BONDS & GOLD - There are a lot of misconceptions about both bonds and gold. For instance, it's widely held by many advisors that bonds are a racket. Or as crusty old Franz Pick used to say, "bonds are guaranteed certificates of confiscation." Of course, over the long term that is absolutely true, due to systematic central bank inflation. But bonds do throw off interest, and if you have enough bonds, and you continue to reinvest most of the interest you can live off your bonds.
Sure, in the end bonds will chip away at your purchasing power, so to offset the cost of inflation you must save. For instance, if inflation is 5% you must save enough and compound enough to increase your income 5% every year. That can be done, and I've done it.
Then there is this stupid misconception about gold. For instance, I often hear some ignoramus say, "What good is gold? I pay my rent and buy my food with dollars, not gold. If I go to Safeway and buy a load of groceries, the check-out lady won't take a krugerrand in payment. She won't even know what the hell a krugerrand is."
Of course, she won't. So you don't try to pay for your groceries with a gold coin. You simply go to your local coin dealer and sell one krugerrand for dollars. And that's what you buy your groceries with. That should not be too difficult to understand. Furthermore, in time I believe most banks will deal in gold coins. As the price of gold rises, you will see an increasing number of places where you can buy and sell gold.
Question - "What percentage of gold and silver should you hold in your portfolio?
Answer - This is a question that I can't answer because it has to do with emotions. No matter what I say, some subscribers are going to feel "more comfortable" in dollars, Eurodollars, stocks, Asian stocks, gold, silver or with most of their net worth in their home. Furthermore, as conditions change, as one asset moves up and another moves down, emotions change and thinking changes.
For myself, I want roughly one-third of my assets in gold with some silver. I don't want any common stocks, and I want some German short bonds denominated in euros. I'm afraid of the dollar, but I have a house that's denominated in dollars, and I have some muni bonds denominated in dollars. I honestly don't know what the "cup of gold" is in this economy, but I do know that I don't want any debt.
As I see it, we're at a very interesting and economically dangerous period in history. We have the problem of terrorism. We have the problem of the US spending $400 billion a year in defense. We have the problem of the massive negative trade balance, negative current account balance and the huge negative budget balance.
It's almost impossible in my mind to understand how the dollar can hold up against the spending and debt-building that the US is now incurring. Again, this bespeaks to me of the safety of gold.
I view the current situation as the US sort of "sleep-walking" through a maze of potential dangers. The stock market is overvalued, real estate is overvalued, the dollar is overvalued, yet there is a strange sort of "What me worry?" attitude in the nation. Maybe I'm just a born worrier. But I don't think so - I believe I'm a born realist. Let history be the judge.
Richard Russell Editor-in-chief - DOW THEORY LETTERS www.dowtheoryletters.com/dtlol.nsf
