Retirement Planning And Gold

retirement-planningThe question of how much gold or silver one should hold is a common one. The answer is usually expressed in terms of portfolio percentages, as in 10 – 20 percent of one’s investments. Such an answer is without basis. Why is 15%, for example, any better than 100% or 0%?

The question and the answer reflect the uncertainty of the period in which it is asked. In prior decades, people assumed (mistakenly) that the dollar was an honest and stable currency. It wasn’t. Since the formation of the Federal Reserve in 1913, the dollar has lost 97% of its purchasing power. Generally this loss was persistent and gradual with the exception of a few instances.

Today, people increasingly understand thss-7853536-potOfGolde risks in holding dollars and dollar-denominated assets. Central banks around the world are engaged in outright counterfeiting (printing of new money) at rates never before seen or imagined. While the masses may not understand the causes and solutions to the economic malaise, they are beginning to understand that printing more money has not solved any problems (and has created new ones). Printing more will only cheapen existing money even further. As the possibility of a currency collapse increases, people seek ways to protect themselves.

As money ceases to perform its role as a store of value, other assets are sought. The popularity and value of these other assets is inversely related to the level of confidence in fiat currency. As confidence sinks, the value of alternative stores of value increase. These considerations explain the revival of interest in gold, silver and other “hard” assets, but they do not provide an answer to how much of one’s assets should be committed to inflation protection.

The Standard 10 – 20% Non-Answer

This answer is a safe one for someone to express, but it is correct for you only by coincidence. It is no better than rules of thumb used by insurance salesmen to determine how much life insurance you should have. This analogy, while imperfect, does convey the notion that gold is held for insurance purposes. It is a hedge against the decline of the dollar.

Wealth and savings represent deferred consumption. For most of us, wealth represents a nest egg which will be turned into consumption in later years when income stops or is insufficient to support our lifestyle. People establish retirement plans to prepare for this time.

Retirement plans are based on a set of assumptions. These assumptions typically deal with time to retirement, current savings, planned additional savings and the returns expected from these savings. The calculations are simple, although the ability to achieve the necessary levels is not.

Here is the fallacy in most retirement planning programs. Implicit in most is the assumption of an honest dollar, i.e., a dollar that will reasonably retain its purchasing power. Many retirees discover too late the fallacy in this assumption. They meet their objectives, retire and then learn that the depreciating value of the currency is cheating them from the retirement they earned and expected. Their sacrifice and savings to meet all their goals still falls short of the retirement they expected.

What if your savings is adequate enough to sustain you through the latter periods of your life only if the purchasing power of the dollar remains where it is today? Or, if it does not depreciate at a rate faster than you assumed it would? This is the problem that everyone confronts when they deal with dishonest money. You never know whether you have enough to retire or even whether you will be able to retire. You determinations based on today’s dollar, but you have no idea what tomorrow’s dollar will be worth. Without this knowledge, the concept of planning loses meaning.

Financial advisers suggest 10 – 20% as a means of protection against the ravages of inflation. These percentages acknowledge the risks of inflation, although are in no way tied to your situation or alternative scenarios for inflation. They are simple rules of thumb, the equivalent of a financial adviser acknowledging inflation but little more.

Obviously, this range cannot be the same for the marginally secure and the incredibly wealthy. This rule of thumb is not an answer as much as it is a cop-out. It is the financial planner’s CYA plug, acknowledging that inflation will be a factor but unable to provide a meaningful estimate of what it will be.

If you believe that extremely high inflation is coming, perhaps you should have most of your assets in precious metals. If you believe that inflation is not likely, then perhaps 10% or some smaller percentage is appropriate. In the event of either of these outcomes, you are going to be wrong with the 10 – 20% holding. If high inflation does not occur, then presumably you have incurred an opportunity cost equal to the amount that could have been earned in more traditional assets. (Note that for the last 12 years there has been an opportunity profit of holding gold rather than traditional assets. Gold has risen from about 250 to close to 1,800 dollars while home values have decreased and the stock market has been level.

In the event that high inflation does occur, 10 – 20% of your portfolio will be protected in terms of its purchasing power while the remainder presumably loses purchasing power. The only way that 10 – 20% can be justified is as a guess-hedge against not knowing what is coming.

There is no way to take away the uncertainty associated with the future, but there is a different way to look at how much gold or silver might be appropriate for protection. Jeff Clark deals with this topic in a recent interview with Chris Martenson. He suggested that gold by weight rather than gold by dollar amount is the appropriate way to make your decision. His comments indicate the need for a rather large hoard:

You want to focus on how many ounces you own, not necessarily looking at whether the price is $5 higher today than it was yesterday. How many ounces do you own? That is really the question you want to ask yourself, so you can focus on how much you are really going to need, and the amount really comes down to this.

For me, I am probably going to use some of this gold if we get high inflation. How are you going to protect your standard of living if we get some kind of runaway inflation? And let’s say it’s not runaway hyperinflation; let’s just say it’s high inflation, 10%, 15%. Remember it was 14% in 1980, so the odds of us getting high inflation are realistic. So if I am going to use that gold to cover my standard of living, you are going to need about two thirds of an ounce of gold for every thousand dollars of monthly expenses. If you want to protect your standard of living and not have your house be ravaged by inflation, so to speak, so that is a good guideline to follow.

So if inflation lasts a couple years, well, you are going to need 15 ounces of gold for every thousand dollars of monthly expenses. That is a good guideline to think about. And if your expenses are more per month, you are going to need more gold than that. If inflation lasts longer than two years, you are going to need more than that, but you can actually use the sales of gold and silver to protect your standard of living. You sell some gold and silver, you are going to get U.S. dollars or Canadian dollars with it and you can use the increase in the gold and silver price to offset the increase in the goods and services you are buying.

So I think that is the way to view it, to look at how you are going to use it. And so the focus again comes back to how many ounces do you own? So if you do not have any, you need to obviously start buying.

Perhaps it investment advisers do not deal in this fashion with their clients in order not to discourage them. Better to save for retirement than to throw up your hands and say it is hopeless.

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