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Portfolios, Insurance, and Gold

Commodities / Gold and Silver 2015 Mar 06, 2015 - 04:46 AM GMT

By: Submissions


Raymond Matison writes: Over the last two decades investment managers have increasingly accepted the concept that their portfolios should contain some form of insurance against rapid or unexpected market declines – the so called Black Swan event. One way to protect against this is to purchase puts on broad market indexes and calls on precious metals, or purchase some precious metal equity securities, or physical gold bullion.  It is safe to say that many hedge funds today utilize several such strategies.

Portfolio asset allocation of such protection could perhaps represent as much as 5% of a portfolio’s total assets.  Thus, if the market were to decline by 50% in a short period of time, the puts and calls could be expected to offset such a market decline nearly dollar for dollar, or even become profitable, while precious metal equity or physical metal exposure could reduce the overall portfolio loss to just 25%.  On a relative basis, a portfolio so hedged could provide performance that would outperform most others.

Excluding portfolio managers, everyone else in our society is also exposed to some form of insurance from an early age.  The young teenager applying for a driver’s license is surely lectured by his parent about the high cost of auto insurance, and the necessity of offspring to drive carefully as to avoid an accident, which would dramatically increase insurance premiums for the family.

A young married couple searching for and purchasing a home know that it is impossible to purchase that home without a mortgage, nor without fully insuring the property in order to maintain integrity of loan collateral for the lender.

As a family matures and grows, the wage earner or head of household will contemplate his/her financial future and overall financial security of the family.  That person will surely purchase life, health and possibly also disability insurance.   In addition, most people reaching their forties or fifties start thinking about providing for retirement, and may purchase an annuity or some similar retirement insurance product.

It is clear that in our economically developed society every citizen is aware of the protection that insurance can provide. Of course that protection comes at a cost.  Young families may have automobile insurance costs that exceed $1,000 per year, only to explode higher when their children start to drive.  Homeowners insurance easily can range from several hundred dollars to several thousand, depending on the value of the home, deductible, and coverage desired.  Health insurance, even when supported by employer contributions, can easily rise to over $5,000 per year or more.  After normal living expenses, pension or retirement insurance costs can easily consume the balance of remaining earnings.

Consider that auto and homeowners insurance is basically mandatory.  Life and health insurance is not mandatory, but one would be foolish not to purchase some insurance protection for the family against unexpected loss of life, or large hospital and medical expenses.  Insurance regarding pensions or annuities is very expensive.  That is to say, while there may be a given low probability that the insured will use auto, homeowners, or health insurance by filing a claim, there is a 100% probability that the owner or beneficiary of a retirement product will collect some benefits.  As such, retirement products are fundamentally savings accounts, which anticipate that eventually all of the contributions made by the insured over years will be paid out with interest to the policyholder or beneficiary in benefits. 

The question to ask is, if responsible individuals are purchasing insurance to protect against all of these adverse risks, why would they not purchase insurance to protect savings, pensions, and financial assets from becoming worthless due to the action of our politician and government’s long-term fiscal irresponsibility, the historically century-long devaluation of currency by the Federal Reserve, or some other extraneous catastrophic event collapsing our banking and financial system and drastically reducing the value of our fiat currency?  The obvious answer is that we should purchase such insurance as well.  Because there does not appear to be an established term for such insurance, we can coin a new term for this type of insurance coverage - let’s call this “fiat insurance”.

The answer to the question regarding responsible individuals purchasing fiat insurance is that it may be difficult for the average head of household to do so.  Once one subtracts federal, state and city income taxes while also having Social Security and health or Medicare premiums automatically deducted, a notable part of earned income is gone. Subtracting auto, homeowner’s, health, life, disability insurance premiums, and pension contributions really leaves little with which to actually pay for everyday common living expenses.  Rents or mortgage payments usually take a large cut out of earned income. So at the end of all of these deductions there is relatively little money left for insuring against inflation, the devaluation of money, or possible economic and financial collapse.

 Portfolio managers and the head of a household are united in their desire to protect financial asset values. The portfolio manager buys this insurance purchasing financial futures, puts or calls, and owning equities in precious metal securities, or owning gold bullion.  The head of household should also purchase asset solidity or fiat insurance but he/she probably should not be dealing in futures, puts and calls.  This protection can be achieved by purchasing fiat insurance in the form of physical gold or silver.

Portfolio insurance needs to rolled-over periodically as futures or option contract periods expire.  At expiry one needs to purchase additional time-extending contracts of protection.  The premium or cost of such contracts is used up over the period of protection, and in this regard, it appears to work exactly like insurance.  The portfolio manager may, or should understand the nuanced differences between insurance, futures, puts or calls, and actual precious metal possession.  The head of household is unlikely to understand financial futures, but in addition, he is likely not to understand the difference between standard insurance and the coverage that is suggested by fiat insurance in the form physical gold or silver ownership.

