I found this interesting article and wonder what others feel about this? http://economicedge.blogspot.com/2009/06/horror-bond-traders-are-white-with.html
The statement that deflation will be a medium term event and inflation a long term reality is a view also held by more than a few astute bond managers, including the best bond manager in the world. (Guess his name..he just posted his monthly letter a few days ago on this same topic on the website of the company that he runs.) To finance the stimulus package, the government faces selling huge amounts of treasuries for many years unless the economy can grow annually at an acceptable rate. This is because when we pay for imports with dollars, countries that we import from often convert the dollars they are paid with into Treasury bonds. If this growth does not occur and at the same time we do not have enough buyers for our Treasury bonds, then the U.S. Government becomes the buyer of last resort and has to buy these bonds and pay the interest on them. At a certain point, if this continues for a very long time, the government would default since it would not be able to pay the interest due on the outstanding bonds. Preceeding this, high inflation and perhaps some social unrest would be apparent as our economic situation started to unravel. The price of gold and other hard assets (including grains) would likely increase dramatically. In this situation however, even if you were one of the fortunate ones with enough hard assets to barter or pay, it would not be a pleasant country to live in.
The author predicted the Dow could test its March lows and recommended: "If the Dow industrials and transports break the lows, I would seriously consider moving 5% of your IRA and 401k money out and into physical gold on the next correction in gold. Looking back, you should have bought gold bullion in a pyramid formation instead of opening IRA and 401k accounts. It's too late to turn that clock back. It's a small number, but you may not need that much insurance than 5% given the magnitude of the dangers at hand." Well, I'm far from being a goldbug, but that recommendation of having 5% of your net worth in gold hardly seems earth-shattering, and in fact, seems prudent. I'm sure most if the gold bugs around here think the percentage should be much much higher.
There are a number of exceptional money managers including the recently retired Jean-Marie Eveillard of First Eagle Funds that recommended allocating 5-10% of a total portfolio to gold. The gold acts as "insurance" to counter unforeseen negative market movements. Just before he retired he raised the allocation of gold in the First Eagle Overseas Fund to 10%. He was also the manager of the First Eagle Gold Fund. He was quiet, humble and retired with a track record that would place him in a Hall of Fame for investing excellence if there were such a place. You can go to the First Eagle website and read about his ideas. It will make you a better investor. Personally, I have about 7% of my total portfolio in gold. Over the last 5 years, this percentage has fluctuated between 3%-7%. Disclosure: I own both of the above First Eagle Funds.
I suspect that most of the managers that proclaim and support the holding of gold, rather in the forum of in-hand bullion, exchange traded funds like GLD, or miner stock, also have PUT option protection close to the money, as most of the time, any of these vehicles come down faster than they go up. A fund manager's worse nightmare is a sudden decrease in value right at the quarter end. Options aren't for everyone, but if a person is holding significant gold for the short term ( less than 1 year or so) and intends to sell then at a certain profit, the protection of an option can let you sleep better at night. There are ways to invest in "baskets" of commodities, including gold, so that if a person thinks that corn, wheat, heating oil, crude oil, or aluminum might have a greater % increase in the future, a fund like DBC has all of these + gold. I hold Call options for January 2011 as I like the group. Also it has just crossed the 200 day moving average headed up. Investments mentioned are in my opinion only, consult your advisor. Jim
I think it's very prudent to hold precious metals in an investment program. I've had some CEF for many years in my tax deferred account, long before owning gold and silver was considered cool. Bonds are fine as long as they are high quality and short term. The idea that we will have deflation followed by inflation seems to be the consensus view. But I think an equally strong case could be made that we will have inflation first followed by a deflationary collapse. In fact, it seems like the prices of necessities are rising while the prices for luxuries are declining at the same time. In the end, inflation and deflation are basically the same thing (???!) so it doesn't really matter.
Central banks fear deflation more, since more businesses collapse due to falling prices resulting in job losses and reduced economic growth. The central banks have fewer tools for fighting deflation and almost no historical examples to help them navigate the deflationary wilderness. It's easier for Central banks to control an economy that's growing too fast by making access to money more expensive. It's true that an argument can be made for a deflationary collapse. Japan is the poster child for the woes of deflation and there are parallels between Japan and the U.S. with respect to what triggered the deflationary spiral in Japan; namely a real estate bubble and the resulting non-performing loans.
