Americans insure their homes against a varying degree of perils, and in many cases, the insurance they purchase is mandated by the financial institution that carries the mortgage on their property. The result is that all parties that have an interest in the property feel better about unexpected calamities. However, in many cases insurance is optional, and this is true with your financial portfolio.
As the waters continue to recede on the likelihood of a catastrophic global financial meltdown, prudent investors need to insure that this is not simply the eye of the hurricane or the calm in the storm in advance of a pending hurricane.
Flood insurance is not required in hurricane prone areas of the United States. But as many uninsured property owners have discovered, the cost to buy insurance skyrockets following a significant disaster. As we have seen over the last decade, the same is true with gold - the price moves up rapidly when winds from the financial hurricane blow toward catastrophic levels.
Because the financial storm seems to be taking in a holding pattern, many analysts are suggesting that gold has run its course and investors should consider selling. However, given the financial environment in Europe, this might be similar to cancelling your insurance policy because the storm passed yesterday, yet you are still in the middle of hurricane season. The future is unpredictable, and substantial risk is still there. Citigroup's chief economist Willem Buiter, said during a recent radio interview on Bloomberg Surveillance:
Spain has never been so close to default and Greece, Ireland and Portugal may need further bailouts. Spain is the key country about which I'm most worried.
We're not out of the storm yet, and it's likely to be a long time before investors can breathe easy. The current pause in the momentum of the price of an ounce of gold is simply that - a pause. As certain geographic regions of the world continue to experience financial disruptions, it is going to be a bumpy road. The global economy is entirely different today than it was 50 to 75 years ago, and there is no such thing as being financially isolated anymore; what happens in one country has a ripple effect across the entire world.
Given the recent number of articles calling for the end of serious demand for gold, you'd think that the analysts know something that you don't. What is the good news they see? Certainly, it cannot be the mounting $16 Trillion debt load for the United States. Japan's debt is at 235% of GDP, and their trade deficit is going negative. Central Banks around the world are buying gold. Therefore, it does not seem logical for this to be deemed as positive indicators for the overall direction of the global economy.
Inflation in the United States soared to 13.5% in 1980, which generated a nominal peak of $850 for one ounce of gold. However, when converted into 2011 dollars, the 1980 peak for one ounce of gold was $2,337. With gold recently peaking at almost $1,900 in late 2011, we haven't even come close to the inflation adjusted price in 1980.
The United States has reported better than expected employment numbers during the first quarter of 2012 with their fuzzy math. The Bureau of Labor Statistics reports that the U.S. unemployment rate is at 8.2% as of March of this year, although we know that the real number (Bureau of Labor Statistics U6 number) is around 15% unemployment. While it is spun and promoted from the White House like improving news that more Americans are finding employment, it has absolutely no correlation to the balance sheet of the United States. If more Americans were being employed it should raise tax revenues for the country, which would be good for the nation's income statement, but it does nothing to slow down the rapid increase in long-term liabilities that the United States continues to accumulate.
With risks like these, forget about the umbrella for getting wet. Get insurance and protect your financial house against the pending storm with a reasonable and prudent allocation to physical precious metals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
