A Solid Foundation for Every Portfolio
Investment in spot bullion precious metals market should not be considered a short-term speculation, but
rather a long-term investment strategy that should always form a part of your portfolio. Here are few
facts for you to consider….
I. Strategic Asset Allocation
III. Tactical Asset Allocation
The following pages will address these strategies in greater
detail and review why precious metals shall be the
foundation of every investment portfolio.
1. Strategic Asset Allocation
"More efficient investment portfolios can be
created by diversifying among asset categories
with low to negative correlations.”
- Dr. Harry M. Markowitz, Nobel Prize Economist
In search for effective diversification against increasing convergence among mainstream asset classes, investors
are considering a variety of alternative investment vehicles. One being the old-fashioned physical precious metal,
such as gold, silver, platinum and palladium. Why? It offers superior diversification with high liquidity and low
costs. In addition, the price of precious metals typically moves contrary to other investment vehicles, thus giving
balance and protection in a changing economy.
Historical Efficient Frontier, with and without Precious
The spectrum of asset class
combination with optimal risk return
characteristics forms the Efficient
Efficient Frontier - core portfolio
without Precious M etals
Frontier. According to Harry Markowitz,
the most influential economist of 20th
Efficient Frontier - core portfolio
with Precious M etals century, by including precious metals in
their investment portfolios, investors
are thus being able to properly balance
asset classes of different correlations
in order to maximize their potential
returns and minimize the risk of their
investment portfolios. This is at the
heart of calls as Strategic Asset
Low Correlation: The Basis for Diversification
The essence of diversification in a portfolio is the appropriate balance
of asset classes of different correlations. While many investors
believe their portfolios are diversified, they typically contain only
three major asset classes – stocks, bonds and cash. Real estate,
commodities, precious metals and collectibles rarely form part of
most investors’ portfolios. With only three asset classes out of a total
of seven, such portfolios are clearly not adequately diversified. A
recent study carried out by Ibbotson Associates, Portfolio
Diversification with Gold, Silver and Platinum, showed that precious
metals are the most negatively correlated asset class to all other
assets. It also noted that, since 1969, stock and bond correlations
have increased and, contrary to popular belief, a mix of these will not Precious Metals are the only asset
result in a diversified portfolio. Today, most portfolios lack the class with negative average
negatively correlated asset classes – real estate, commodities and correlation to other asset classes.
precious metals – necessary to achieve full diversification, and as a
result are exposed to risk and market volatility.
Correlation Coefficients of Annual Total Return for Precious Metals and
Other Asset Classes – the only asset class with Low to Negative
Correlation to other asset classes
“By allocating 7%-16% to Precious Metals,
investors could increase returns and reduce
portfolio risk.” – Ibbotson & Associates
Source: Ibbotson Associates, 1972-2004 5
Precious Metals Have Been a Solid Hedge Against Inflation.
The price of precious metals typically increases with rising inflation, thus offering insurance against inflation. Gold
also has the amazing ability to accurately forecast the direction of the general price level and interest rates. According
to the recent studies of John List, a top economist at the University of Chicago, by testing three commodity indexes
(Dow Jones Commodity Spot Index, crude oil, and gold) to determine which
one best anticipated changes in the Consumer Price Index (CPI) since
1970, Gold proved to be the best indicator of future inflation, as measured
by the CPI – even better than oil. The lag period is about one year.
“It just makes sense to have portfolio insurance in the
form of bullion… Any investment portfolio must be
bedrocked in Gold!” – Jim Cramer
Research shows that overall performance of 25% High Inflation
Research Center, Inc.
precious metals during the 32-year period was Low Inflation
close to fixed income investments. Even
through the long bear market of 1980 to 2002,
precious metals outperformed both cash and
inflation during the entire period. From 1973 10%
to 1984, a high inflation period, precious
metals were the top-performing asset class, 5%
and the study concluded that precious metals
provide an effective hedge against inflation. US Large Cap US Small Cap International Spot Precious US Long-Term US Cash (US 90- US Inflation
Stocks Stocks Equity M etals Index Government Intermediate- Day Treasury
The study confirms, Precious Metals are the (SPM I) Bonds Term Bonds Bills)
most positively correlated asset class to Source: Ibbotson Associates
inflation, thus, the higher the inflation rate,
the better is performance of Precious Metals. Compounded Annual Return through High Inflation (1972-1981) &
Low Inflation (1982-2004)
Precious metals are thought of as safe heavens during periods of financial stress. They can act as a hedge against
instability of other investment vehicles; they can rise when stocks, bonds, real estate and Treasury bills fall.
