin in the Ozarks. Instead, I hope to try to make you understand that gold investments come in different sizes and shapes, with varying degrees of risk and reward. It’s not an all or nothing choice. The better you understand gold, its attributes and how it fits into your financial planning, the more you should feel more comfortable with it. You might then want to take bolder steps that can protect you more fully against the enormous unknowns facing us. 

I believe that in spite of a huge move since 2001, gold is still very early in a generational bull market. Bob Hoye, one of the most astute market analyst around, believes it will last for 15-20 years. That gives us 7 to 12 more years to ride it. Remember, the recent bull market in stocks lasted almost 18 years. The gold fundamentals continue to get more and more compelling, and technically gold is rapidly approaching an amazing liftoff stage.

But back to the three approaches towards gold.  I have put them into an ascending order of risk and reward:  1) gold as insurance; 2) gold as a core investment, and 3) gold as a speculative vehicle. Today we will discuss the first approach.  

Protecting Against the Unknown

What is the purpose of insurance? Of course, it is to protect you against the unknown and the unexpected. You can’t risk not having it in your life, even if you never have to use it. One disastrous episode, even if you had nothing to do with it, could totally change your life.

If you own a house, you undoubtedly carry property, theft and fire insurance. In spite of the onerous costs, you must have life and health insurance. You can’t legally drive a car without adequate property and liability coverage. But strangely, when in comes to finances, most people handle things differently. They tend to be careless without giving any serious thought as to how or where they should put their money. Remember the dot-com era? I don’t know a single person who doesn’t have his tale of woe from it. And to prove that this wasn’t an accident, many then threw the leftovers, plus what the banks and mortgage companies shoveled their way, into the great American housing disaster.

But when it comes to gold, after nearly nine consecutive years of higher prices, a great majority of Americans don’t have one cent in a gold-related investment. And even after watching the government inject trillions of governmental monopoly money, most Americans continue to shun it. Incomprehensibly, most Americans still put their trust in stocks and real estate. And the financial media think that “gold bugs” are weird.

Getting Started

Here is what I am getting at. If you are one of those who feel as though gold is too mysterious or too risky to get involved with, then I want to present the first step to getting comfortable with it.  Approach gold just as you would with the different types of insurance you carry. You can get more deeply involved later. Your mindset has to be that if things don’t get much worse, gold may not do much. Although, considering its performance over the past nine years, even through some good times and rising and falling consumer prices, it should continue to do well.

But, if things hit the proverbial fan, gold, like a comprehensive car or property policy, will bail you out, or at least greatly help you in your time of need.  Don’t you think that those who really got rocked after 2000 wish they had bought some gold insurance instead of gambling it in those supposedly safe places?

Without going into great detail, there are several ways to buy the insurance. I don’t want to pose as an expert in these areas, but they are simple to buy: coins or some other small amounts in bars, or through the various ETFs or gold funds. Personally, I would start with coins purchased through one of the reputable online dealers, or if you have a coin store nearby that others can recommend, that would be okay. Given my expectations for the future, I am not comfortable with owning gold through a paper deed, especially if there is no formal audit procedure to verify your share. This may ultimately prove to be an important concern. We can get delve into this at another time, or you can email me and I’ll get you a good source of information.

Next week: Gold as Insurance, Part 2. (If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • Richard July 18, 2009, 4:46 pm

    Re: Ivy League Elite & Wall Street
    I do not think the problem is the educational institutions so much as the type of personality that is tolerated in Wall Street big leagues. Basically, I believe that if you are capable of independent thought and action, you will be viewed as a dangerous outsider. The need for groupthink, aye-aye-Captain footsoldiers is high when enormous profits are at stake. These firms have highly profitable products for sale, regardless of their ultimate worth and are not about to let free thinking or moral individuals get in the way of their bonus checks.

