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Is Gold as Dead as Florida Hurricanes?

October 21, 2014

It’s been over 3,280 days since a hurricane hit Florida. As hurricane season comes to a close next month, only Mother Nature knows how long the streak will last.

Like many Floridians, my wife and I stayed home and rode out a hurricane—once! We’d built a home on Perdido Key, a barrier island west of Pensacola. It was engineered to withstand 150-plus mph winds, and it was a beautiful home with a master bedroom spanning the entire third floor, looking out across the Gulf of Mexico.

Hurricane Danny hit the Gulf shortly after we moved in. It was a fast-moving Category I with winds gusting in the 75-80 mph range. Full of confidence and a bit curious, we decided to hunker down and ride it out. At the speed it was traveling, it should have been over in a matter of hours. Then, Danny caught everyone by surprise and stalled in Mobile Bay, pounding us for three days.

The waves on the Gulf were terrifying. We watched the rising tide bang boats against the rocks and sink others. Our front door had a double deadbolt with a keyhole on each side. Water shot through three feet into the room for 24 hours straight. Newly planted palm trees strained against support wires and toppled onto their sides.

We tried to get some sleep in our bedroom, but we could feel the house move with each gust of wind. We watched bits and pieces of our neighbor’s tile roof fly off and smash a few feet from our house. We were trapped and terrified for three days.

The no-hurricane record has been all over the Florida news, highlighting concern that people are becoming complacent. They don’t understand what adequate preparation entails. The storm itself can be horrific, but the aftermath can be equally disastrous, leaving people without food, water, power, and access to basic services for several days. Homes that survive a storm often have to be gutted because of mold and mildew. Without power, sewage immediately becomes a problem.

Plus, if your flood, wind, and homeowners insurance is not up to date, say hello to serious financial hardship. Many Floridians discovered too late that their policy limits had not increased with inflation and wouldn’t cover the cost of rebuilding.

Are You Crazy?—Part 1

Just for fun, I told a friend that I was thinking about selling my generator and dumping our emergency supplies. He looked at me in disbelief and finally uttered, “Are you crazy? When the next one hits, don’t try to mooch off of us. It’s every man for himself.”

Exasperated, he explained that hurricane-causing conditions had not gone away. Until the sun no longer heats the water, we no longer have large and fast temperature changes, and there are no trade winds, a hurricane is a constant threat.

He was red in the face when he finished. I told him I was kidding and wanted to discuss something else: economic hurricanes.

Food, Water, a Generator, and Gold

Many financial pundits are shining the all-clear signal, saying that our economy is fine. People are bailing on gold and mining stocks because they’ve dropped so low. To paraphrase my colleague, Casey Research Chief Economist Bud Conrad, gold sentiment has dropped to zero.

Take a look at the price of gold over the last decade:

Precious Metals Fall into Two Camps

High inflation (Hurricane Danny) and hyperinflation (Hurricane Katrina) are two potential threats to all of our lives. While we hope neither hits, we should still prepare.

At Miller’s Money, we put metals into two categories. The first is core holdings. This is pure insurance against a catastrophe—much the same as our hurricane survival package. Not all storms are category V. Even if we don’t have hyperinflation, during the Jimmy Carter era we experienced double-digit inflation that devastated a lot of retirement nest eggs. Investors holding long-term 6% certificates of deposit would have lost 25% of their buying power during a five-year period, even after they collected the 6% interest.

What if the storm intensifies into hyperinflation and its inevitable aftermath? Many of the items we keep for hurricane emergencies may come in handy if the food supply is interrupted, electricity is cut off, or the currency collapses. Metals will protect us from the rising tide of inflation and protect our purchasing power.

The second category for metals and metal stocks is investment. These holdings are bought with the express intent of selling down the road for a nice profit. There is quite a debate going on in this arena. Some experts are touting the terrific buying opportunity. Others say gold is an ancient relic and there are a lot of better investment opportunities available. Should you take advantage of the buying opportunity or unload?

We set strict position limits in the Money Forever portfolio. When you’re investing money earmarked for retirement, which is our focus, the speculation portion is limited because preserving capital is the overriding consideration.

Gold stocks fall into two general categories. The first is established mining companies and the second is exploration and development companies. Stock in the first group is more directly related to the current price of gold. Every dollar fluctuation in the price of gold adds or subtracts from their net profit as their costs are primarily fixed.

For exploration and development companies, it’s a combination of the price of gold, their ability to raise capital, and a heavy emphasis on the economic viability of their discovery. In a large number of cases a major mining company buys them out and takes them into the production phase.

In both cases, there are certain events that can produce spectacular results; however, the risk is also high. The real question is do you have room to invest any more capital in the speculative portion of your portfolio? That’s up to the individual investor to answer. If you do have room, there are some incredible bargains in the market today. Our metals team travels the globe and has identified many candidates selling at true bargain-basement prices.

What about your core holdings? Should you buy or lighten your portion of metals? The first question to answer is: do you have ample core holdings at the moment? We recommend holding 10%-20% of your net worth in core holdings, depending on your comfort level. (Mining stocks are generally not core holdings; they are speculative.) A lot of investors are slowly building to that target. If you think you should add more, then the current prices present a terrific opportunity.

Once you add to these core holdings, then the daily price fluctuations are no more relevant than the price of the case of beef stew we have stored in our closet. It’s insurance for a catastrophe we hope never happens. When the big one hits, we could probably sell our stew for an astronomical sum, but we won’t because it will help us survive. We would use some of our metal holdings, priced at current value, to buy things we need.

Are You Crazy?—Part 2

The same friend who was flabbergasted by my pretend plan to dump our hurricane supplies asked if I planned to sell any of our gold. I looked at him and asked, “Are you crazy?” Then I explained that the conditions that spawn inflation have not gone away either.

The reasons to own gold have compounded over the last decade. The US government has printed trillions of dollars, our country’s debts are out of sight, and the Chinese and Russians are doing everything they can to oust the US dollar as the world’s reserve currency. When the world no longer needs or wants to hold dollars, they will fly out the door faster than any hurricane wind mankind has ever seen. The value of the dollar will drop like a two-ton anchor and the price of gold will soar.

Precious metals are insurance against the ultimate financial hurricane. Fiat currencies eventually collapsed; the US dollar will not get a free pass. Just as sure as the sun heats the water, we have large and fast temperature changes, and there are trade winds, an overly indebted government will experience a currency collapse.

We have all had ample warning and should be prepared. Don’t be fooled by the short-term thinking.

For more up-to-date economic analysis and time-tested tips for protecting your nest egg, sign up for our free weekly e-letter, Miller’s Money Weekly. Follow us on Twitter @millersmoney.