Kirsch went on to say that such “money” would be principally for protection, not profit, and function as insurance against a catastrophe, i.e. as your bridge across any social, political and economic abyss. It would be your ace in the hole that you hoped you would never have to use.

Asset Allocation Recommendations Go As High as 50% for Physical Gold and Silver
H.C. Wainwright & Co. has gone one step further providing research that indicates that every portfolio should have a core holding of 15% gold to further offset the ravages of future inflation.

Harry Schultz is one of those who think a major catastrophe is looming on the horizon. He predicts that gold will reach a parabolic top of $6,000 per ounce. He currently recommends an asset allocation of: 30-40% government notes, bills and/or bonds; 10-15% commodities; 8-10% stocks and 40-50% precious metals made up of 5% juniors, 15% gold/silver producers and 20-30% physical bullion. Schultz believes holding such a large position in physical gold is a means to partly exit the banking system, to protect oneself against bank failures, to legally transport wealth, to off-set inflation, and for privacy.

Current Ownership of Gold is Negligible
Ronald-Peter Stoferle, an analyst with Erste Bank, recently published a 68 page report entitled “In GOLD we trust” in which he concluded that, given the fact that only 0.8% of all global financial assets are currently invested in gold, gold shares and ETFs, it is hardly indicative of gold being anywhere near bubble territory as of yet.

According to Stoferle, many studies show that gold, as part of a portfolio, reduces overall risk and improves portfolio performance. Importantly, as gold is not linked to any liability or promise as opposed to shares or bonds, he recommends it for diversification purposes.

Many Reasons to Own Gold
Ben Davies of London-based Hinde Capital, in a report entitled “Why Gold?” maintains that there are three principal reasons for investing in gold, namely, that 1) Gold is insurance, 2) Gold is undervalued and 3) Gold is in demand. He could perhaps now add that 4) Gold is in short supply. Davies is extremely bullish on the future price of gold believing that it will eventually go to a parabolic peak of from $10,000 to $15,000.

John Embry at Investor’s Digest of Canada recently wrote an article entitled: “Gold’s on the cusp of a parabolic move up” in which he made the following key points:
1. The IMF is now being forced to dump what gold it still has available into the market to restrain the rising price.
2. Western central banks have nowhere near the amount of gold in their vaults that they claim.
3. Due to physical shortages the western central banks can no longer supply the amount needed to balance supply and demand.
4. Mine production continues to stagnate at best.

Mr. Embry’s message is that it is imperative that investors ignore the volatility created by the anti-gold cartel (although corrections orchestrated by the Orwellians who mistakenly believe they can maintain control will remain an irritant) and use every opportunity that is created by them to purchase more physical gold.

Conclusion
We are now entering the final chapter in which the anti-gold cartel will throw the dice in a last ditch attempt to manage the price of gold. That’s all the more reason to hold the aces of a solid portfolio – physical gold and silver – and maybe some platinum too!

Editor’s Note:
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Recent research by H.C. Wainwright & Co. Economics Inc. suggests that there no “better measure of currency depreciation or a better predictor of inflation and its manifestations” than gold and, as such, “equity investors [can best] protect their portfolios by diverting part of their holdings to gold.”

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below reformatted and edited [..] excerpts from R. David Ranson’s original report* for the sake of clarity and brevity to ensure a fast and easy read. Ranson goes on to say:

Asset markets reflect inflation long before economic statistics reveal it
Over long periods of time [i.e. 50 years] the relationship of the price of gold with the cost of living is almost exactly one for one [but] the average time lag between price movements in gold and U.S. consumer-price changes is five or six years long. [As such, the] current practice that defines inflation de facto as the change in the official cost of living index can be highly misleading… For investors, inflation is ultimately nothing more or less than the depreciation of their currency and it is vital to recognize it as soon as it is reflected in asset market prices [and] for that purpose, the consumer price index is [of] no use at all.

U.S. equities underperform when the dollar depreciates relative to gold
Returns from investments such as commodities and real estate are positively correlated with gold-price movements most of the time, and so these are inflation hedges. Bonds and most stocks, however, are vulnerable to inflation because their returns tend to be negatively correlated with gold…To protect against inflation, therefore, a U.S. fixed-income or equity investor must hold inflation-hedge assets whose price movements anticipate changes in conventional measures of inflation many years before they become visible. Gold is such an asset. TIPS [Treasury Inflation Protected Securities in the U.S. and Real Return Bonds in Canada] are not.

