Gold, Guns and Gas: Three Ways To Keep Your Money Safe

 
on June 08 2012 12:40 PM

The world's economies have fallen to their weakest level since the recession ended in 2009. German and U.S. bonds actually charge buyers interest rather than pay buyers interest. The euro zone's survival appears at risk and China's red-hot economy, the second-biggest in the world, is not so red hot any more.

It's enough to make a retail investor throw in the towel. And in case that's not incentive enough to get out, there are the market gyrations.

Some people are trying to take money out of the market just because of volatility, Jerry Doyle, a wealth strategist with BNY Mellon Wealth Management, said.

So what's a retail investor to do? Start by breathing deeply ... there really are alternatives to the stock and bond markets and the troubles in the euro zone and China. Stuffing cash under a mattress is not the only alternative.

And read this guide on how to protect assets from the storms and downdrafts pummeling conventional securities.

Five Factors for Analysis

When considering an alternative investment, think first about whether it can be quickly sold for cash. That's called liquidity. Fine art or collectible cars may take longer to sell than gold or futures. If you won't need the money for awhile, liquidity matters less; if you will need the money in the short-term, liquidity matters more.

Secondly, make sure the alternative investment rises when conventional markets fall and falls when conventional markets rise. That's called noncorrelation. An alternative investment that loses value when bonds or stocks lose value, isn't much of an alternative.

Thirdly, determine whether there is any demand for the alternative investment. Ignore alternative investments that strike most people as merely weird. The demand for a highly unusual piece of art by a noted artist could cost a fortune but be of zero interest outside a tight circle of the cognoscenti. Likewise, be careful not to price yourself out of a limited market; an over-the-top price tag can kill off demand as quickly as weirdness can.

Fourthly, gauge an alternative investment's objective value. Does its perceived worth vary greatly by region, or does its value rise and fall according to the mood du jour of cultural brahmins? Precious metals and diamonds tend to have a higher objective -- that is steady -- value than do sculptures.

Lastly, when reading advice on alternative investments make sure you know exactly what an advisor is trying to protect against. Some advisors offer advice for use if the stock market declines more than 20 percent; other advisors offer advice for use if a global apocalypse drives us into bands of hunter-gatherers. What is good advice for one scenario is bad advice for another.

The Midas Touch

There's no question in the case of gold specifically. Gold today is increasingly being treated as currency alternative, said James Kuntz, managing director for Pacific Wealth Management. Gold is increasingly used as currency by central banks and in developing economies such as India, and many see it as being the only asset with any true inherent value.

Moreover, there is definitely a historical factor of gold that has gone back over the millennia. At the end of the day, it's a store of value, Kuntz said.

Gold and silver are seen as having specific properties that enable them to beat other assets in maintaining value and liquidity. Gold and silver, if they are pure, one is the same as any other one, and that's one of the assets of good money, Albert Lu, managing director of WB Advisors LLC, said. Essentially, because pure gold is pure gold wherever it is, it maintains value across borders and markets in a way currencies do not.

Lu also counsels against buying precious metals-backed equities, like mining stocks or gold-backed exchange-traded funds, because in the event of a global financial panic that freezes markets it might be impossible to sell one's holdings.

I always tell people to think about holding at least some portion of their gold in bars or bullion of some kind, Lu said, although investors do have to keep in mind the cost of storing and moving gold bullion.

What Will the Future Bring?

Kuntz recommends using a managed futures portfolio, a basket of futures contracts in multiple markets, because it is relatively liquid and the value of the portfolio tends to move in the opposite direction of stocks. While futures may not generate lots of additional value in times of relative economic calm, when stock markets fall futures offer opportunities not available to the investor who only holds equities.

Additionally, futures offer another alternative investment, like gold, where there is not a huge amount of objective variation between experts. Unlike fine art, where opinions and tastes can differ radically, the markets treat soybeans as soybeans, even given the fact that there are varieties of soybeans.

I Like Racehorses and Cars and Paintings and Stamps and Guns and Coins and ...

A third category of alternative investments that can help protect assets are collectibles. Examples include fine art, race horses, wine, numismatics, philately, antique guns and classic cars. Kuntz says collectibles have the potential for a lot of variation in the qualitative interpretation of value. Investors must be willing to spend the time to develop expertise in the collectible market to know when they are getting something at a good rate.

Timing also matters, says Karl Byrd, executive vice president of Security Ballew Wealth Management. The key to buying a collectible is buying it at the right price and selling it at the right price, he said.

If I had a multimillionaire client that said he really wanted to collect X, the first thing I would do is ask if they have expertise in that asset class. If they say no ... I say look for someone you trust to offer specialty advice, do due diligence, Byrd said, adding that he frequently helps clients with that due diligence.

Another pitfall for investors buying into collectibles is that they do not consider the liquidity of the collectibles. The rarer and more valuable an object, the fewer potential buyers and thus the longer it may take to sell.

Rarity takes care of supply, but demand is not guaranteed. You are basically vulnerable to their taste and their ability to make that kind of purchase, Lu said.

Collectibles are not a good place to put your money if you think you may need to access it quickly. If an object has to go through an auction, you are limited to the timetable of the auction houses and also must be prepared to pay commissions and expenses for the sale. Likewise, for the duration of the time that you hold the collectible, you must be prepared to pay upkeep and insurance on it, costs which are not usually tax deductible.

As an alternative to selling collectible assets, some wealthy collectors may choose to give them to charitable foundations as tax deductions. However, collectibles given to a public charity must have been held for more than a year, and the charity must use the donation for a similar use, according to Doyle. In other words, a painting given to a museum must be displayed or loaned for display by that museum.

Bottom line: When entering into the collectible market, investors should carefully consider what percentage of your investable portfolio is an appropriate percentage to invest in this asset class, Byrd said.

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