In light of the issues raised by Prudent Investor's article about the $600 Trillion derivatives mess, and similar articles, I have been giving a lot of thought to what really is the ultimate hedge in a complete financial meltdown. I am not predicting one - simply addressing how one can hedge against it.
So far, gold has not been playing that role, as the price of gold has actually declined recently in line with general commodity deflation. In the end, gold may or may not play a part, but gold has virtually no intrinsic value. Scarcity alone is not a guarantee of value if nobody is interested in the product or commodity, and I can certainly envision a future where paper currencies are laughed at alongside gold.
In fact, almost every physical product one can think of besides food, drugs (both legal and illegal) and petroleum products only have derivative value, with little or no intrinsic value; even food is subject to spoilage.
What about real estate? Certainly homes or office buildings have some intrinsic value even if the price deflates 50 or 75%. Though this is true, there is always the possibility that taxes and expenditures to keep these assets from deteriorating (i.e. repairs, heat, insurance etc.) in the event there is no potential rental market will represent a significant financial drain. Indeed, these could turn out to be liabilities, not assets.
What is left? I'd like to propose an asset that involves little to insignicicant financial maintenance, is not subject to spoilage, cannot be printed or reproduced, is not subject to counterparty risk or margin calls, does not require storage or possibly even insurance. In addition, it requires no physical maintenance. It is subject to deflation, but if purchased without leverage, it can never be called or inflated away and since it involves virtually no annual financial upkeep it should be able to survive any financial calamity you can imagine.
I'm talking about rural land that is subject to agricultural or livestock tax exemption. Throughout the country, there are millions of acres of land that have such a low tax rate that it can be paid with pocket money. I personally own several parcels of this type of land where the taxes on a 40 acre parcel are under $20/year.
In addition, one can just let it sit there while you can live thousands of miles away and not worry about it. It can't be destroyed (short of nuclear annihilation), it doesn't require maintenence, it can't be stolen, forged, reproduced and if you buy it without a mortgage can never be called away from you.
Granted, buying land like this is not as easy as hitting a key on your online brokerage account and buying yourself 1000 shares of AIG (oops, bad example) or LEH (oops I did it again), but as we've seen, these "assets" can become worthless overnight and with a $600 trillion derivative guillotine overhead, it may be worth doing some legwork to locate this type of property for all the reasons I've mentioned above.
Disclosure: I am "long" rural land. I am not a real estate broker.
