(Following is the third installment in a series of articles by Chuck Cohen, a seasoned and highly successful investment consultant who lives in New York City. We will be featuring Chuck’s thoughts regularly at Rick’s Picks in order to expand our coverage, in particular, of junior mining shares, a core area of his expertise. In the coming weeks, Chuck will take up the topics of gold as a core investment, and gold as a speculative vehicle. Today he tackles gold’s usefulness as insurance against financial calamity“. RA)

 No One-Size-Fits-All Strategy

In spite of the sharp drop in shares over the past nine years or so, most investors remain firmly committed to common stocks. Mutual fund statistics show that very few holders have pulled their money out of their funds. And the recent “Big Money Poll” in Barron’s shows that the big guys are even surer than  they were even at the very top.  It is clear that investors have been stirred, but far from shaken, by the decade’s decline and by our faltering economy.

And gold? To many investors and even professionals, buying gold is like traveling to Myanmar or northern Pakistan: Few dare to venture there. The truth is, that to our Ivy League and Keynesian educated financial community, gold is viewed as a superstitious relic.

I don’t seek to persuade you to sell everything you own, put it all into gold and gold shares, and then buy guns and ammo before retreating to a barricaded cabin in the Ozarks. Instead, I hope to try to make you understand that gold investments come in different sizes and shapes, with varying degrees of risk and reward. It’s not an all or nothing choice. The better you understand gold, its attributes and how it fits into your financial planning, the more you should feel more comfortable with it. You might then want to take bolder steps that can protect you more fully against the enormous unknowns facing us. 

I believe that in spite of a huge move since 2001, gold is still very early in a generational bull market. Bob Hoye, one of the most astute market analyst around, believes it will last for 15-20 years. That gives us 7 to 12 more years to ride it. Remember, the recent bull market in stocks lasted almost 18 years. The gold fundamentals continue to get more and more compelling, and technically gold is rapidly approaching an amazing liftoff stage.

But back to the three approaches towards gold.  I have put them into an ascending order of risk and reward:  1) gold as insurance; 2) gold as a core investment, and 3) gold as a speculative vehicle. Today we will discuss the first approach.  

Protecting Against the Unknown

What is the purpose of insurance? Of course, it is to protect you against the unknown and the unexpected. You can’t risk not having it in your life, even if you never have to use it. One disastrous episode, even if you had nothing to do with it, could totally change your life.

If you own a house, you undoubtedly carry property, theft and fire insurance. In spite of the onerous costs, you must have life and health insurance. You can’t legally drive a car without adequate property and liability coverage. But strangely, when in comes to finances, most people handle things differently. They tend to be careless without giving any serious thought as to how or where they should put their money. Remember the dot-com era? I don’t know a single person who doesn’t have his tale of woe from it. And to prove that this wasn’t an accident, many then threw the leftovers, plus what the banks and mortgage companies shoveled their way, into the great American housing disaster.

But when it comes to gold, after nearly nine consecutive years of higher prices, a great majority of Americans don’t have one cent in a gold-related investment. And even after watching the government inject trillions of governmental monopoly money, most Americans continue to shun it. Incomprehensibly, most Americans still put their trust in stocks and real estate. And the financial media think that “gold bugs” are weird.

Getting Started

Here is what I am getting at. If you are one of those who feel as though gold is too mysterious or too risky to get involved with, then I want to present the first step to getting comfortable with it.  Approach gold just as you would with the different types of insurance you carry. You can get more deeply involved later. Your mindset has to be that if things don’t get much worse, gold may not do much. Although, considering its performance over the past nine years, even through some good times and rising and falling consumer prices, it should continue to do well.

But, if things hit the proverbial fan, gold, like a comprehensive car or property policy, will bail you out, or at least greatly help you in your time of need.  Don’t you think that those who really got rocked after 2000 wish they had bought some gold insurance instead of gambling it in those supposedly safe places?

Without going into great detail, there are several ways to buy the insurance. I don’t want to pose as an expert in these areas, but they are simple to buy: coins or some other small amounts in bars, or through the various ETFs or gold funds. Personally, I would start with coins purchased through one of the reputable online dealers, or if you have a coin store nearby that others can recommend, that would be okay. Given my expectations for the future, I am not comfortable with owning gold through a paper deed, especially if there is no formal audit procedure to verify your share. This may ultimately prove to be an important concern. We can get delve into this at another time, or you can email me and I’ll get you a good source of information.

Next week: Gold as Insurance, Part 2. (If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)