Seeking Alpha
Long only, value, research analyst, gold
Profile| Send Message|
( followers)  

Say what you will about Ron Paul, but the man practices what he preaches. His portfolio, as reported by the Wall-Street Journal, is essentially one huge bet against the dollar and the stock market.

The WSJ asked William Bernstein, an investment manager at Efficient Portfolio Advisors, to review the portfolio. He said the following, and he wasn't kidding:

"This portfolio is a half-step away from a cellar-full of canned goods and nine-millimeter rounds."

What's in the portfolio? Gold and silver mining stocks (HUI), real estate, cash, and some shorts on stocks. But is this a good strategy? Let's talk about it.

It's a full-on bet against the dollar

I've written before that I believe that most of us are going to see the death of the dollar's reserve status. That means I'm not a fan of the dollar, what the Fed is doing to the dollar, what congress is doing to the dollar, or what naive voters who love their favorite spending programs are doing to the dollar.

Ron Paul believes that, plus some. He's been talking bluntly about the collapse of the dollar for literally decades, often being wrong - dead wrong - about his specific predictions.

I realize this will infuriate some people who will try to paint me as some sort of "statist", but it's true, and simply needs to be pointed out. Here's a quote from Ron Paul that sounds like a chilling prophecy, that should make him look good, right? Here it is:

"I believe such a [gold] standard to be not only desirable and feasible, but absolutely necessary if we aim to avoid the very real possibility of hyperinflation in the near future, and economic collapse."

Many reading this probably wouldn't disagree, and even I wouldn't disagree, necessarily. It's possible that something could trigger hyperinflation, though the liquidity trap pretty much guarantees that the government is going to have to make some sort of insane move to kick that into play.

The problem? The quote was from Ron Paul in 1981. When you predict a crisis around the corner that could be hyperinflationary for 27 years, eventually you're going to run into problems and be "vindicated". The only problem is that we're seeing inflation, but nothing close to hyperinflation - not even close. It's been almost three decades.

Let's look at something else he said recently about gold:

"Mr. Speaker, gold prices continue to soar -- or rather, the dollar continues to decline in value... we are witnessing the remonetization of gold, in disregard of the official U.S. Government position concerning the precious metal. The surge in gold prices is the world's vote of no confidence in paper currencies and the governments that promote fiat monetary policies."

He's obviously talking about gold right now, correct? Not quite. That's actually a quote from 1979, according to his book "Pillars of Prosperity".

The scary part is, of course, 1980. Leading up to the 1980 gold price crash, many Austrians like Paul contributed the rise to the "remonetization of the dollar". Now, of course, there are plenty of other theories because the price just about collapsed suddenly.

Either way, it's a good example of how doomers often manipulate the data to fit the prejudice - and I don't say that as someone who's all about financial sunshine and economic butterflies, as any look over my previous articles can show.

Oddly enough, there's no mention of gold coins or numismatic coins in his reportings, even though he's required by law to report such holdings. I think it's fair to say that even if he's not reporting those, they probably exist buried in a safe or something in a foreign country, especially since he's likely very, very aware of FDR's gold confiscation of the 1930s.

If he doesn't have physical metals, that's an even worse choice than the stocks, because your gold mining stocks won't be nearly as important during a real economic hellstorm as physical metals and other hard assets like tools and bullets.

Do I hate Liberty, Gold, and the American Way?

Just to save time, I don't hate all that is good and holy just because I disagree with Ron Paul's portfolio for most people. If anything, I'm closer to agreeing with his understanding of the future of economics than Ben Bernanke's bubble economics.

But what I don't agree with is the idea of putting all of one's eggs in one basket. That's a horrible approach and generally is more risky than preparing for doomsday.

Here's one of my favorite quotes from Warren Buffett that should hopefully silence some of the angry doomsday-only bulls:

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

Yes, a lot of that was inflation caused, but it's unavoidable that putting money in stocks went through FDR, huge wars, debt problems worse than now, the creation of the Fed, the roaring 20s, the 70s stagflation, and stocks still outperformed gold plenty.

This doesn't mean gold isn't a good investment. Nothing like that at all. I don't think there's a problem with an investor putting as much as 20% of his portfolio in to gold-related assets like bullion and stocks. Just so long as it's mixed with other assets as well.

What to do instead

Ron Paul isn't the only Austrian investor in town ready for Armageddon. There are plenty of other strategies, my favorite being that of the Permanent Portfolio strategy for economic upheavel.

The portfolio probably isn't new to most, but it's pretty simple: 25% in gold (GLD or even SLV to some extent), 25% in stocks, 25% in bonds, 25% in cash. The portfolio has done insanely well over the last decade, and didn't get absolutely destroyed like gold portfolios did in 1980.

A better allocation would probably be something like 40% stocks, and 20% in each of the other assets of gold, bonds, and cash. Still, it's an improvement over the Ron Paul portfolio, at least most likely over the long term.

It's safer because it doesn't require you bet over half of everything on the price of gold. Remember, just because gold will increase as the US pays the piper, doesn't mean that it can't fall in the meantime.

Either way, building a portfolio that can do well during prosperity as well as having a built-in economic hedge doesn't require that we sell all of our stocks and bonds and put it into cases of ammo in our garages. There are alternatives that are just as safe-haven oriented that don't take even bigger risks.

Source: Should You Copy The 'Ron Paul Portfolio'?

Additional disclosure: I own gold and silver and will likely be increasing my holdings monthly for the foreseeable future.