Saturday, October 11, 2008

Cash and gold - 1 year returns

Below stolen from the Wall Street journal, via The Big Picture blog.

Gold has outperformed cash over the past year and both have trounced stocks and real estate. This trend will be intact next year as well, but I suspect gold will pull even further ahead of cash. Gold cannot go bankrupt and has been real money for 5000 years, while hundreds of man-made currencies have come and gone. The U.S. dollar will be just a memory at some point, but gold will still have intrinsic value for years after this occurs. Gold can be passed on to children and grandchildren and will always retain its value, while companies come and go (ask ex-Bear Stearns and Enron employees). Gold is the protector of the common man.

If you do not have any gold as part of your investment portfolio, you are ignoring the wisdom of centuries of accumulated knowledge. Most who know what they are talking about recommend 5-15% of your net worth/investments be in gold/precious metals. Though silver has more explosive and volatile potential than gold and can provide outsized returns, it doesn't do well during deflation and is not for the faint of heart (gold is volatile enough).

The Dow to gold ratio closed around 10 for the week and we will get to a 1:1 ratio before this secular bear market finishes. I don't know if that will be at Dow 1,000 or Dow 10,000, but either way, gold will kick the Dow's (and S&P 500's and Nasdaq's) butt for at LEAST 3 more years. Once the ratio returns to 1:1, you can sell your gold and buy stocks "for the long run" and you'll be able to buy a whole lot more stocks than everyone else around you.

I recommend PHYSICAL gold coins and/or bars kept in a safe place where there is no risk of default and do not trust GLD (an ETF that tracks the price of gold) to hold up when the poop really hits the fan. I like Krugerrand 1 oz. gold coins (minted by the South African government) for their recognizability, liquidity and small unit size that allows incremental purchases when funds become available.

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