The head of household should consider protecting financial assets by choosing and allocating a designated amount as his annual “fiat insurance premium” and use those funds in purchasing precious metal coins or bullion on an annual basis.  The difference between the portfolio manager’s insurance costs and that of the head of household purchase of physical metal are dramatic.  At the expiry of the futures or options contract its premium is used up and gone.  By contrast, a head of household purchasing his fiat insurance through physical metal has not used up that premium, but rather has purchased one or several coins of gold or silver which will always maintain some value.

Consider what financial asset protection a family could accumulate if it had set its own level of fiat-insurance premium comparable to that of the cost of annual auto insurance say $1,000, and consistently purchased a fixed amount of coins over the last twenty years.  This insurance premium never expires, but accrues and accumulates all previous year’s contributions into a solid, growing asset. Conservatively, a $1000 purchase of gold coins each year over the last twenty years would have allowed one to purchase about 51 coins, at a current market value exceeding $60,000.  But this approximate, accumulated value of fiat insurance protection is not the point, since in a period of financial or economic crisis, its nominal value would eventually rise dramatically further.  So very clearly, buying insurance to protect against automobile accidents, home fires, liability, hospital and surgery expenses, is dramatically different from fiat insurance through buying precious metals as a means to insure ones personal financial assets, savings, cash, and protection against persistently manufactured inflation, and political and governmental malfeasance.

Some precious metal dealers suggest that depending on one’s personal level of concern, investment in precious metals should comprise 5-25% of one’s total assets.  If a middle class head of household were to set aside a fiat premium equal only to that of his automobile insurance premium, then after ten or more years his assets in precious metals would likely fall into that 5-25% range of his total assets.  Therefore, purchasing precious metals on a schedule each year in an amount that compares to other insurance premiums is far different and better than purchasing standard insurance or futures, puts and calls – it is also both wise and necessary.

Gold and precious metal dealers have provided a worthwhile service to individuals who understand their need to acquire precious metals.  However, these dealers have also done a great disservice to them, and indirectly to themselves, by promoting the purchase of precious metals as an investment from which to make a big profit.  The message to buy gold or silver “now” because it is going to go up in the near future is the wrong message.  As we know from the market experience of the last several years, precious metal prices can also decline substantially.  One should look at the purchase of precious metals and coins similar to the annual purchase of insurance, rather than a one time or periodic investment.  Precious metal dealers would do well to change their marketing strategies to promote fiat insurance rather than opportunities for profit.  The message should be, do not buy precious metals to get rich, buy them to insure against becoming poor.  Set an amount aside to purchase this fiat-insurance, accumulate the coins over years, and never consider whether precious metal prices are up or down at the moment.  When the next national or global financial crises hits again, you will likely be able to discover your accumulated number of coins will provide the needed insurance proceeds against that catastrophe.

It is quite likely that when this next financial crisis hits (possibly in the next two years), people will be selling bonds and stocks to raise cash in order to pay down debt, margin calls, credit cards, auto loans, and for other everyday needs.  Those who will have exhausted their paper, financial resources will sell any precious metals they own, in turn depressing their market price.  Thus, it is foreseeable that precious metal prices could fall further before a new monetary system, which could include gold if only in some referential basis, would raise its price dramatically.  As a result, investors and concerned citizens should just set their own asset protection annual fiat insurance premium, and keep buying precious metals. You will surely get much value out of fiat insurance when compared to your auto, home, health, pension insurance.  Precious metal dealers would also experience repeat annual sales of their products from steady customers.

Critics may claim that despite this proposal seeming basically sound its problem is that ten or twenty years ago one could purchase more coins for a fixed dollar amount than today.  In this regard the insurance concept again applies.  For those who did not start their retirement financing early, the contribution or premium necessary to adequately fund retirement starting at a later age has to be increased.  For those who were not adequately informed about protecting themselves against recessions, excessive money printing, and other means of economic pirating of their financial assets years ago, now must increase their fiat insurance premium.

We need not be concerned how professional money managers protect their portfolios. However, individuals need help protecting the value of financial assets against eroding fiat values, which is best served by purchasing fiat insurance on an annual basis in the form of physical precious metals.  Coin and precious metal dealers should sell their products to individuals on an insurance concept rather than on greed or potential for significant profit, because markets in periods of economic distress can remain lower, or be manipulated lower for longer periods of time than dealers can maintain their investment recommendation credibility.

Raymond Matison

Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience.  First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics.  He can be e-mailed at
Copyright © 2015 Raymond Matison - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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