by David Galland: The
End of the Statist Quo
As the U.S.
dollar takes a nosedive and precious metals gain more and more attention
from individual investors, the number of questions and concerns
is increasing as well. The following reader email addressed to Casey
Research is representative of so many inquiries that we decided
to provide an in-depth response that may prove instructional to
others as well.
I have been
agonizing about getting metal after dumping paper metal I held
and was reading the Daily Dispatch looking for investment clues.
I was pondering the ratios of thirds that you mentioned in a recent
Dispatch and the pursuing of metal stocks when an issue occurred
to me that was not mentioned.
On the one
hand, you discuss the dollar trap of investors running from one
currency to another, away from the dollar and back to it. I fear
that the dollar is doomed as are other fiat currencies, and time
is getting short. So the question that came to mind is, what happens
if one is invested in metal stocks or any vehicle that is denominated
in a fiat currency, and that currency goes bust, blotto?
does that investment retain? Does it become a total loss? Redefined
into the currency of the locality that operations are in? Converted
into some other New World Order monetary unit, SDR’s or nationalization
of any regional assets by the locals? Is this impossible to plan
I am probably speculating on a subject that can only be determined
by psychics and crystal balls, or those with a sixth sense on
the subject, but it is an issue I have not heard anyone ponder,
except those who only beat the drum for physical metals.
If I allocate
away from physical into speculative investments denominated in
fiat in the ratios you suggest, it might provide an additional
boost if one’s timing is impeccable. But weighing that against
being trapped in a depreciating currency unit, along with the
possibility of physical metal becoming unobtainium, it does not
seem to be a prudent decision.
appreciate a further explanation for your ratios, and does the
ratio vary with total personal asset amount? Is your ratio determined
by finances or politics?
Here at Casey
Research, our current rule of thumb suggests a portfolio allocation
of approximately one-third in precious metals and related investments;
one-third in cash (spread among several currencies), and one-third
in “other” – namely deep-value stocks, energy, emerging
market investments, etc. These ratios are meant entirely as a general
guideline, as everyone’s circumstances will be different.
is that the one-third dedicated to a mix of physical precious metals
and stocks (the mix determined by risk tolerance) will offer you
“insurance” against further currency debasement as well
as some very attractive upside potential… with the amount of
the upside determined by the amount of risk you are willing to take
Which is to
say, with the true Mania Phase of the precious metals markets still
ahead of us, the micro-cap junior resource explorers still hold
the potential for explosive profits. But they require being able
to hang in there through periods of extreme volatility. Moving down
the risk/reward scale, the larger producers will provide very handsome
upside, but without the risk of being “trapped” in a thinly
traded junior. And finally, for the precious metals component of
the portfolio, the amount you hold in physical metals should be
viewed as a core holding of “good” money.
dedicated to cash reduces overall volatility and gives you ammo
to jump on new opportunities. By spreading the money across a number
of better-managed currencies, as well as your native currency for
general expenses and liquidity, your currency portfolio can preserve
value better than a “red or black” bet on a single currency
such as the U.S. dollar or euro.
have done well with the “resource” currencies of the Canadian
dollar and the Norwegian krone. In time, as the purchasing power
of the fiat currencies begin to decline, we’ll be looking to
reduce this segment of the portfolio.
one-third is something of a catch-all, where we opportunistically
follow some key themes such as energy, food, inverse interest rates,
foreign real estate, and so forth.
particular allocation is necessarily general – with some focusing
more heavily on the precious metals, others on the cash component,
and others on more traditional stocks.
Now, as to
the part of Chet’s question dealing with “what happens
if one is invested in metal stocks or any vehicle that is denominated
in a fiat currency, and that currency goes bust, blotto?”
that, I adroitly hand the baton over to Terry Coxon, one of our
Casey economists and editors.
Not to worry.
You may be confusing “denominated in” with “quoted
and every CD is denominated in a particular currency, which means
that what it promises to pay you is a certain number of units
of the currency. A U.S. Treasury bond, for example, promises you
a certain number of U.S. dollars. An investment’s denomination
is part of the investment’s character.
cases, an investment is quoted in a particular currency. Prices
of U.S. Treasury bonds, to use the same example, are customarily
quoted in U.S. dollars. But that is only a matter of customary
practice. You could, if you found it convenient, quote the price
of a U.S. Treasury bond in Swiss francs. For all I know, there
are people in Zurich who do just that.
the difference between denominated in and quoted in. The denomination
is inherent in the investment. The currency used for price quotes
is a matter of convention and can change.
stocks trading in New York are quoted in U.S. dollars, stocks
trading in London are quoted in pence, and stocks trading in Tokyo
are quoted in yen. Notably, some stocks are quoted in more than
one currency, such as Canadian stocks that trade both in Canada
and in the U.S. – a demonstration that the currency used
for quoting a stock’s price is a matter of choice and not
something inherent in the investment.
So in what
currency is a common stock denominated? No currency at all. A
share of common stock doesn’t promise to pay you a certain
number of units of a particular currency. Instead, it promises
to pay you a pro-rata portion of whatever money or other property
the company distributes as a dividend. If all paper currencies
lose all value, successful gold mining companies will still own
their properties and can still operate profitably. But when they
pay dividends, they won’t be paying out dollars or any other
paper currency. They will be paying out whatever has replaced
the paper currencies – perhaps gold itself.
chosen gold stocks won’t evaporate when paper currencies
do. They will rise in value.
And no one
chooses gold stocks more carefully than BIG GOLD editor Jeff
Clark. Picked for asset protection as well as outstanding profit
potential, his medium- to large-cap gold and silver producers are
generating steady returns of 56.8%… 46%… even 187.9% for subscribers.
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is the managing editor of Casey