The Golden Game

Those serious precious metals investors will know that this isn’t a game – at least not in the long term.  As long as politicians and central banks keep printing money in their attempts to “solve” their economic problems, fiat currencies will continue to lose value and force prices for precious metals and other commodities upward.

However, the recent turn of events in Europe shows that the short term, erratic price movements can turn the most fearless investors into trembling game players, trading their long-term winners for short-term losers.  It’s worth a deeper look into this phenomenon, because the psychology in play here is one that will be predominant when the final crash eventually brings everything down.

If the crash comes via the sudden political transformation that abruptly halts the printing presses, thus forcing austerity by lack of currency supply, then everything, including precious metals, will crash (at least temporarily). In this case, cash will be temporarily enthroned – it will be hard to come by.  Prices will come down on everything and those that have cash will be able to sweep up some sweet deals.

This is what most investors were afraid of during the European crisis of September and October, 2011.  They were “keeping their powder dry” in case this scenario played out.

But eventually, the economy would need a strong, dependable currency again in order to sustain any growth. If the government simply started printing again, they’d only get more of the same problems. There would therefore need to be some kind of guarantee that would prevent the money supply from inflating at will – perhaps by backing the currency with precious metals.  In either case, holding precious metals for the long term is the best strategy.

But how much should an investor allocate his/her investment portfolio to precious metals? The chart to the right suggests that a 33% allocation each, in cash, stocks and physical metal, will best serve to enable good deals to be snatched up when the market drops and still rake in gains during the the long-term bull market.  Keep in mind that owning a precious metals ETF is not the same as owning physical metal – an ETF would be part of the stocks allocation.

Using this type of approach, the investor must continually adjust the allocations as needed when the market fluctuates. Note that this allocation chart is for investable funds only and should not include cash that is needed for living expenses or any non-discretionary items.