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The Gold Investor's Biggest RiskBy
Saturday, November 12, 2011
While I'm convinced that our gold and silver investments will pay off, they don't come without risk.
What do you suppose is the biggest risk we face? Another 2008-style selloff? Gold stocks never breaking out of their funk? Maybe a depression that slams our standard of living?
Though those things are possible, I don't see that as your greatest threat. Master speculator Doug Casey summed it up well:
I know many reading this are prudent investors. You own gold and silver as solid protection against currency debasement, inflation, and faltering economies. You set aside cash for emergencies. You have strong exposure to gold stocks, both producers and juniors, positioned ahead of what is likely the next-favored asset class. You feel protected and poised to profit.
Yet, despite all this preparation, you remain exposed to one of the biggest risks.
Similar to holding a diversified portfolio at a bank without checking the institution's solvency, many investors keep their entire stash of precious metals inside one political system without considering the potential trap they've set for themselves. While storing some of your gold outside your home country is not a panacea, it does offer one important thing: another layer of protection.
Consider the exposure of the typical U.S. investor: 1) systemic risk, because both the bank and broker are U.S. domiciled, 2) currency risk, as virtually every transaction is made in U.S. dollars, 3) political risk, because they are left totally exposed to the whims of a single government, and 4) economic risk, by being vulnerable to the breakdown of a single economy.
Viewed in this context, the average U.S. investor has minimal diversification.
The remedy is to internationalize the storage of some of your precious metals. This act reduces four primary risks:
Confiscation: I don't know the likelihood of another gold confiscation. But I do know that things are working against us – particularly for U.S. citizens. With $14.7 trillion of debt and $115 trillion of unfunded liabilities, the U.S. government will likely pursue heavy-handed solutions. Under the 1933 FDR "gold confiscation" in the U.S. (the executive order was actually a forced delivery of citizens' gold in exchange for cash), foreign-held gold was exempted.
Capital Controls: Many prudent analysts, including my colleagues at Casey Research, believe some form of capital controls lie ahead, limiting or eliminating a citizen's ability to carry or send money abroad. If enacted, all your capital would be trapped inside the U.S. and at the mercy of whatever taxing and regulating schemes the government might concoct. Although you might be able to leave the country, your assets could not travel with you.
Administrative Action: There are plenty of horror stories of asset seizure by a government agency without any notice or due process, possibly leaving the victim without the means to mount a legal defense. Having some gold or silver stored elsewhere provides what could be your only available source of funds in such a scenario.
Lack of Personal Control: Having gold and silver stored elsewhere adds to your options. You will have a source of funds available for business, entrepreneurial pursuits, investment, or pleasure.
Notice above I said these risks can be reduced, not eliminated. There is no perfect solution. U.S. persons could, for example, be compelled to pay a "wealth tax" on assets held worldwide, or even repatriate them in a worst-case scenario. But absent a crystal ball, the political diversity of asset location is an essential strategy against an uncertain future.
Foreign-held assets also require greater awareness and planning:
The bottom line, though, is that foreign-held precious metals can mitigate risk and give you more options. And as your metal holdings grow, diversification becomes more crucial.
Given our current rapacious climate, it's likely that simply buying gold won't be enough. I strongly suggest every investor diversify one's bullion storage outside their current political regime. The option may not be available someday, leaving you vulnerable without a secondary source of bullion.
I advise taking advantage of the opportunity before it is gone.
Good investing,
Jeff Clark, Casey Research
Further Reading:
"We're living in a time where things you don't believe could happen are starting to happen every day," Sovereign Man's Simon Black tells us. "That's why it's more important than ever to consider 'internationalizing' yourself immediately."
Find more ideas on why it's not enough to own gold and silver here...
Market NotesRICK PERRY'S SPECTACULAR BLOWUP This week's chart is likely the most unusual one we've featured in our Saturday edition.
It's not a stock, bond, or commodity chart. It doesn't display details on economic growth or anything like that. It displays what happened after one of the most embarrassing political debate slip-ups in recent history.
This week, a high-profile Republican nominee, Texas Governor Rick Perry, came off as "less than intelligent" when he forgot one of the major components of his government-reform plan. It will go down as one of the great presidential blowups in history... one his campaign will not be able to recover from.
The chart below displays the odds of Perry winning the nomination, as users of popular betting website "Intrade" have set them. Perry was once a favorite to win the nomination. But gaffes over the past few months have sent his chances plummeting. And this week's horrible performance caused a "flash crash" in his odds. They were cut by more than half. It's a bad bear market in Rick Perry!
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Stat of the week
15%
Increase in the price of crude oil in the past month.
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