Research shows that for the period of 1972-2004, Precious Metals’ overall performance was close to that of fixed
income and it outperformed cash and inflation.
No other investment reacts to market downturns as well as gold, silver, platinum or palladium bullion. It is the
best known portfolio insurance. Precious metals are the only asset class with a negative average correlation to
other asset classes, the basis for diversification.
Arithmetic Historical Returns for Nine Years of
Negative US Large Cap Returns
U S Inf lat io n
Research Center, Inc.
C ash ( U S 9 0 - D ay T reasury B ills)
U S Int ermediat e- Term B o nd s
U S Lo ng - T erm Government B o nds
Spo t Precio us M et als Ind ex ( SPM I)
Int ernat io nal Equit y
U S Small C ap St ocks
U S Large C ap St ocks
(15) (10) (5) - 5 10
Source: Ibbotson Associates, 1972-2004
Gold Bullion vs. Mining Stocks
When examining the hedging attributes of precious metals, it is important to distinguish between bullion and
mining stocks. For example, in the financial crash of 1987, both the Dow and Precious Metals Mining Sticks have
experienced major similar declines, while Gold itself has appreciated. The Closed End Central Fund (CEF) that
holds both gold and silver acted as a mining stock during that timeframe. This confirms that it is important to
hold bullion in fully allocated segregated form to provide the desired hedging benefits.
Crash of 1987: The Dow, Gold Bullion and Mining Stocks
Source: stockcharts.com 8
“… Put 10% of your money in
Gold and hope it doesn’t work.”
- old Wall Street saying
In today’s economic climate, there are plenty of risks to hedge against, one of them is currency exchange
• Currency Crisis of Mexico,1995,
the price of Gold rose over • In Indonesian Currency Crisis of
100% in just 3 months. 1997, Gold skyrocketed over
310% in 1 year.
• In Russian Currency Crisis of +304%
1998, the price of Gold rose
over 300% over 1 year period.
• Similarly in Argentinean
Currency Crisis of 2002, there
was a roughly 350% increase in
price of Gold in just 6 months.
Currency Risk & Growth of U.S. Money Supply
Growth of US Money Supply
Typically, a currency crisis results when there is an excessive
growth in a Money Supply as evidenced by the Chart of M3 U.S.
Money Supply. For example, in 1971, total M3 Money Supply
produced was at about $800Bil levels. In 2006, an annual
increase in M3 was around $980Bil., thus creating a yearly
increase in money supply that surpassed total money in
circulation back in 1971. If this process continues, ultimately
too much money is being creating resulting in hyperinflation
and essentially leading to currency collapse. Precious Metals
act as a leading indicator as they act essentially as a non
confidence vote in a government’s monetary policy.
Today, fundamentals are in play again as the lax monetary
policy of the Federal Reserve is hugely increasing the money
supply, which can really only result in further dollar weakness,
global inflation and higher commodity prices.
The supply of precious metals is pretty much fixed so gold
and silver will rise in price as the money supply expands.
M3 is Soaring
Money Supply & U.S. Dollar Depreciation
Precious Metals Have Been a Solid Hedge Against a Declining U.S. Dollar.
The results of increasing Money Supply can already be seen in the loss of the exchange traded value of U.S. dollar.
US Dollar is down over
30% since its peak of February 2002
During same time period, precious
metals went up over 100%
Source: stockcharts.com 13
U.S. Money Supply & Erosion of Purchasing Power
Apart from Foreign Exchange losses, an increase in Money Supply results in steady erosion of purchasing power.