    The same mentality pervades much of high echelon society/educational/economic/media think-tanks, etc. There is an unspoken subtext which you are expected to implicitly understand and accept before you are either accepted or allowed to progress within these controlled spheres of influence. This is a symptom of systemic collapse as the forces of control have more to gain by prolonging a system which is ultimately ruinous to society at large, but profitable to the few.
    The Hollow-men are in charge, headpiece filled with straw, like rats feet over broken glass, in our dry cellar,” to quote some T.S. Eliot

  • Jim P July 18, 2009, 2:19 am

    Hi,
    I love the idea of Gold for insurance however after buying and holding it in one form or another since this bull started around 2000/1 I have decided to forget the bullion/coins/bars, Etf’s, Perth mint,etc. and just buy a core position 50% and a trading position 50% of highly liquid High Quality Gold stocks as my insurance policy. I gave up trying to find the right way/place to store bullion and have found I can do much better regarding profits just in stocks.
    I use a portfolio of 6 Premium hand chosen by me Stocks.
    One quick click of the mouse and I am in or out of a cash position
    The profits in stocks so far have outstriped the equivilant of holding the same $ investments in bullion as I have tracked it ever since I embarked on this strategy. I can easily trade stocks but cannot easily trade bullion.
    If we should be so fortunate as to get a quick dip in the Gold price right in here somewhere I will quickly and easily back up the TRUCK …….
    What’s Wrong ” if anything” With That Strategy ???

    • ccohen July 20, 2009, 12:29 am

      This is Chuck. I don’t have any real problem with your strategy. It makes a lot of sense. The advantage of buying coins on weakness is that you will tend to just hold them and not trade them and they serve the same purpose as having cash in the bank, but given what is coming up, even safer. But stick to some kind of trading discipline. One day, though, the pattern of the past 6 years will be broken and all gold shares will break out. At least, that is my observation.

  • richard July 13, 2009, 3:36 pm

    ETF ‘s are not insurance! Be warned! Their sponsors are the same international banks who are shorting gold, so do not suppose that you have insurance in this short term only trading vehicle which clearly tells you in their prospectus that you have no rights to claim any physical gold and that theft of gold in the fund is a risk that you, not they assume.
    Now you don`t suppose that these banksters would steal do you?
    Would it not be handy for the guv and the banks to have a lot of gold in one place should there be an official devaluation of the dollar? Do you not think that you would be closed out at the price of the day before devaluation? Did you know that etf gold can be used to settle Comex gold contracts with the Comex ?
    ETF s are a 2 week trading vehicle at best, and open the door for multiple receopts to be issued against your gold by parties that have paid fines or pled guilty too many times to breaking the rules.

  • cosmo July 13, 2009, 12:08 pm

    I am in Northern Pakistan as I write. I can tell you that they are the kindest people in the world. All the travelers I meet say the same thing. You should come and see for yourself before you start talking about someplace you’ve never been…

    I bought gold 5 years ago. All my cash is in coins. It has been paying for my travels for 5 years and counting. I tried the trading game and it cost me plenty. Now I sleep like a baby every night knowing that my cash will NEVER go to zero. Y’all enjoy the fall from grace of the US, I’ll be trekking in the Himalyas. Peace

    • ccohen July 14, 2009, 8:48 pm

      Cosmo: I didn’t intend that comment to be directed against the Pakistani people of the north but rather as to reflect the perception that it is a dangerous place to visit. Perhaps, I should have said just the Taliban areas. Chuck

  • Jeff Kahn July 13, 2009, 12:41 am

    Hi,

    I appreciate the gold series. However, I can’t say how tired I am of hearing gratuitous comments about the IVY educated elitist blah blah blah. The problem in this country is not an Ivy League education but the horrible state of most of the rest of the educational system. In fact, much of the current classes at Harvard and Yale are now filled with Chinese, Korean and Indian students who score higher than US students, and are more than happy to take those spots eschewed by our Ivy hating friends. That’s a shame for America.

    • ccohen July 14, 2009, 8:46 pm

      Jeff:

      I apologize for the delay. My comment was not a direct impugning of all of the Ivy schools but specifically the brotherhood of Yale and Harvard that has been responsible for much of the economic policies that have ruined our nation. There is a common acceptance of much of the Keynesian stuff at these schools that enters our policies, and obviously they have been disastrous regardless of how highly these schools are thought of. If you think this is an exaggeration, then look at the resumes of almost all of the policy makers including the past few presidents. Many Yale and Harvard degrees. Actually, I am a graduate of Pennsylvania, but that doesn’t mean much. I didn’t mean to offend you or anyone else by this. Chuck


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