Can You Afford Not to Own Gold?

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Do yourself a favor: Take a good, hard look at the financial world around you.

Three years after the Lehman Brothers disaster, Bank of America (NYS: BAC) shares hover 75% lower than where they stood on that fateful mid-September day. The Dow Jones Industrial Average (INDEX: ^DJI) has added 2.5%, while the S&P 500 (INDEX: ^GSPC) has yielded a corresponding 1.7% decline.

Meanwhile, the U.S. national debt has surged by 44% -- or $4.5 trillion -- and the Federal Reserve's balance sheet has expanded an astonishing 133% to $2.8 trillion. And despite the myriad fiscal and monetary responses, both the unemployment rate and housing market continue to disappoint. President Obama has hatched a $447 billion jobs plan, but the consensus expectation of it passing appears as zero-bound as the Fed funds rate. The Fed, for its part, will now twist its way into longer-dated Treasuries and agency mortgage-backed securities. This is broadly viewed as an impotent measure considering the Federal Open Market Committee's own admission of "significant downside risks to the economic outlook."

Significant, indeed: Europe is coming apart at the seams! In a last-ditch effort to stem the union's dangerous debt contagion, Treasury Secretary Tim Geithner has championed a familiar plan to leverage the EU's financial stability facility up from $600 billion to a whopping $2.7 trillion! The latest strategy appears to include a plan to impose partial default upon Greece -- and prepare for the potential failures of Portugal and Ireland -- while also trying to prevent similar outcomes in Italy and Spain. Geithner warns: "The threat of cascading default, bank runs, and catastrophic risk must be taken off the tale, as otherwise it will undermine all other efforts, both within Europe and globally."

Europe's nuclear option
London financial columnist Ambrose Evans-Pritchard advocates taking Geithner's "nuclear option" a step further, suggesting:

The Geithner Plan must be accompanied by a monetary blitz, since the fiscal card is largely exhausted and Germany refuses to lower its savings rate to rebalance the EMU system. The only plausible option is for the ECB to let rip with unsterilized bond purchases on a mass scale, with a treaty change in the bank's mandate to target jobs and growth.

But many European leaders are strongly resisting the U.S. model of throwing ever-increasing piles of sovereign debt onto the pyre of an as-yet-uncontrolled global debt crisis. German finance minister Wolfgang Schauble called Geithner's plan "a stupid idea." Patrick Honohan, Ireland's central bank governor, added: "The details of this financial engineering have a familiar ring to those who remember the 'CDOs' and other instruments of structured disguise before the subprime debacle. The bill comes due."

Higher stakes and elusive returns
If there is one point of clarity amid this macroeconomic landscape, it is that reactive fiscal and monetary intervention has been (and will continue to be) used by sovereign states and their central banks to combat this global crisis. A political imperative exists, compelling them to action. Because it is hard to imagine that austerity measures can stem the tide of the broader debt crisis -- particularly given the results of previous interventions -- the opposite approach is selected by default. Some version of a printing press will remain the sole weapon within their arsenals. European leaders may be resistant to the proposed scale and structure of its bailout fund -- but just you watch, the untold billions will flow toward the continent's most toxic assets just as they have in the United States.

On a broader scale, I'm confident that more rounds of quantitative easing remain on the horizon. England's central bank is said to be warming to the idea, and given my rather sour view of domestic economic activity, I believe the Fed's operation twist will prove little more than a placeholder for an eventual QE3.

And so, for those who place their faith in the masterminds of aggressive intervention like Ben Bernanke, Tim Geithner, and their counterparts overseas, I have a few questions.

  • While you can effectively argue that years of reactive intervention have prolonged the status quo and forestalled a calamitous crash, can any well-informed and reasonable individual say with confidence that another stage of the global financial crisis -- one that could make Lehman Brothers look like a walk in the park -- is not still a viable threat?
  • Given that aggressive intervention in U.S. has failed to result in the economic recovery so repeatedly promised, why should investors believe that further intervention will yield a different result?
  • And finally, here is the $100 trillion question: What if the entire economic paradigm behind the questionable strategy of addressing a debt crisis with ever-increasing debt was a misguided approach from the start? What if the deleveraging mountain of toxic derivatives was always too giant a beast to slay and that increasing sovereign debt simply raises the stakes in a futile game?

If I have bummed you out, I'm sorry. But I believe folks have been spoon-fed sugar-coated visions of our financial condition for far too long and that a touch of harsh realism may be what's needed to encourage investors to take action to protect their hard-earned capital.

The ultimate safe haven
Simply stated, investors cannot afford to ignore precious metals as a means of safeguarding some of their investment capital from the potential ravages of a global financial catastrophe. Allocation, of course, is tailored to each investor according to their own perspectives and priorities. Far from advocating a sudden or wholesale shift, I have championed a methodical approach to gold, and I suggest that some allocation to gold and/or silver is prudent under the circumstances.

Competitive devaluation of currencies, after all, is a necessary offshoot of the prevailing interventionist strategy for combating the crisis. For a recent example, consider Switzerland's move to place an artificial ceiling over its currency vis-a-vis the Euro. Although a counterintuitive correction in gold prices followed, the move is unquestionably bullish for gold because it removes another relative safe haven from the grasp of nervous investors. From a broader perspective, note how the unprecedented measures undertaken in the U.S. after the Lehman bankruptcy have corresponded to the price of gold more than doubling from $774 on September 15, 2008. As the final scale of the Eurozone's response to its horrific debt crisis comes into view, I urge you to watch for the price of gold to corroborate the view that increasing sovereign debt exposures and waning confidence in paper currencies render gold the ultimate safe haven for our predicament.

So accept the timely gift this volatile market has presented to you, and consider forging some exposure to gold and/or silver over the coming days and weeks. At just over $1,600, gold is available at a 16% discount to its recent high above $1,920. Silver has declined 25% in just a matter of days. While this volatility may seem to some like complete randomness, it is instead the welcome arrival of a long-overdue correction. Central Fund of Canada (ASE: CEF) provides one-stop exposure to both gold and silver in roughly equal parts, and is highly regarded as a reliable, unencumbered proxy for bullion. If the recent pullback doesn't provide enough comfort to get you into some bullion exposure, gold and silver equities have been beaten down to levels that would be more appropriate for gold at $1,200 rather than gold at $1,600. Anywhere beneath $50 per share, Goldcorp (NYS: GG) remains a remarkable bargain and a tremendously cost-effective means of acquiring precious metals exposure. I recently highlighted Primero Mining (NYS: PPP) as the greatest gold stock in the world, and along with Silver Wheaton (NYS: SLW) , it's a core holding in my own equity portfolio.

How you go about gaining some exposure to precious metals is, I would argue, the lesser of two key concerns. Given our global economy, I believe achieving some exposure is the No. 1 priority.

At the time this article was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Central Fund of Canada, Goldcorp, Primero Mining, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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