By John March, Partner, Superior Gold Group

In the midst of the global financial crisis, few investment strategies appear to be effective.  Buy and hold has decimated returns, and diversification across different countries hasn't worked.  Even asset allocation has let down investors as many asset classes, including real estate and hedge funds, have taken a nosedive.

Moreover, money market funds have failed as a place to hide as they fell behind inflation. Treasuries have dropped in yield to the point where the 30 day T Bill actually dropped below a 0% yield.  So what is an investor to do?  Is there a last bastion left to protect asset values, and make a profit?

Yes, physical gold is that bastion. Some experts recommend that it should be bought and held, at least 3 to 5 years and comprise about 10% or 20% of an entire portfolio.  It is important to remember Gold is a hedge and should be the "rudder" of your portfolio, not the "engine."

Forms of Physical Gold

The basic forms of gold are Bullion, Proof, Semi-Numismatic and Numismatic.  Bullion comes in many forms ranging from gold bars, modern issue gold coins, nuggets, and jewelry.

Proof Gold is coin which comes directly from government mints. Proof is uncirculated and untouched by human hands.

Semi-numismatic refers to gold coin of common date minted prior to 1933. Semi-numismatic coin can be graded or raw (loose coin). With Semi-numismatic coins mint mark and issue dates are not relative to collectible value.

Numismatic coins refer to collectible coins minted prior to 1933. Mint mark and date play a key role in determining coin value. Numismatic coins graded by reputable grading services carry the most favorable value.

Professional Coin Grading Service (PCGS) and Numismatic Guarantee Corporation (NGC) are two of the most highly respected and widely recognized grading services in the US.  These services will hermetically seal graded coins in plastic and certify their authenticity.

Generally the higher the coin grade the more valuable the coin. Premium coins are valued according to their Mint State condition - MS60 to MS70 with MS70 being near perfect condition. However, pure Numismatic coins may have a lower grade yet command a higher market value due to rarity and desirability.

The Case for Owning Physical Gold

Physical gold should be bought for at least a 3 to 5 year period as a necessary part of a well-balanced investment portfolio.  Gold is the proven symbol of wealth and has a 5,000 year track record as a monetary metal (along with silver) and importantly, inversely tracks many investments, including the dollar and usually  stock markets.  It also tends to follow or beat inflation, responds positively to geo-economic turmoil (flight to safety), and typically goes up when oil prices increase.

Various types of gold react differently to these variables. The most reactive is gold futures. The least reactive to global and market instability is pre 1933 Mint State US gold coins which tend to be downward resistant and can hold their value longer when the markets correct or turn downward.

Gold should always be held as a personal possession and/or a qualified plan such as precious metals backed IRA, 401(K), or retirement plan. A mix of both is preferred for long term financial stability.

Gauging the Performance of Physical Gold

When investing in physical gold and/or silver, watch for long term trends, not short term reactions. Over the long, medium, and short term, gold, particularly numismatic gold has performed admirably.

Numismatic gold is currently the "Shinning Star" of a portfolio.  This chart shows the 10, 5, 3, and 1 year performance of Gold vs. the Dow, S&P, and NASDAQ as of 11/06/08. It assumes return on $100,000 invested over the various periods of time.

There appears to be no long term pressures that will alter these trends in the near future, in fact our current government stimulus spending could amplify demand and increase the value of gold and the other precious metals.

Commodity Cycles

Commodity cycles typically last 16 to 22 years, according to Pamela and Mary Ann Aden, noted commodity analyst and publishers of the Aden Report. If they are correct, and I believe they are, then we are only into the current cycle by 7 years. That means 9 plus years to go.

Recommendations for a Portfolio

Here are two recommendations for the truly diversified portfolio: (1) for physical possession, US Gold MS 60-64, pre 1933, both St. Gaudens and Liberties; (2) secure your retirement account, IRA or 401k with Proof Gold (which  will develop numismatic value over the years).  Both of these will gain from gold's performance as well as rarity value.

Remember a balanced portfolio is not just diversification among stock sectors; it's a balance of stocks, cash, bonds, and physical metals.  As mentioned earlier, we recommend 10% to 20% in physical gold and silver, which is a very conservative position.

Why Now is an Ideal Time to Invest in Physical Precious Metals

The economy will continue to deteriorate and the government will continue to try to solve the problem by spending more money it doesn't have.  At the end of 2008, the U.S. will have nearly $12 Trillion ($12,000 Billion) in deficits on top of the $50 trillion in unfunded debt (the amount of Medicare, Medicaid and Social Security that is beyond our current projected funding).  The World GDP is about $60 Trillion; therefore even if we injected the entire World GDP into our debt it would not cover our U.S. deficit.

Politicians don't like hard decisions; they only like politically correct decisions.  There are three (3) ways to solve the problem.

Politicians will follow the line of least resistance because either of the first two options are a politically disastrous career option.

This means governments will most likely print more money, a lot more money.  Already in 2008 the U.S. money supply has increased by 16%.  This huge government spending will eventual cause inflation not previously experienced.  That in turn will cause the dollar to drop like a rock, and commodities and precious metals to rise in a major way.

No one has a crystal ball, but we believe that gold will rise to over $2,000 per ounce and silver over $75 per ounce over the next 3 to 5 years.  Many of my fellow gold investors feel I am being absurdly conservative, but I feel I am being realistic.  Gold is a play to hedge against a shaky economy and to increase the odds of "return of capital" plus inflation.  If it can have a great return as well, all the better.