- Wednesday, June 29, 2016

The Great Depression. Black Monday. 9/11. The Great Recession. Brexit.

Which of these financial crises did the experts predict? And which of these crises was the average investor prepared to overcome and thrive?

The answer is that almost no one, expert and investor alike, was prepared for these events that devastated savings and portfolios in a blink of the eye.

Investors have a name for these unexpected events: Black Swans.

The term, coined by professor and former derivatives trader Nassim Nicholas Taleb, refers to the rare or unexpected event which has profound economic or social consequences.

One could argue that Brexit was far from unexpected, given the referendum was first announced four months ago. But, as is often the case, the experts got it wrong when they largely predicted the United Kingdom would vote to remain in the European Union. And despite four months to prepare for this vote, the world economies and financial institutions were nonetheless unprepared for the consequences of the U.K. departure from the EU. And like other Black Swan events, the Brexit crisis is likely to worsen and have long-lasting effects.

The U.K.’s departure may signal the ultimate demise of the EU and its single currency, the euro. Some experts believe such a collapse could threaten the trillions of dollars that U.S. companies have invested in the EU. We are also at risk of a global economic slowdown, given that the EU economy is the third largest in the world and its combined imports/exports exceed those of both the U.S. and China.

As the world economies grapple with the effects of Brexit, there are other possible Black Swans waiting to unfold. These include a currency collapse in China or the U.S., a regional war in the Middle East, a significant terrorist attack akin to 9/11, mismanagement of interest rates by the Federal Reserve, a major natural disaster, a pandemic, a cyber-attack on U.S. financial institutions or infrastructure. Sadly, the list could go on and on.

What can investors do to protect themselves from the unknown or unexpected? One of the most important decisions a smart investor can make is to diversify his or her portfolio with a recognized safe haven asset such as gold. Indeed, gold was the asset of choice for many investors who rushed to acquire the yellow metal once the Brexit results were announced.

Why gold? One of the goals of a diversified portfolio is to include assets which react differently to the same event. Here physical gold shines, since it is an asset which is uncorrelated to other asset classes, free of counter-party risk and offers protection against currency manipulation and collapse. As the United States Mint explained, “[m]any investment experts believe that adding gold to your portfolio may improve its performance. That is because the forces that determine gold prices usually differ from, and in many cases counter, the forces that determine the price of many financial assets. Investment advisors often suggest that this relationship may help to reduce portfolio volatility.” (US Mint, “American Eagle Gold Bullion Coins,” 2010.)

These are among the many reasons gold has been considered an alternative currency and storehouse of wealth for 2,000 years. It is a hard asset that has survived economic collapse, dislocations, depressions and recessions, and whose value has never gone to zero.

There’s a famous Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second best time is now.” This ancient proverb offers a fundamental rule of investing: It’s never too late to make a smart investment decision.

Goldline has personal Account Executives available to assist clients throughout the purchasing process and offers a wealth of free information about investing in gold and other precious metals. Call Goldline today at 800-760-1956 to learn how easy it is to acquire gold bullion delivered to your home or added to an IRA.

Brian R. Crumbaker, JD, MBA, is chief executive officer of Goldline, LLC.

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