Protect Your Wealth Against Inflation

“O gold! I still prefer thee unto paper which makes bank credit like a bank of vapour.” – Calvin Coolidge

My brother got married outdoors on the hottest day of one of the hottest summers I can recall. As the bride and groom recited their vows, I looked around and could see that everybody was thinking exactly what I was … “Pleeeze get this over with, so I can duck into that shaded tent before I faint.”

When the ceremony ended, we scurried to take shelter. Not long after we got there, storm clouds darkened the sky and the wind began to swirl. Within minutes, an incredibly violent thunderstorm pelted down rain and buffeted the pitched tent. Deep pools of water immediately formed in several places on the suddenly straining roof.

As the tent swayed dangerously back and forth, creaked and groaned, a crazy old guy was going around and asking people: “What would you do if the tent caved in?” That crazy old guy was my father – and, as a former marine, he was just acting out the marine credo to “always be ready.”

Not surprisingly, nobody had much of an answer for him.

“Be ready for anything” is a pretty good philosophy for almost everything in life. So let me ask you: Do you have an investment strategy or fallback position if your financial tent caves in?

If not, you should. And the sooner the better. Because disaster can strike at any moment. It did with 9/11. Perhaps the best example, however, is what happened with World War I.

The first mention of the possibility that there might be even a small war was in an article in The London Times on July 22, 1914. That was just seven days before Austro-Hungarian artillery began bombarding Belgrade, and less than two weeks before Britain declared war against Germany. Major European financial markets closed for the rest of the year. If they had remained opened, the vast majority of people’s fortunes would have been wiped out.

The Ultimate Insurance Against Catastrophe … and a Lot More

Everyone needs insurance against catastrophe, and the heads-over-shoulders choice for you should be gold. Why gold? Because while gold is protecting you against catastrophe, it also can be appreciating significantly.

Now, if that same investment in gold also hedges you against inflation, against a decline in bond prices, against a falling dollar and a worsening economy, all the better.

And gold has other advantages.

That last one bears repeating. Gold is in the middle of a bull run. It broke clear of a bear run in 2001 when it hit a low of $250 an ounce. Now it’s around $444 an ounce.

It hasn’t been a straight shot up. (It rarely is for any investment.) In fact, it recently dipped a bit before finding a second wind.

Many investors, most of whom are very experienced in the gold market, trade in and out of gold when it does its little ups and downs. You can make a lot of money that way. You can also lose a lot of money that way.

That’s not for you. I want you to invest in gold as a long-term investment. Why? Because it’s one of the safest medium- to long-term investments you can make these days. And it’s one of the riskiest short-term investments you can make. I’d much rather you play it safe than sorry.

How high can gold go before it tops out? I don’t know. Nobody knows. But I’m convinced it has a long way to go before peaking.

One colleague that I’ve known practically forever, Don Mahoney, notes that the majority of predictions range from $800 to $1,000, surpassing the $800 high for gold in the 1980’s. He, along with James DiGeorgia, just authored the fact-filled and incredibly useful book The  Rise of Gold in the 21st Century.

Another colleague of mine, Dan Denning, editor of the Strategic Investment letter, thinks the gold market will keep going up after having hit a 16-year high late last year. So far, he’s been proven correct. As for the long term, Denning says he’s “a mega-bull.”

Gold has a lot of converts. However, not everyone is sold on it. For example, Bernie Shaeffer, chairman of Cincinnati-based Schaeffer’s Investment Research, said recently in Barron’s Online that he’s no fan of gold. He thinks much of the recent flow into gold was due to the bearishness on the dollar.

I have to respectfully disagree with Mr. Shaeffer. There are solid reasons why gold is looking so good these days.

1. Several factors are supporting gold’s current bull run. Gold production declined 5% in 2004. Demand from China is up. And central banks have slowed down gold sales dramatically.

2. With rising interest rates and the cost of energy increasing, inflation is rearing its ugly head. When people and investors see their dollar buying less, they move into gold in greater numbers, and the price consequently increases.

3. The dollar is trending down. When the dollar goes south, gold heads north. It usually happens the other way around too, but several times this year both the dollar and gold strengthened at the same time. While the dollar has shown surprising strength this year, gold has also shown surprising strength by going up in the face of a strong dollar.

4. Gold loves uncertainty. And there’s plenty of that going around. Let’s not forget Iraq, Afghanistan, and terrorism. Domestically, how about runaway oil prices, overheated property markets, and huge budget and trade deficits?

5. China’s unpegging its currency from the dollar. I believe this is the beginning of the end of dollar-pegging in Asia. The dollar won’t be getting the support it’s used to having from central banks in Asia. And that’s going to make the dollar weaker.

But You Need to Buy Now Before Gold Production Takes a Big Hit and Prices Surge

If you’re thinking of making an investment in gold, you should do it sooner rather than later. If you wait, it may be too late. Here’s what I’m talking about.

South Africa’s three major mineworker unions are talking strike. And they’re serious. The impact could be devastating. It would take 28,000 ounces out of daily gold production. Just the possibility of this happening has already boosted prices. If the strikes do occur, prices will skyrocket.

Unfortunately, I can’t tell you today, as we go to press, whether the strikes will indeed occur. I suggest you keep your eyes and ears on the news. If it happens, you’ll have to move very quickly.

Ah, but what is the best and easiest way to invest in gold? Luckily, my friends Don Mahoney and James DiGeorgia have told me about several great ways to do it.

The do’s and don’ts that really stand out are these:

While gold and gold stocks tend to move in tandem, I’m not going to recommend that you invest in gold stocks as an alternative to investing in gold.

If you have only IRA money to invest, that leaves you in the lurch. (Sorry … IRAs aren’t allowed to invest directly in gold.) You can, however, put your IRA money into streetTRACKS Gold Shares (GLD), an Exchange-Traded Fund (ETF) which holds gold and whose shares reflect the price of gold.

I’m not sold on gold mining stocks, though. Too often, they don’t follow gold prices as they move up … or at least they don’t follow them all the way up. And too often, when gold prices fall, gold stocks fall further.

And remember, you’re investing in the company, not in the yellow metal itself.

Take, for example, Hecla Mining, a perfectly respectable mining company of gold and other precious metals. It suffered a strike at its Mexico operations recently, pushing down its stock price 16% from the first quarter of this year. As an investor in this company, you’d have a hard time trying to predict strikes, never mind more mundane things like increases in mining costs (another problem that is currently afflicting Hecla).

How much to invest in gold? Follow my overall investing strategy and don’t invest more than 4% of your net investment worth. And if you see gold decline by 20% or more, get out immediately. Do this and you will only put at risk 1% of your investing money.

As you grow more familiar with gold investing, you may want to put a bigger portion of your money into gold. It’s always better to start out slowly. And safely. After all, that’s the whole point of investing in gold.