Do CFP’s Understand the Need to Diversify Portfolios With Gold?

I decided to reply to an article written by a CFP (Certified Financial Planner).  His article was titled; “Will the Gold Rush Continue, or will Fool’s Gold Rule?” and you can read my reply to his article in the comment section of the “All Things Financial Planning” website.

CFP’s are great as advisors as they take into account the entire realm of planning when recommending how people should handle their finances and investments.  They have to pass a comprehensive exam and are required to complete continuing education each year to stay on top of their expertise.

But even CFP’s can misinterpret the need for gold as part of a diversified portfolio.  The reason is, the books they are required to read before taking the CFP exam don’t even address gold properly and there are no continuing education courses that addresses diversification into gold.

The CFP in this case wrote a pretty good article on gold yet the article was missing one important reason why people should be invested in gold.  The U.S. Dollar today is not the same U.S. dollar of yesterday as the dynamic with gold changed in 2000 because of the added ways that people can now diversify out of the U.S. dollar.

He did speak about inflation saying;

“However, the required holding period may be lengthy; over the last several decades, gold has not always kept pace with inflation.”

This is typical of the responses one gets when talking about gold.  This type of response neglects to address the issue of “what’s happening now!”

One could use the same analogy of taking a particular stock of a company and saying that it too hasn’t performed well over the last couple of decades.  The reality is there’s a difference between the stock of a company and gold.  Stocks have a short term history compared to gold.  Gold has thousands of years of history of maintaining purchasing power.

The real issue however, is the blind faith that all those who criticize gold have in a piece of paper that has existed 38 years without gold backing.  In 28 of those 38 years we had no real competition to the U.S. dollar.  The world reserve currency was the U.S. dollar.  All was well.  Except for possibly the Savings and Loan crisis where the U.S. government had to intervene and resolve the situation that caused the insurer to Savings and Loans, FSLIC, to go bankrupt.

But what has happened in the last 10 years that was a game changer for the U.S. dollar?

Answer:  The introduction of the EURO and other financial instruments that have allowed the world to diversify out of the U.S. dollar.  What also has happened is the U.S. government via the Federal Reserve has allowed out country to continuously take advantage of the U.S. Dollar world reserve currency status by running up massive debts as they spent more than the tax receipts provided.   In addition, the U.S. has been involved in three wars and is presently still involved in two.

The U.S. has almost 12 trillion in debt and they’re still fighting wars?  Does anyone see the problem for our future generations, let alone our seniors who rely on the purchasing power of social security for their retirement?  Your government is destroying your retirement!  How?  Because the Federal Reserve allows them to borrow money they don’t have, loan it out to individuals and other countries like China and Japan and continue the madness that has got us to where we are today.

If a CFP cannot comprehend what our government is doing and protect clients purchasing power of their U.S. Dollar based assets, then they aren’t worth considering.  A CFP will recommend you protect your car, your house, your life with insurance, but won’t insure your portfolio with a little gold.

Instead they say;

But, how long will it last? Investors 30 years ago who feared that the high inflation of the period could continue on well into the future sought out gold as a buffer. Many bought in at high prices that wouldn’t be seen again for decades. As those investors learned, changing attitudes about the future can turn a gold rush into a popped gold bubble.

My counter to them would be, how do you expect the U.S. government to pay off the outstanding debt and handle future debt while at the same time exceeding $1 Trillion in current deficit spending?

There are only three ways to eliminate this debt:

1.  Raise taxes

2. Inflate it away

3. Default

Which of these three ways is a serious option?  Congressmen won’t get elected by running on a campaign of “I’m going to raise your taxes!”  Defaulting will destroy what the last century has built.  This leaves only #2, inflating it away.

Inflating it away simply means that we pay today’s debt off with future dollars that buy less.  So if I have $1 of debt today, I can pay it of with $1 of debt tomorrow, but the $1 debt of tomorrow will have 50% less purchasing power so technically I can pay $1 of tomorrow money for $2 of today’s in terms of purchasing power.  I’ve reduced my debt by 50%!

Now, under this simplified scenario, what will $1 of gold today buy you tomorrow?

Being that most investors today have 60% or so invested in stocks, 35% in bonds and 5% in cash, typically about 88% of one’s portfolio is subject to the fall of the U.S. Dollar.

As I explained in my reply to the CFP,

The stocks might be 80% U.S. and 20% international, the bonds are typically U.S. corporate and U.S. government and the cash of course U.S. (granted there are some who recommend real estate and even commodities so I am talking in general).

Adding these numbers up, you might have about 12% (20% x 60%) in foreign stocks that might (might) counteract the fall of the dollar. This means that you have 88% of the portfolio at risk of a dollar fall.

Where is your insurance for this 88% of your portfolio?  In some states you are required by law to have insurance for your car.  Maybe they should pass a law to have U.S. Dollar insurance for your portfolio.  Wouldn’t it be prudent?

Please note, I didn’t include the following in my limited reply to the CFP:

1.  Over 100 banks in the U.S. have failed in 2009 and FDIC will need more funds possibly as soon as next year.

2.  Fannie and Freddie and many other “too big to fail” entities will need more bailout funds.  That’s why Timmy Geithner was in front of Congress asking them for even MORE Fed power when it was the Federal Reserve that was at the root cause of pretty much everything that got us to this point in time.

3.  Medicare, Social Security, Cash for Clunkers and Houses, Green Initiatives, Cap and Trade, the list just never ends….

4.  There are going to be the exception to the rule with CFP’s.  Not all investment advisors are alike, but most do follow the so called experts who wrote the books telling them what to recommend.  It is the thinking of those they follow I hope that CFP’s will start to question and advise their clients according to “what’s happening now!”

Disclosure: From a short term perspective, I did note when gold was trading at $1,058 that it could be peaking as the Dollar rebounds.  Nothing goes straight up or down.  Personally I don’t mind gold falling in price for the short term.  It will allow me to get the message out to more folks so they can buy  gold at a lower price.

My gold and silver investing book called “Buy Gold and Silver Safely” will be available on Amazon.com in the weeks ahead.  If you would like to be notified of its release, please email me at doug@fedupbook.com