“$5.03 in the year
2005 has the same
as $1 in the year
1970,” i.e., U.S.
by more than 80% –
US Department of
Purchasing Power: Then and Now…
Purchase Price in U.S. $ 1971 2006 Price Change
Compact Chrysler Car $ 2,313 $ 15,200 657% “Gold is a constant, like the North Star.” -
Avg House Price $ 24,608 $ 299,100 1215%
Dow Jones 890 12,502 1405%
Purchase Price in Gold oz 1971 2006 Increase
1 Ounce of Gold $ 35 $ 632 1806%
Compact Chrysler Car 66 oz 24 oz 175%
If we look at the loss of purchasing power from a
practical example, the percent increase in prices is
astonishing. For example, it would take 12 times as Avg House Price 703 oz 384 oz 83%
much dollars to buy an average house today than what
it used to cost in 1971. While 1 ounce of Gold has Dow Jones 25 oz 20 oz 25%
appreciated by over 1800% during the same time
Dow Jones and Gold Prices as of Dec. 28, 2006
period, if we convert these prices to the ounces of
Gold, we can see that instead of increasing prices, the
prices actually declined once measured in the number
of gold ounces. Precious Metals preserve the
Gold has always preserved its purchasing power over the
purchasing power against erosion by inflation.
long run. To demonstrate the long-term value of gold,
let’s take a look at $20 Saint-Gaudens Double Eagle gold
coin. Prior to 1933, our grandparents carried this coin in
their pockets as money. Back then, they could buy a
tailor-made suit for one double eagle, or $20. Today, the
Saint Gaudens coin, which is worth between $600 and
$1,000, depending on its rarity and condition, can buy the
same tailor-made suit with the value of this one coin.
“The implications of a change in the gold price are far-reaching.
Gold serves as a dependable barometer of purchasing power-and
therefore of pressures on inflation and bond markets. It is widely
regarded as an effective hedge against inflation, just as it is a hedge
against a broad number of economic ‘shocks.’ Combine this with its
liquidity vis-à-vis inflation linked bonds, and gold, as many investors
are currently discovering, has a vital role to play.”
- World Gold Council, November 2005
Fat Tail Events
“Fat Tail” Events refer to protection against a sudden financial crises, such as:
War Bullion vs. The Dow
Systemic Financial Risks
• Derivatives Accident
• Bankruptcies of major
financial institution, and
Disruption of Oil Supply
Precious Metals act as portfolio Source: stockcharts.com
insurance to mitigate catastrophic
effects on assets in traditional As evidenced by the chart above, 9/11 terrorist attacks have
financial world if such “Fat Tail” sent the Dow into financial turmoil. At the same time,
events to occur. precious metal prices have appreciated by over 120%.
“… Derivatives are financial weapons of mass
destruction, carrying dangers that while now
latent are potentially lethal.”
- Warren Buffet, 2003
3. Tactical Asset Allocation
A Solid Foundation for Every Portfolio
The Dow-Gold Ratio
Diversification protects investment portfolios. Many of the world-renowned authorities on asset allocation
theory agree that investors could improve returns and reduce risk by holding 7-16% in precious metals
bullion. No other investment reacts to market downturns as well as gold, silver, platinum or palladium
bullion. It is the best known portfolio insurance.
The Dow-to-Gold ratio measures how many
ounces of gold are required to purchase the Dow.
It is a reliable method of taking the temperature
of the markets, and also a leading indicator that
a cyclical trend change is occurring. History
suggests that markets move in cycles lasting
approximately 20 years. As these cyclical trends
occur, an important indicator for portfolio
adjustments between asset classes is the Dow-
Gold Ratio. Research indicates that when the
ratio rises (like it did in the 1920s, 60s, and 90s),
portfolios should contain more of financial
assets. When the ratio declines, as in early 70s
and is currently doing now, portfolios should
contain more of physical bullion allocation. Since
2005, precious metals have been rising
drastically against all currencies, signaling the Declining Dow-Gold Ratio indicates rising
beginning of a true Bull Market in precious bullion prices.
metals. Now, with the ratio at 22 and falling,
many authorities suggest that it is time to
increase portfolio allocation to gold and other
precious metals in order to take full advantage of
current market trends.
Will Trend Remain the Same?
Bullion vs. The Dow,
2000 - Present
Gold +130% Since 2000, when Dow-Gold ratio peaked, price of Gold and
Silver +150% Silver have risen by astonishing 130-150%, respectively, YTD;
price of Platinum has increased by whooping 200%! During the
same period, the Dow Jones remained almost flat.
