Sunday, December 08, 2013

The Sound of Music and gold

I watched the recent live performance of The Sound of Music on TV. The investment angle that came to mind is all those that are preparing to hunker down, with ammo, food and water stockpiles. About half the time, it is like the movie, there is a very short time to leave. The family or person fleeing often has to go with what they can carry. Any financial assets, such as stocks, bonds, deeds to real estate, may or may not have any value. Many assets get frozen during emergency times.

That's where a bit of gold and a bit of silver can be helpful. If the fleeing family has a few rolls of gold and/or silver coins, that might be enough to buy passage, or bribes, or food or lodging during extreme times. Paper money, checks, other forms of payment may not be as useful during turbulent times. I'll not overlook the value of friends (the nuns helped them escape, the young man decided not to turn in his girlfriend) and faith. I believe that faith is more valuable than gold during the worst of times.

As much as I am fan of the Vanguard Way, the Boglehead Way, historic events are times when having some physical assets may come in handy. No paper asset allocation can be sure to withstand the storms of war, or revolution. Of course, physical assets too have their flaws. They can be stolen, or confiscated, or paint a target on the person with those assets if word gets around. Say, there are a thousand refugees arriving in a foreign town. A couple of those families are flashing gold and silver. Word gets around. Muggings or worse may be in store for those paying in metal.

Some may say I am being alarmist. To that I say: read some history. Look at the great powers in 1900 and how many experienced major events by 1950. How many stocks, bonds, deeds to real estate in those nations, became essentially worthless? Americans like to cite their own financial history, but in so many other major powers, the financial reset button got hit. Only in England, among the financial powers in 1900, was there a relatively stable financial market. Japan, China, Russia, France, Italy, Germany, all saw huge disruptions in their stock and bond markets. This is where the Boglehead philosophy of stocks and bonds can fail. 

Let's just put it in round numbers, with the U.K. and U.S. having stable markets, the rest of the major financial powers unstable (Switzerland is not a major power). So 2 out of 8 is 25%, 25% chance of stable markets during that 50 year span. Stable is a euphemism because it includes the Great Depression and a 90% drop in U.S. equities. This is why I have always been an advocate of having some physical assets. Again, nothing, absolutely nothing is foolproof and anything done the wrong way, can be more trouble than it is worth. Still...

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