For purposes of designing portfolios that are insured against inflation, gold again plays a double role.
1. The correlation of its price movements with those of any investment portfolio serves as an objective measure of the vulnerability of the portfolio to the dollar’s depreciation.
2. Gold is also an asset that can be included in a portfolio of stocks or bonds to reduce its vulnerability.

Sensitivity of an equity portfolio to the gold price
[First, let's look at the correlation factor.] The correlation between the total return from an equity portfolio and changes in the price of gold is not simultaneous [i.e. approx. 5-6 years says Wainwright].

[Now, let's review the vulnerability factor.] The average cumulative return from an investment in the S&P 500 index following a major rise in the price of gold as compared with that following a major decline [has] a time lag stretching out for three to five years [and, as such,]…the admixture of gold in an equities portfolio will reduce its volatility and protect it from inflation. The first and obvious channel is the contemporaneous inverse correlation between equity returns and the gold price change. As a result of this correlation, annual returns from the mix have a lower standard deviation than those of annual returns from either asset alone. The delayed inverse correlation is even stronger. The presence of gold protects the portfolio against damage to the portfolio that will not be felt in the form of stock market responses for several years into the future. This correlation, which is also inverse, reduces even further the volatility of the mix if we measure returns over multi-year time frames.

[To put the above in other words, gold] tends to produce particularly high returns following years in which its own price has already risen and credit spreads in the corporate bond market have widened [and] under symmetrically opposite conditions it produces very low returns. [Source: See 'Research Summary: Systemic asset allocation strategies from market signals of growth and inflation,' Tactical Aset Selector, Wainwright Economics, May 31,2010, especially Figure Three.]

Measuring the riskiness of a mix of equities and gold
Naturally, the inclusion of gold in any portfolio tends to reduce the standard deviation of returns from the portfolio…the annual return from gold has a substantially higher volatility than the annual return from stocks. [As their analyses revealed:]
1. The point of minimum volatility in a mix of the two is reached in a portfolio containing 31 percent gold and 69 percent S&P 500…[while]
2. the mix that maximizes the ratio of return to risk is slightly different: 32 percent gold, 68 percent stocks…

[It must be emphasized, however, that] we are chiefly concerned here with still another distinct definition of risk: the sensitivity of the portfolio to inflation [and such an analysis suggests a different gold-to-stock split on that basis]…We know [as mentioned previously,] that the damage to a stocks portfolio from a rise in the price of gold lasts about five years… [and have determined that:]

1. the sensitivity of portfolio returns to the cumulative change in the price of gold is almost exactly zero at a mix of 15 percent gold and 85 percent stocks [and that,] according to our calculations, such a portfolio is almost exactly immune to the damage that inflation (as expressed by the gold price) does to stocks.

Investment conclusion
Including gold bullion in an equities portfolio has the effect of lowering the volatility of portfolio return and raising the return-risk ratio, just as the inclusion of any other asset would. Gold, however, has a special risk-reducing property that other assets lack. It is not only a hedge against inflation, but a market leading indicator of inflation and, better still, a direct measure of the damage done by inflation to an equities portfolio. The negative impact on stock returns from a rise in the price of gold lasts for at least five years.

We calculate that a US equities portfolio in which 15 percent of the assets are diverted to gold bullion would be effectively immune from damage due to a rising gold price. That is equivalent, we believe, to immunity from inflation.

*http://bmgbullion.com/doc_bin/Gold%20immunizing%20equities%20-%20June%202010.pdf

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See larger image The Inflation Crisis and How to Resolve It (Hardcover) By (author) Henry Hazlitt List Price: $14.00 USD New From: $7.00 In Stock Used from: $6.87 In Stock

In further edited excerpts from the original article* John Reese (validea.com) goes on to say:

It may seem like jumping the gun, given that both Canada and the U.S. have been experiencing deflation in recent months but the threat is serious. For investors, that raises two key questions:

1. Does Inflation Mean Troubled Times for Stocks?
Many say high-inflation periods are indeed trouble for stocks. As inflation rises, governments will raise interest rates, the theory goes, and investors will flee stocks and head to Treasury bills.

