How A Gold Investor Could Do Almost Everything Right And Still Lose Everything

By: Jeff Berwick | Tue, Sep 28, 2010
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Given the ongoing global financial crisis constructing a solid and conservative portfolio today is much different than at any other point in history. What worked in the 80's and 90's is anathema today. A smattering of large cap American industrial and banks stocks and US Government Tbills and corporate bonds are a sure recipe for disaster over anything but the short term.

In The Dollar Vigilante newsletter in August we gave our thoughts on what a very general portfolio allocation would be for your average middle aged working person. We stated that 30% gold and silver bullion, 20% short term cash (in various forms, USD, CDN, Yen), 15% gold mining majors, 15% gold and silver junior stocks, 15% agriculture & commodities, and 5% in uranium stocks was a reasonably safe portfolio with excellent growth potential.

However, there is a very important thing to take note of. International diversification is key! To buy all of these items in one country turns this portfolio from being relatively safe to being extremely risky.


Geographical Diversification of Assets

For example, you could be an American living in Texas and buy the exact percentages we recommended. You could have bought gold bullion and stored it in your home and in a bank safety-deposit box in Houston. You could have put 20% in cash in a US Dollar bank account at Citibank and bought 15% in gold mining majors whose main operations are in the US and hold those stock certificates in a US brokerage account. You also bought some excellent quality junior mining stocks who are all based in the US into the same brokerage account.

You could have followed our recommendations to the T. But you have just put all your assets at dire risk. Why? You have them all in one country.

What would happen tomorrow when due to the Chinese selling Treasury Bonds (which they have been doing at a steady pace for months now) it causes the US dollar to plummet on foreign exchange markets and causes a stampede out of Treasuries. It is completely feasible that Ben Bernanke would meet with President Obama and demand that foreign exchange controls be put on all accounts in the US to attempt to stop the flight from the US Dollar.

This would further cause panic. Citibank would go under along with 20% of your total US Dollar cash assets. Gold would skyrocket but you can bet that the US Government would be well aware of this and would place, at minimum, some sort of sales tax on gold, if not outright confiscation. The tax they choose could be as high as 50% or more. Whatever amount they decide. They've got all the guns. They make the rules.

So, you'd have wealth in your gold but you'd be stuck to sell it to get anything else of value for it except in the black market where, if caught by Homeland Security, you risk being imprisoned.

You may have kept some cash hidden under your mattress so you head for the airport to get out of the US to avoid all the chaos. But the government is already there and already using cash-sniffing dogs. Think we are paranoid? http://www.liveleak.com/view?i=7b9_1265973374. They are already positioned at major US airports.

As well, US stock exchanges would likely be shuttered as they drop precipitously, leaving the rest of your assets in your brokerage account inaccessible. And this can happen in other countries than the US. Areas at distinct risk include basically all of the Eurozone, Japan and more.

The point being, international diversification is more important now than it has ever been.

Don't just have one bank. Have at least one other bank outside of your jurisdiction. If you live in the US, have one in Hong Kong or Singapore.

Don't just have one brokerage account. If you have one in the US, have at least one other in Luxembourg (Internaxx), Hong Kong, Panama or one of the numerous caribbean tax haven countries such as Turks & Caicos.

Many Americans, so used to government control of their lives will ask, is it "legal" to have a bank or brokerage account outside the US? The answer is, yes, it is still fully legal. You may have to report its existence and pay taxes on any interest, dividend or capital gains income, but it is still allowed - so do it while you can.

As for storage of gold, there are two excellent outfits that help you store your gold & silver in vaults from Switzerland to the UK to Hong Kong and more. They are Goldmoney.com and Bullionvault.com.

Obviously to go through the trouble of all this you would need liquid assets worth, probably, more than $50,000 USD. Otherwise the time and effort to set up all these accounts may not be worth it.

However, easily building liquid assets of over $50,000 can be achieved in the next 12-24 months solely by investing in the stocks and investments we have been recommending. The stocks our Full Subscribers have access to are up the following amounts since August: 28.9%, 23.9%, 13.4% and 12.0%. Subscribe now (for only $25/month) to get access to these past stock recommendations and upcoming recommendations.


