The Importance of Gold Coins in a Sound Portfolio

Gold coins are routinely derided as an investment because they generate no cash flow. However, it is no less foolish to put all of your money into cash generating assets than it is to use it all to buy gold coins.

Cash flow is absolutely necessary because it gives investors the ability to act quickly when special opportunities arise. On the other hand, greater potential for cash returns comes at the expense of greater risk to capital. Wealth creation must be balanced with wealth preservation as goals in a sound investment strategy.

The ideal portfolio provides the mix of long term gains and cash flow that meets the specific needs of each investor. Regardless of those needs, only a well constructed and diversified investment strategy can achieve that end.

Several decades ago cash served the purpose of safe haven well enough. It was far from ideal, but it was comfortable. The problem was that cash in a bank or the money market wasn’t available to fuel the equities market, and that threatened to put a damper on economic growth.

Acting on the precepts of the prevailing school of economic thought, the Fed embarked on a program to keep the economy rolling through greater citizen participation in the stock market. At the time there appeared to be no reason not to do so. Keeping interest rates low effectively removed the incentive to hold cash, and the booming stock market offered a tantalizing alternative.

As we can clearly see now, savings were an essential contributor to the historic growth of our economy. The substitution of credit for savings to drive our consumption had devastating and far-reaching implications.

Along the way people began to realize that they were digging themselves into a pretty deep hole, and they went in search of a substitute for cash to secure a portion of their wealth. Many discovered gold coins and have been rewarded many times over. But the strategy can be taken too far. Many who fled entirely to gold missed out on some spectacular booms.

Along with the booms, of course, were equally spectacular busts. That’s the nature of risk. It is our appetite for risk in light of potential reward that should determine our investment mix. The extreme diversity in that appetite is the nature of human beings.

Different times call for different strengths in a well diversified portfolio. In a strong economy perhaps 5% to 10% allocated to gold coins would suffice. In hard times such as these, where the risk of precipitous drops in equity capital runs high, a much stronger position in gold coin investments would be prudent.

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