How To Defend Your Portfolio

This summers must-read book for investors is The Death of Money, by Jim Rickards whose previous work, Currency Wars, caused a stir two-and-a-half years ago with its tough conclusions about the outlook for global economic stability.

In the afterword to his latest tome, Rickards says things have gone from bad to worse in that time and he does not expect his more optimistic scenario – low inflation to amortise the debt mountain – to be realised.

His recommendation for portfolio allocation has therefore become equally extreme and designed as a balance that will defend investors from waves of deflation and high inflation as the global currency system unravels.

His preferred allocation is: 20 per cent gold; 20 per cent urban land without buildings on it; 10 per cent fine art of museum quality; 20 per cent alternative hedge funds; and 30 per cent cash in Singapore, Canadian and US dollars and the Euro.

“Cash may not be the best investment after a calamity, but it can serve the investor well until the calamity emerges,” he notes.

Perhaps it is important also to highlight what is not in this portfolio: direct ownership of US or any other stocks, for example, or government bonds. The value of both has been inflated by years of money printing that is about to come unstuck very badly. In a systemic collapse, the asset classes that underpin the savings of most people would be reduced to trash.

Gold should be in physical form as coins or bullion and easily accessed. “Gold stored in banks will not be accessible when it is most needed,” warns Rickards. That’s fine in theory but how practical is home storage? Thieves are always with us.

Still Rickards is undoubtedly right about gold’s insurance function for a portfolio as a hedge against both inflation and deflation. In inflation, gold does very well until interest rates rise above inflation. In deflation, governments will devalue paper money by printing it to boost inflation and that raises gold prices.

Why invest in urban land without any buildings on it? Rickards says that although land would decline in value in a deflation, it would also be cheap to build on it and the money would be made on the upturn. We think back to Khalaf Al Habtoor doing just that in the Dubai crash and cashing in now with the hotel room boom. Still, we wonder if prime real estate with steady rental income would not serve very much the same function.

As for fine art of museum quality, yes, it is a form of portable wealth and not a market that governments bother to manipulate. However, this market has been through a huge boom in recent years and we wonder how liquid it would be if many investors wanted to cash out, say to meet margin calls on their crashing stock portfolio.

With hedge funds, it is all about strategies and the person running the show. Again, in theory, these funds provide access to a myriad of asset classes that should be hedged against each other to offset inflation or deflation.

Liquidity can also be an issue as redemptions may be prevented for five to seven years. Hedge funds also widely use derivative products that could be at risk in the kind of global financial crisis part two that Rickards describes.

Perhaps the most unlikely choice for the author of The Death of Money is cash as 30 per cent of his model portfolio. True, it is an excellent deflation hedge as cash acquires higher spending power as the value of money drops. It also removes volatility and can be converted to something else at the drop of a hat.

Indeed, to be fair to Rickards, he makes it clear that this portfolio is not set in stone. Far from it, this is a dynamic portfolio that can and should be moved around as the times dictate: “If gold reaches $9,000 an ounce, there may come a time to sell gold and acquire more land… If inflation emerges more rapidly it may make sense to convert cash to gold.”