Tuesday, December 17, 2013

Gold and other insurance from getting fucked

Disclaimer: I’m not advising anyone to follow my opinions in this article. It’s your money. Do whatever you think is best for you. I also do not guarantee the accuracy of any of the information presented in this article.

I don’t exactly know when it will happen, but it’s likely the world will enter a deep recession somewhere down the road that will make the 2008-09 great financial crisis look like a coffee date at Starbucks. It could happen 5-years from now or maybe 20-years from now. I don’t fucking know when it’s coming, but it will come if the largest economies in the world continue fucking around with the money supply and pursuing idiotic socialist policies. Just to highlight how dire the situation is, I will briefly discuss the economic position of the U.S. and Japan. China and Europe are also in terrible economic shape, but I will skip talking about them as the main point of this article is to discuss how to protect your portfolio.

United States

According to this article in the Wall Street Journal: “The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceed $86.8 trillion, or 550% of GDP.” It’s impossible to tax or print (without experiencing hyperinflation) your way out of shit like this.

Japan

According to Trading Economics, Japan has a government debt-to-GDP ratio of 211.7% in 2012. With such a high debt load, Japan could go bankrupt if interest rates increased by a few percentage points. According to this article on Forbes, the interest expense on government debt would take up 80% of government revenue if interest rates rose to 2%.

Solutions

I’ve never invested in gold or silver in my life. But seeing how depressing things are, I think it may be prudent to allocate a small percentage of your portfolio to precious metals or investments related to precious metals (I personally plan to invest 5% of my portfolio in precious metals companies). That’s why I’m planning to invest in companies that acquire and manage gold royalties and/or silver streaming companies. These types of companies have high margins and unlike mining companies, they don’t have to keep incurring capital expenditures to maintain production. You can invest in silver and gold commodities as well. If you think that there’s a risk that your government might start confiscating assets, then you might consider investing in physical gold/silver instead of gold/silver futures, gold/silver investment accounts or other gold/silver related investments. Just make sure you have a safe place to store your precious metals. I personally do not plan to invest in physical gold as I think that the Malaysian government is stable and the risk of them confiscating assets is low in the foreseeable future. Investors shouldn’t look at their precious metals related investments as a way to make money, but rather as an insurance policy in case shit hits the fan.

I’m also keeping a significant percentage of my portfolio in cash so I can take advantage of any opportunities that may arise if an economic powerhouse enters a deep recession. If you think that your local currency is at risk of significant deterioration, then you might consider having some of your cash holdings in more stable currencies such as the Singapore Dollar and the Swiss Franc. I’m not recommending that you keep a significant percentage of your portfolio in cash, but that’s what I’m personally doing. I’m also dedicating a significant part of my portfolio to high quality dividend stocks so that I can keep building my cash hoard. I might even go into real estate if Malaysian property prices ever experiences a pull back.

I’m sure some of you are thinking: “Hey jackass, if you think the world is so fucked up, why are you still investing in stocks?” While I don’t know when the music will stop, I don’t think it’s going to happen anytime soon, at least not in the United States. Don’t get me wrong, the U.S. may enter a recession (I don’t know), but I don’t think it will experience a depression anytime soon. It’s China and Japan that people should worry about (I have minimal to no exposure to these 2 countries), I think those economies will collapse before the U.S. does. I’m also investing in high quality companies, and there should still be demand for their products and services when the dust settles. Stocks are also a much better hedge against inflation than cash as good companies can eventually raise prices, and I’m almost certain that inflation will accelerate as central banks will try to print their way out of this mess. Also, it could be a long time before the U.S. collapses. And while countries like Malaysia and Singapore might enter a recession if China or Japan has a crisis, over the long-term countries like Malaysia and Singapore should do ok. So, I can’t just stop investing and miss out on making money. As the old saying goes, make hay while the sun shines (even if the sun is getting a little dimmer everyday).


Whether or not the economic powerhouses of the world will experience an economic crisis is not certain. I sure as hell hope everything remains fine. If the world economy does collapse, my portfolio will still get screwed. But I hope that the precautions I take will allow my portfolio to at least afford to go out for dinner and wine before being involuntarily ravaged in bed by a global economic crisis. Thank you for reading. Take care and stay rational!    

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