To determine if this trend will continue , it is important to
look at some key drivers for these increases in precious
While some investors look to commodity
based Supply-Demand fundaments, the recent
rise in precious metals prices can be
attributed to increasing concerns of the
strength of U.S. Dollar, the amount of debt
owed by U.S. government as well as concerns
about oil prices.
Precious Metals Have Been a Solid Hedge Against a Declining U.S. Dollar.
T he U.S. government has put America into huge financial trouble. The value of the U.S. Dollar
declined more than 60% from 2001 through 2007, plunging 10% in just a few weeks.
Research Center, Inc.
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Since the U.S. Dollar acts as the world’s reserve currency, any declines in the U.S. Dollar and U.S.
financial assets ultimately ends up impacting most of the world’s major economies.
The Forbidden Topic: U.S. National Debt
Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about
$1.4 billion a day — or nearly $1 million a minute. To put this in perspective, at the time Nixon removed
gold convertibility in 1971, the total cumulative national debt was just over $400 Bil. Today, U.S. National
Debt rose to a mind-numbing number of $9.13 trillion. The national debt is out of control and someday
soon foreigners will decide to dump the U.S. Dollar.
What's that mean to you? It means the current U.S. national debt path is damaging to future U.S. living
standards. It also means almost $30,000 in debt for each man, woman, child and infant in the United
States. Even if one managed to escape the recent housing and credit crunches and is coping with rising
fuel prices, one may still be headed for economic misery, along with the rest of the country. That's
because the government is fast straining resources needed to meet interest payments on its national
debt. Many leading economists suggest, “…the basic facts are a matter of arithmetic, not ideology. The
government is in the same predicament as the average homeowner who took out an adjustable
mortgage… If interest on the national debt will become unsustainable, foreign countries will begin to
dump their dollar holdings. U.S. will have to shell out a lot of resources to make those interest
payments… A major economic slowdown may be looming...”
Source: Stanley Collender, former congressional budget analyst 23
Precious Metals are safe heavens for alternative currency holdings…-Ibbotson & Associates
Growing Trade Deficit
To make matters even worse, the Trade Deficit
began to grow at an astonishing rates every year
since 1975. In 2006, it was recorded at the
whooping $765 Bil. This means that U.S. has to
borrow about $700 Bil. annually from foreigners to
fund its consumption of foreign made goods and
Typically, the Trade Deficit declines with declines in
value of underlining currency, U.S. Dollar. However, this
is not the case, not anymore. Since the U.S. is
dependent on oil imports, a declining currency actually
results in a higher deficit. Thereby, the Trade Deficit has
continuously increased as the U.S. Dollar has declined by
over 35% during the same time period. Clearly, this
cannot go on forever as at some point foreigners will be
unwilling to continue to fund U.S. expenditures and U.S.
will be forced to expand its money supply even further.
Current Account,… Yet Another Danger to U.S. Economy
The imbalances are also reflected in our Current Account position. Based on the studies of Bureau of Economic
Analysis, the U.S. Current Account deficit is now approaching 7% of GDP. According to leading economists, in the
past, a Current Account deficit in excess of 5% of GDP had resulted in Currency Crisis. In Currency Crisis,
demand for alternative currency holdings such as gold, silver and platinum increases dramatically because
precious metals offer protection against currency exchange declines.
U.S. Unsustainable Debt Levels and Precious Metals
As evidenced by the rising U.S. Debt levels and a lax monetary policy of the Federal Reserve, as foreign
investors loose confidence in the U.S.’ ability to service its debt, they will seek to exit U.S. Dollars for the
safety of precious metals in increasing numbers. This will lead to high inflation in the U.S. and skyrocketing
precious metals prices.
“The supply of precious metals is pretty much fixed… There is not
enough gold available to cover present dollars in circulation, unless
gold was to be valued at $5,000 an ounce.” - Associated Press
Oil & Precious Metals
Higher oil prices are very bullish for gold investors, especially when viewed
in their proper inflation-adjusted real context within market history.