Geographical Diversification of Mining Stocks

Even if you don't have the assets to bother setting up bank and brokerage accounts abroad but do have a small portfolio of investments in your local brokerage account you still need to be very cautious about diversifying and spreading out your risk between countries.

For example, let's say you own five gold major stocks and five junior mining stocks. You need to make sure that you don't have more than 20% of your total in any one jurisdiction.

Why? When governments are strapped for cash they scurry around and try to find the one or two industries that are making money. Invariably, in the coming years, one of the only industries making money will be precious metals mining. And, as soon as they notice that, it is all they can do to not slap on a new large tax, tariff or even nationalize the companies in whole.

We've seen examples of this already in places such as the US (The Hardrock Mining & Reclamation Act of 2009) and Australia (Australian Mining Tax). Both of these have come under fire and may not go through YET. But these sort of political robberies are just par for the course in the world we live in today. Similar occurrences have happened in Ecuador, Eritrea and many more.

Therefore, as a prudent, conservative investor it is absolutely critical to ensure you have your mining properties spread out to avoid risk.

An excellent resource for assessing risks in various jurisdictions is the Fraser Institute that puts out an annual survey of mining companies asking them their thoughts on the jurisdictions in which they work.

Below is a chart showing how much confidence mining companies have in the current taxation in the region and in the taxation regime.

Soverign Mining Risk

You may be surprised to see countries such as Botswana and Papua New Guinea near the top and jurisdictions such as Colorado and California near the bottom, but these are the realities as the people with their boots on the ground see them.

And so, even if you don't have the current assets to begin international diversification, be prepared to do so as soon as you achieve a certain amount of wealth.

And for those that do have the capability, we urge you to begin doing so immediately. We are not talking years or decades anymore. It is literally months before many of these types of currency controls and issues begin.

 


 

Jeff Berwick

Author: Jeff Berwick

Jeff Berwick
Chief Editor
The Dollar Vigilante

Jeff Berwick

Anarcho-Capitalist. Libertarian. Freedom fighter against mankind's two biggest enemies, the State and the Central Banks. Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast. Jeff is a prominent speaker at many of the world's freedom, investment and gold conferences as well as regularly in the media including CNBC, CNN and Fox Business.

Jeff's background in the financial markets dates back to his founding of Canada's largest financial website, Stockhouse.com, in 1994. In the late '90s the company expanded worldwide into 8 different countries and had 250 employees and a market capitalization of $240 million USD at the peak of the "tech bubble". To this day more than a million investors use Stockhouse.com for investment information every month.

Jeff was the CEO from 1994 until 2002 when he sold the company and still continued on as a director afterwards until 2007. Afterwards, Berwick went forth to live on and travel the world by sailboat but after one year of sailing his boat sank in a storm off the coast of El Salvador. After being saved clinging to his surfboard with nothing but a pair of surfing shorts left of all his material possessions he decided to "live nowhere" and travel the world as spontaneously as possible with one overarching goal: See and understand the world with his own eyes, not through the lens of the media.

He went on to visit nearly 100 countries over four years and did and saw things that no education could ever teach. He met and spoke with a plethora of amazing people, from self-made billionaires to some of the brightest minds in finance - as well as entrepreneurs from a broad range of backgrounds and locations from tech companies in southern China to resource developers in Mongolia, Thailand, Russia and Chile. He also read everything he could find on how the world really works... politically and financially. A pursuit he continues to this day.

He expatriated, long ago from his country of birth, Canada, and considers himself a citizen of the world. He has lived in numerous locales since including Los Angeles, Hong Kong, Bangkok and currently lives in Acapulco, Mexico and is building a home in Cafayate, Argentina. In essence, everything he writes about here for TDV he has done or is doing.

As well, during his travels, both real and virtual (through the internet), he met some amazing people who have a similar shared vision of what is currently going on in the world and enticed them to come aboard TDV and provide their own brand of analysis.

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