The U.S., China, Japan and the Eurozone (countries using the euro), have a combined M1 money supply of $24 trillion. Those same countries have approximately 33,000 tons of official gold.
|Bombshell: Is Donald Trump Starting A New Social Security Program? |
Last month in Massachusetts, thousands of Americans cashed checks from one of the fastest growing “retirement programs” in the country… a little-known way to collect $597- $6,189 a month in investment income for life! This “program” has no income or age restrictions. Available in all 50 states. Click here to find out how to collect your first check. .
Historically, a successful gold standard requires 40% gold backing to maintain confidence. That was the experience of the United States from 1913 to 1965 when the 40% backing was removed.
Taking 40% of $24 trillion means that $9.6 trillion of gold is required.
Taking the available 33,000 tons of gold and dividing that into $9.6 trillion gives an implied gold price of just over $9,000 per ounce. Considering that global M1 money supply continues to grow faster than the quantity of official gold, this implied price will rise over time, so $10,000 per ounce seems like a reasonable estimate.
I believe this kind of monetary reset is just a matter of time. It could happen through a planned process such as a new Bretton Woods, or a chaotic process in response to lost confidence, heightened money velocity, and runaway inflation.
The portfolio recommendation is to put 10% of investable assets into physical gold as a diversifying asset allocation and as portfolio insurance. The following example demonstrates that insurance aspect.
For purposes of simplification, we’ll assume the overall portfolio contains 10% gold, 30% cash, and 60% equities. Obviously those percentages can vary and the equity portion can include private equity and other alternative investments.
Here’s how the 10% allocation to gold works to preserve wealth:
If gold declines 20%, unlikely in my view, the impact on your overall portfolio is a 2% decline (20% x 10%). That’s not highly damaging and will be made up as equity assets outperform.
Conversely, it gold goes to $10,000 per ounce, that’s a 650% gain from current levels, highly likely in my view. That price spike gives you a 65% gain on your overall portfolio (650% x 10%).
There is a conditional correlation between a state where gold goes up 650% and where stocks, bonds and other assets are declining. For this purpose, we’ll assume a scenario similar to the worst of the Great Depression from 1929 – 1932 where stocks fell 85%.
An 85% decline in stocks making up 60% of your portfolio produces an overall portfolio loss of just over 50%.
In this scenario, the gains on the gold (650% separately and 65% on your total portfolio) will more than preserve your wealth against an 85% decline in stocks comprising 60% of your portfolio (85% separately and 50% on your total portfolio). The 30% cash allocation holds constant.
So, if 60% of your portfolio drops 85% (about equal to the stock market drop in the Great Depression), and 10% of your portfolio goes up 650% (gold’s performance in a monetary reset) you lose 50% of your portfolio of stocks, but you make 65% on your portfolio on gold.
Your total wealth is preserved and even increased slightly. Total portfolio performance in this scenario is a gain of 15%. That’s the insurance aspect at work.
1. Gold has asymmetric performance characteristics. It has limited downside (20%) but substantial upside (650%).
2. The gains on gold are likely to come at a time when stocks are crashing. That’s an example of conditional correlation.
3. In the scenario where gold rises 650% and stocks fall 85%, the gain on gold (10% allocation) exceeds the loss on stocks (60% allocation), so the overall portfolio is enhanced.
Investors without an allocation to gold will be wiped out. Those with a 10% allocation will have survived the storm with their wealth intact. That’s why I recommend gold.
This article originally appeared on The Daily Reckoning.