The reality is much more complex. While history has shown that the stock-fleeing scenario can happen, it doesn’t always. In 1975, when U.S. inflation averaged 9.2 per cent, the S&P 500 surged about 30 per cent while 10-year U.S. Treasury bills averaged an 8-per-cent yield. In 1980, when inflation averaged 13.6 per cent – the highest annual reading of the past 60-plus years – the S&P gained almost 30 per cent, while 10-year T-bills yielded an average of 11.4 per cent throughout the year.

Over the longer term, some of history’s top strategists actually say that inflation is a big reason to buy stocks – not to avoid them. Foremost among them is Warren Buffett. His inflation research goes way back. In 1977 – just before the U.S. was about to enter into one of the worst inflationary climates in history – in a column for Fortune magazine he said, “stocks are probably still the best of all the poor alternatives in an era of inflation – at least they are if you buy in at appropriate prices.”

Why keep your long-term focus on stocks if inflation is coming? For starters, they have an overall advantage over fixed-income investments because of the equity risk premium – the notion that stocks return more than fixed income investments over the long haul because investors demand greater returns for taking on greater short-term volatility.

Just as importantly, when you factor in inflation, that advantage becomes even greater. When inflation hits, stocks can draw on increasing earnings streams as companies raise prices and increase profits to keep up with inflation. Most bonds and bills can’t do that and when inflation is factored in, the equity risk premium becomes crucial. Fixed-income investments, because their nominal yields are usually lower than nominal stock returns to begin with, have a much bigger percentage of returns eaten away by inflation.

In his book “Contrarian Investment Strategies” , David Dreman noted that from 1946 to 1996, compound returns after inflation for stocks were better than those of bonds 84 per cent of the time if your holding period was five years. Stocks also outperformed T-bills in 82 per cent of those five-year periods. Using 10-year periods, stocks beat bonds 94 per cent of the time and T-bills 86 per cent of the time. When you look at 20-year holding periods, stocks beat both bonds and T-bills 100 per cent of the time.

2. How Can You Position Your Portfolio to Deal With an Inflationary Climate?
If you knew, if and when, major inflation was going to set in and how long it would last, you might – and, I stress, might –be able to make some short-term profits by jumping back and forth between stocks and fixed-income investments but no one knows those factors in advance, which is why I’m sticking with stocks.

My Buffett-based approach targets stocks that have boosted earnings per share in at least nine of the past 10 years, have 10-year average returns on equity of at least 15 per cent and have positive free cash flows, all of which align with Mr. Buffett’s inflation-protection advice. My model is quite stringent, and currently gives 100 per cent scores to less than a dozen stocks in the market.

*http://m.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/ask-buffett-if-inflation-comes-stocks-are-best-bet/article1279016/?service=mobile

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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See larger image Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies (Hardcover) By (author) Jeremy Siegel List Price: $34.95 USD New From: $14.99 In Stock Used from: $15.90 In Stock

In further edited excerpts from the original article* Jason Zweig (www.morningstar.com) goes on to say:

There’s been an enormous amount of performance-chasing. Part of it is that humans are a hopeful species. We want to believe that the worst is behind us and that happy days are here again and because of that, people are already doing some very foolish things that they will come to regret later. Instead, they should stop and reflect on what has recently transpired and take action to better invest in these difficult times.

Following are a few suggestions on how to do just that:

1. Practice Staying Calm and Making Sound Decisions
To prepare for times of financial turmoil it is important to deliberately create an environment that makes rational decision-making difficult and then develop a series of portfolio decisions. You need to consider those decisions while the lights are flashing and the bells are clanging and CNBC is full of red arrows pointing downward and all the stock charts are going through the floor. You have to come up with a way of calmly arriving at a decision that makes sense. I think one of the ways you need to do that is that you need to imagine the future. You need to frame the decision as “Let’s make sure we do something today that we won’t regret six months, a year, five years from now.”

This kind of exercise is that it’s practice for the real world because as we saw last fall, and this past spring, that’s what it was like. People made decisions every day under those circumstances, and a lot of those decisions were bad, because people had never been in circumstances like that before.

