In my opinion, and the opinion of the experts I follow, there is currently only one major asset class in a confirmed secular bull market. That asset class is commodities. Furthermore, this bull market is showing no signs of approaching the bubble stage. Jim Rogers estimates it could run until at least 2020. Since I have tried over the years but failed to find a safe or easy way to own most of the commodities, I decided to hold only gold and silver. This has been very profitable since 2000, giving my entire portfolio an average annual return of about 16% - now in its 12th year without a down year.

While gold and silver are the main assets in the portfolio, they are not the only assets. I have a small interest in natural gas production (non-publically traded), a substantial cash reserve and no debt. That’s it. This is the easiest portfolio to manage I have had in my lifetime. All I need to do is keep three balls in the air at all times: 

1. Keep the majority of my assets in gold and silver (let’s say half to two-thirds). As you know I prefer to have more silver than gold);

2. Keep a substantial cash reserve at all times (30% to 40% depending on my best estimate of future needs;

3. Have ZERO DEBT.

If I keep these three balls in the air, I rarely have to do anything. I don’t try to trade in and out. I don’t try to guess the short term movements of the market. I try to be patient and let the portfolio perform. I expect to give it at least five years, or until my experts tell me the secular commodity bull market is coming to an end. IF I DIDN’T HAVE THE THREE BALLS IN THE AIR, I WOULD CONCENTRATE ON GETTING THEM IN PLACE BEFORE I DID ANYTHING ELSE. 

Balls 1 and 3 are easy to understand. But I find that many investors don’t seem to understand the importance of a substantial cash reserve. There are two main purposes of a cash reserve. One is to protect against deflation, i.e. a period of time during which the dollar rises against almost all other asset classes including gold and silver and other commodities. The other is to provide buying power to purchase outstanding values created during these deflationary periods. There have been many such periods, some short, some longer over the last 100 years. Thus every one of my experts keeps a healthy cash reserve to serve these two purposes. The Permanent Portfolio Fund (PRPFX) keeps about 30% of its assets in Treasury Bills (US dollar cash), and an additional 20% in long Treasury Bonds, thus half of PRPFX is in the US dollar. This is one of the reasons for the long and stable performance of PRPFX.

The case for US dollar cash

Often I hear someone say, “Why keep any of your portfolio invested in dollars when the dollar is steadily losing purchasing power by the creation of more fiat currency?” The answer is that unexpected and unpredictable deflationary periods occur. In the 1930s we had a long deflationary period during which almost all asset classes fell sharply against the dollar. Cash was literally king during this period. Many millionaires were created during this period as those with no debt and a good cash reserve were able to purchase incredible bargains.

Many shorter deflationary periods have occurred since. About 6 years ago, the housing bubble burst and houses have been going down against the dollar since. My experts predicted this would happen. I passed the information to my investors suggesting they might want to consider selling and paying down their mortgage. We’re now in the second dip of this trend and it’s not over yet.

I have learned that at any time, any asset class can deflate against the currency when certain events or circumstances occur. Wars and natural disasters of all kinds can cause deflation. Large amounts of debt can suddenly default. The creditors who lent the money discover that their investment is worth zero. Any large debt default can create deflation because huge amounts of the currency just disappear. And any time a large amount of any asset disappears, then that asset can go up in demand and in value. When debt pyramids default, the dollar goes up in value. We very well may be beginning another such period as I write this. Potential debt defaults are in the news now. If they get out of hand, a huge amount of assets can disappear, and the dollar could go into a powerful rally.

There are even times when gold and silver can go down against the dollar and go down substantially. Let me give you some information you may be unaware of. Between 1968 and 1980, gold went up 24 times from $35 to $850. This was logical because our currency’s gold backing was removed in 1971. What many may not be aware of or have forgotten about is that after gold topped at $850 in January, 1980, it started falling and went down for the next 20 years! That’s right, until 2000. During those twenty years, it fell from $850 to $257, losing 70% of its value in terms of the US dollar, even as the dollar was losing purchasing power every year through the creation of more fiat money. How could this happen? In 1979, Paul Volcker began raising interest rates, getting them well up into double digit levels. All of a sudden people were getting double digit returns on their savings accounts and CDs. Money began flowing into the banks, not only from US citizens but from all over the world. At that time the US was considered one of the safest places on earth to invest. This could happen again and you can’t predict it.

Even as late as 2008, we had a deflationary period lasting about 18 months. The stock averages fell by more than half. Houses were falling in value as I have already stated. Gold fell about 30% and silver fell 60% during this deflationary period. The dollar went up against almost everything during this period.

What you least expect often happens

I learned these lessons from experience, and I paid my tuition! I have learned that what people least expect often happens, and when it does, it costs them the most money. If you have debt and/or very little cash, you can be forced to liquidate other assets to service that debt. You will find that your need for cash is greatest and hardest to get when you need it the most. Even if that cash eventually becomes worthless through currency debasement, it will be too late for you to profit from it if you have been forced to act to raise cash. You must have all three balls in the air.

The market always does what it's supposed to but never when

This great statement made by Richard Russell sums it up. Every undervalued asset will go up sooner or later, but no one knows when. It can even go in the opposite direction for a time, and we don’t know when that will be. I believe someday silver will go much, much higher, but I don’t know when that will be, and before it does, it could correct downward. I remember the 60% drop in 2008. In spite of that it has averaged 18% annual gains over more than 11 years.
As Richard Russell says, “The experts don’t need the market.” They have positioned themselves in such a way that they don’t need for any asset class to act in a certain way. One of the things that means is that they have a substantial cash reserve. They can sit and wait for the super bargains to come along, and then buy them. I believe I should follow them and do likewise. It’s best to be prepared.

The salient points are:

1. I view my gold and silver as serving an opposite function to my cash. My precious metals and cash are hedging one another. If our fiat paper dollar continues to fall in purchasing power, then my gold and silver will preserve the purchasing power of my portfolio.

2. When I purchase silver or gold I see myself accumulating ounces of intrinsic wealth, not some number of dollars worth of metal. Thus, each ounce I add increases my savings regardless of the price in the depreciating currency at that time. Start thinking about ounces not dollars. NOTE: Due to recent disastrous events, I do now see a good opportunity for small investors to invest in agriculture. See the following short article written by my partner, Ted Spaeth: A Simple Way to Invest in Agriculture.

3. When I purchase gold or silver, I do NOT do so with the intention of selling it or trading it for a profit. My intention is to spend it or give it away as the dollar becomes worthless over time. History tells me all paper currencies eventually become worthless (more than 3000 so far including two in the US). Yet for 4000 years, gold and silver have preserved wealth and purchasing power, serving as money or backing for paper currencies for much of that time.

4. For those unpredictable times when the dollar will go up against most other assets (due to deflationary episodes, depressions, natural disasters, wars, etc., my intention is to hold an adequate cash reserve. It will prevent me from being forced to liquidate other assets. I have learned that cash is the hardest thing to get when it is needed the most.

5. I have learned that the two most important character traits of my experts are patience and emotional control (the ability to act independently of fear and greed). They have shown me and taught me what these traits look like.

6. Most financial experts will not advise what I do, and many will disagree with some points I have written above. For almost 50 years I listened to hundreds of them. At this point I trust only a handful of them. See Whom To Listen To for a discussion of this.

7. Finally, and most important of all, I will acknowledge that God owns all the wealth in the world. I am only managing it for Him. I am to maximize His estate, not mine. I understand that I cannot serve both God and money. See Matthew 6:19-34 for the specifics.