In addition to U.S. current monetary issues that are impacting precious
metals prices, there is also an issue of Peak Oil. Based on numerous
studies, experts now believe that the world is very close to reaching
peak oil production. As production of oil will start to decline,
particularly as demand from Asia will continue to increase, it will result
in a continually increasing oil prices. Higher oil prices have a negative
impact on global economies as well as financial assets while positively
impacting precious metals prices.
Studies suggest that there is a positive correlation Gold-Oil Ratio
between oil prices and the price of gold, up to 90%
confidence level, or what is known as Gold-Oil
Ratio. As price of oil increases, gold follows. As
gold rises, silver and platinum follow.
Historically oil have traded at around 15 barrels of
oil to 1 oz of Gold, on average. Right now we have
an anomaly where it takes about 10 barrels of oil to
1 oz of Gold. Thereby, either Gold has some
catching up to do or Oil has to come down in price.
Since its highly unlikely that Oil will come down to
$30 per barrel, it is safe to assume that Gold should
be trading at $1,300 per ounce with the oil price
at its current levels. 28
“We have gold because we
cannot trust governments”
– President Herbert Hoover
Gold Appreciation in Major Currencies
The Bull Market in Precious Metals has begun in
2002. By 2005, the price of gold has been
increasing steadily in all currencies with price of
Gold in U.S. Dollars leading the way. By 2007, the
price of gold in U.S. Dollars has appreciated by
Precious Metals Bull Markets: Then and Now
History suggests that markets move in cycles lasting approximately 20 years. Some investors think we’re well into
current bull market and it is too late to invest in precious metals. However, if we compare the Current Bull Market
to that of the 1970s, we’ll find striking similarities between the two. To put it in perspective, gold had appreciated
by 2,400% in the bull market of the 70s. With Gold closing 2007 at roughly $835 per oz and gaining roughly 130% in
its value since the beginning of current bull market, it becomes apparent that Current Bull Market is only at its
infancy of what could be a 20-year Bull Market in Precious Metals.
"Gold prices actually started their
life at $35 per ounce in the early
1970s. From there, it went to $850-
$875 - a twenty-five-times-over
move. In the current Bull Market,
Gold began its latest move up at
$252, so prices at $6,250 can't be
ruled out either, in terms of
magnitude of the move." –
JON NADLER, Investment Products Analyst,
Who Expects 4-Digit Gold… and WHY?
HOWARD RUFF - "Gold and silver are now early in a historic bull market
that will dwarf the 500-1,700% profits we made in the '70s. The most
powerful, completely essential factor affecting gold is monetary
inflation. The most compelling force affecting silver…is the
supply/demand equation." -Marketwatch
JAMES TURK, - "There are two aspects to what's driving the gold price:
First, there is strong physical demand around the world… Second, the
physical demand for gold is causing a huge problem for the gold shorts…
It is very possible gold could have a massive spike in the next six to 12
months to as high as $2,000, driven by these factors." -Barron's
MARC FABER, Author, Tomorrow's Gold, - "A vicious drop in the Dow
coupled with a vicious rise in gold, possibly pushing gold to an
astounding $2,000, $3,000 or even $6,000. Commodities are an asset
class for the first time in history." Marketwatch.com
EMANUEL BALARIE, - "I think gold prices will eventually shatter even my
own bullish expectations of $1,000/oz. If you have not entered the gold
market, waiting for an opportune time might be too late. Keep in mind
that regardless of what the media is telling you, gold is still cheap at
these levels." CNBC Squawk on the Street
JIM CRAMER, Founder, Thestreet.com, - "Any portfolio designed to
counter government-mandated inflation has to be bedrocked in gold" -
New York Magazine
The information presented to you has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and its accuracy cannot be guaranteed. It shall be used for informational
purposes only. No information presented here shall be construed as investment advice, recommendations, or solicitation. NBI Metals, LLC, is not liable for any loss or damage that you might incur by using
or acting on this information. Products and services described may not be available in all jurisdictions. Please be advised that as with all speculative investments, purchasing spot precious metals involves
a risk of loss that should be carefully evaluated prior to investing any funds. Client shall carefully review all documents and risk disclosures prior to opening an account with NBI Metals, LLC.