I would close this observation with a reminder to everybody, which is now part of American folklore. Think of Sully, the famous captain of the US Air flight bringing his plane down into the Hudson River and having every single passenger survive. What enabled him to do that? Not his superior knowledge, not knowing more about his airplane, or the Hudson River, than anybody else. What enabled him to do it was practice.

If you’ve never really practiced what it’s like to make a decision in a global financial panic, you can make panicky decisions in a global financial panic, and you’ll crash your plane and you’ll kill everybody but if you’ve practiced how to stay calm and make a good decision, you stand a better chance of being able to do it. Repetition is the key to calmness.

2. Understand Diversification
A lot of investors have been saying of late that strategic asset allocation is dead and that tactical asset allocation is the way to go. I don’t think that is the case. I think people have confused a whole bunch of factors. One, people really misunderstand what diversification means. People think diversification means that if you combine uncorrelated assets you end up with a portfolio that won’t go down in value but that’s not what diversification means.

First of all, you’re not diversified unless you own something that hurts to own and the second thing is that at a time when it seems the whole world is going to hell in a hand basket, everything goes down. That’s what happened this time, that’s what happened in 1973-74, and it happened in 1929 and it happened in 1907. It happened numerous times in the 19th century and as far back as you care to go.

So diversification is really powerful, but it’s not magic. It’s a very good thing but it doesn’t work miracles. So that’s a problem I have with this argument. When people say diversification failed, they’re defining failure in a very strange way. They seem to be saying if, when most assets went down, something didn’t go up, then diversification didn’t work but that’s not what it ever meant. All it ever meant is that if you have assets that are statistically not highly correlated, putting them together will give you a better trade-off of risk and return.

If you look at what happened in the financial crisis, that’s what you got. People who owned some stocks and some bonds did better than people who owned all stocks. People who had some other assets in there did better still. The fact that the U.S. market went down 37% and foreign stocks and emerging markets stocks went down also doesn’t mean that diversification didn’t work, because they didn’t all go down exactly 37%.

Diversification did work for exactly that reason–you got different rates of return. People want diversification to produce a positive return out of some asset when their favourite asset is down but there are no guarantees. Diversification isn’t a form of insurance; it’s just a form of risk control.

The problem with this whole “asset allocation is dead” argument is that, while asset allocation hasn’t worked in certain years nothing else has either. That’s the problem I have with this whole debate; it’s easy to say what hasn’t worked well lately, but it doesn’t mean that all the things that never worked have suddenly started to work.

3. Consider Indexing
There are many many reasons why I favour indexing and believe it makes sense for most investors:

a) Human life is finite, so if I find a fund manager I love, I have to ask myself if he or she is still going to be around in 30 years when I retire or 100 years from now when my kids or grandkids inherit my shares in this fund, and what confidence do I have that he’s as good at picking successors as he is at picking stocks? That would be the first.

b) In a taxable account, it’s hard to argue for active management at all. If an active manager is doing his or her job and being active, then capital gains are going to be generated. In fact, the better a person is at doing his or her job, the larger those gains are going to be over time.

c) Indexes minimize some of the worst aspects of human error. In the case of short-term bond funds in particular, a lot of the managers just yielded to the temptation of chasing yield and putting in a lot of mortgage garbage because they could goose the yield. If you bought a short-term bond index fund, you just didn’t get that sort of thing. There are short-term bond ETFs, and none of them blew up because the computers–the machines–didn’t have much interest in mortgage derivatives. The humans running active funds, on the other hand, were hell-bent on earning a bonus based on how much yield they could produce.

d) The overriding reason is that, in my opinion, it’s extraordinarily difficult to pick individual securities that will outperform a market benchmark and even harder to select managers who will outperform a category average.

e) It’s extraordinarily difficult to pick a great manager who will still be great and the most basic reason for it of all is that luck is really the driving force, to the extent that most investors don’t appreciate and can’t appreciate because it makes people uncomfortable, but it happens to be true.

I’m not saying that active management is bad or futile, or that I think everyone who invests in an actively managed fund is an idiot. What I am saying is that it’s extraordinarily hard to get it right, and maybe the best reason of all to do it is if you can find a manager whose view of the world is really similar to your own. Because then you’re a lot more likely to go along for the ride.

