The Golden Anchor

By   December 31, 2008

The golden anchor is a way to remove virtually all counterparty risk while still staying reasonably well diversified. Buy a large chunk of gold, place it in a secure location and short most of this position on paper. Then go out and use the money from the shorting to buy a diversified portfolio as you normally would.

In today’s risky world, with governments everywhere competing for the biggest fiat-funded bailout, precious metals should be a part of any diversified portfolio. However, most investments professionals only recommend 10-20% of the portfolio’s net worth to be in precious metals. And most people have such precious metals investments in either ETFs or certificates. I agree that 20% is probably enough of a weighting towards silver and gold, provided you have other commodities such as oil and food in your portfolio. I’m not a certified financial advisor, but here’s what I would consider fair diversification:

  • 20% Stocks (Mostly tech companies, as they create additional value for tomorrow)
  • 20% Real estate (Most people far exceed this by owning their own home, only needed if you rent)
  • 20% Commodities (Energy and food)
  • 20% Cash (Several currencies if possible)
  • 20% Gold and silver (Actually take delivery of your gold and get your own bank safe deposit box to store it)

Why do I want you to take delivery of the gold and silver? Because as things have developed, there is a new type of risk out there, that threatens to take out your entire portfolio: What if the stock exchange closes? What if the bank takes a prolonged bank holiday? 60% of your portfolio is rendered unavailable if your stock exchange or broker closes. Another 20% is unavailable if currencies are destroyed. If your gold and silver only exists in your broker’s computer or as a fancy piece of paper, you are last in line when the limited quantity of actual gold is divided. What if it is overbooked?

Having 20% of your portfolio in gold in a vault that only you have the key to open, makes you extremely unlikely to lose everything in any scenario. But why settle for 20%? Is there a way to maintain diversification and have less counterparty risk? What I propose is to own more gold, say 80% of your portfolio.

By now you have way too much gold to be properly diversified. So you go to your broker and short gold ETFs for 60% of your portfolio’s total value. Your net position in gold is now 20%. Your 60% stock portfolio is enough to maintain margin requirements for the 60% short gold position. In the event of large upward moves in the gold price, you may need to sell some of your gold to maintain the short paper position. You are still net long on gold, so such moves are to your benefit still. If gold goes down, you may want to buy more as the gold in the vault no longer covers 80% of your portfolio, but you’re not forced to do so.

There is a slight premium on owning physical gold as opposed to certificates. And there is a larger spread between bid and ask when selling. This amounts to what I would call an ‘insurance premium’ that you pay to use the above strategy. But even if the markets close or your broker capsizes, you have access to 80% of your portfolio in the vault. Depending on whether your selected currencies are still worth anything, your 20% cash position is ready as well.

2 Comments on “The Golden Anchor

  1. Kristian Eide

    You forgot one important detail in your account – some of the money will need to be used for the purchase of a number of AK-47 assault rifles with sufficient ammunition to hold off all those who would like to get their hands on the gold if the world situation ever gets bad enough that the stock exchange closes.

  2. geir

    Surely somebody will be willing to sell you a good weapon if you’re paying in gold. I’m more worried about governments suddenly deciding that owning gold is illegal. Because they can do that, just like in the 1930s.

    We did come fairly close to a situation where the stock market / banks were closing last fall. The Russian exchange was closed for four days, the British banking system was on the edge of collapsing (http://www.dailymail.co.uk/news/article-1127278/Revealed-Day-banks-just-hours-collapse.html) and arbitrary new rules in the US banned short selling. The obvious next rule is to just ban selling. No way the stock prices can go down then 😉

    So you see, a situation where banks and stock exchanges go under and you are last in line to claim money that is simply not there, is a real concern at this point. The FDIC has $53 billion in capital to insure $4.2 trillion in deposits. You can do the math. Putting money in a bank account at this point is equivalent to lending it to companies already bankrupt (zombies kept alive by creative accounting), only you get lousy interest rates that don’t compensate you for the risk.

    As Saint-Obama is revealed to be helpless in stopping this train-wreck, I expect to see another severe market crash, and I would not be surprised to see the S&P 500 live up to its name this year. Obama is not going to fix anything, as he has shown absolutely no desire or will to crack down on the fraud that has been rampant in the system. In fact, his new secretary of treasury and thus head of the IRS, Tim Geithner, is a tax evader himself!

    If you live in California, you should also be aware that that state is as bankrupt as the banking system itself, and make sure you’re not withholding too much taxes this year, as you are likely to get that reimbursed with IOUs. If you’re able to trade that junk for money at any reasonable rate, you should be very happy indeed.

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