Index funds don’t have personalities. A great active manager can be a magnet for loyalty, and that’s really important and I would never denigrate that. In fact, most investors would probably be better off putting their money into a mediocre fund they could be loyal to than a whole series of great funds that they go barging in and out of at the worst possible times.

*http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?id=313708

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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See larger image Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich (Paperback) By (author) Jason Zweig List Price: $15.00 USD New From: $2.47 In Stock Used from: $2.44 In Stock

1. Ultra

It really means: Leveraged to the hilt.

2. Global growth

It really means: We’ll chase stocks for you in whichever country is most overheated right now.

3. Clean/green

It really means: A basket of government-subsidized experiments and some GE shares.

4. Deep value

It really means: We will invest in sewing machine and typewriter companies.

5. Socially responsible

It really means: No such thing – all corporations are evil.

6. Diversified

It really means: We will basically buy the index and go golfing.

7. Enhanced

It really means: Uses exotic derivatives you’ve never heard of.

8. Aggressive growth

It really means: Collection of Chinese gaming stocks and New Jersey biotech startups.

9. Moderate allocation

It really means: Gutless fund manager.

10. Opportunities

It really means: We will throw darts.

11. Core

It really means: No need to spread it out: send us everything you have.

*http://www.thereformedbroker.com/2009/12/14/decoding-fund-brochures/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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See larger image Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition (Hardcover) By (author) John C. Bogle List Price: $29.95 USD New From: $15.49 In Stock Used from: $14.95 In Stock

Below are further edited excerpts from Ian Campbell’s (www.stockresearchportal.com) original article*:

1. Criteria #1, #2, #3 to infinity are openness, honesty, integrity, etc.

2. Someone who is smart, with a commitment to detail and, preferably, a Chartered Accountant (or if I was in the U.S. a CPA) with a strong theoretical accounting background and some real business operating experience.

3. Someone in good health who has a real chance of ‘being on the right side of the grass’ for some time.

4. Someone who is well traveled – in particular someone who has traveled (preferably on business) to China in particular. The ideal candidate would also have traveled in India, Brazil, Europe, and perhaps Russia.

5. Someone who is a ‘clients first’ person, and who has a great sense of responsibility to their clients.

6. Someone who has a clear understanding of each client’s risk/reward tolerance and hence appropriate ‘asset allocation’ (broken down into measurable steps), and is not locked into the ‘investment business mantra’ of diversification where market conditions and prospects ought to dictate ‘investment focus’.

7. Someone who actually does meaningful research on the companies they invest client’s money in, including visiting with company presidents, company facilities, etc.

8. Someone who purposefully involves their clients in the investment ‘decision making’ process.

9. Someone who is mature with at least 10 – 20 years investment management experience and good judgment.

10. Someone who is a good listener open to communication with his/her clients; who has strongly held opinions but adjusts those opinions continuously with both conversational and documentary exposure; who has sound logic to back up their opinions and is a good communicator of their opinions.

11. Someone who has strong references from an existing client base.

12. Someone who is skeptical of the manner in which the investment business generally operates, and in particular a disbeliever in the ‘efficient market theory’.

13. Someone with a proven track record, particularly in the difficult market conditions of all or some of the early 80′s, the early 90′s, and the period immediately after the ‘dot.com meltdown’.

14. Someone who is a student of macro-economics with no predetermined view on how things are going to unfold going forward – i.e. a good listener and flexible thinker who does not attorn to any given mantra such as “the U.S. is resilient and so always will be the world’s #1 economy”. While that view might prove to be right, I would only be interested in dealing with someone who constantly tested such a theory and was prepared to adapt away from it if logic so dictated.

15. Someone who provides a monthly reporting system that suits the way the client wants to review their portfolio and related investment return results.

Recognizing it is unlikely that any one investment advisor would satisfy each of the criteria in this wish list, you might want to go beyond the individual investment advisor and look to see if the people in the investment advisor’s firm collectively satisfy all these criteria.

*www.stockresearchportal.com

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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See larger image The Trust Equation (Hardcover) By (author) Steven Drozdeck, Lyn Fisher List Price: $34.95 USD New From: $27.20 In Stock Used from: $0.26 In Stock