Strategic Asset Allocation


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Why Precious Metals? Why Now? Listen to the Experts

  • Strategic asset allocation is an approach to investing that involves making conscious selections regarding the types of assets that will be part of the investment portfolio. This systematic approach to buying and selling investments is usually based on the short-term and long-term financial goals set in place by the investor. The goal is to generate the most revenue while at the same time keeping the level of risk to the investor as low as possible.
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Strategic Asset Allocation

  1. 1. Strategic Asset Allocation gold silver platinum palladium 1-866-924-GOLD 866-924-
  2. 2. Precious Metals: A Solid Foundation for Every Portfolio Why? 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 II. Hedging 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. 2
  3. 3. 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 3
  4. 4. Portfolio Diversification 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 Metals M +L 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 Allocation. 4
  5. 5. 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
  6. 6. Inflation 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 1989-2006 Moore 20% close to fixed income investments. Even through the long bear market of 1980 to 2002, 15% 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 0% 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) 6
  7. 7. Market Volatility 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. 1989-2006 Moore C ash ( U S 9 0 - D ay T reasury B ills) 2006 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 7
  8. 8. 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: 8
  9. 9. 9
  10. 10. 2. Hedging “… Put 10% of your money in Gold and hope it doesn’t work.” - old Wall Street saying 10
  11. 11. Currency Risk In today’s economic climate, there are plenty of risks to hedge against, one of them is currency exchange declines. +111% +312% • 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. +348% • 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. 11
  12. 12. 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 12
  13. 13. 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: 13
  14. 14. 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 "purchasing power" as $1 in the year 1970,” i.e., U.S. Dollar depreciated by more than 80% – US Department of Labor
  15. 15. 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.” - Steve Forbes Avg House Price $ 24,608 $ 299,100 1215% Dow Jones 890 12,502 1405% Purchase Power 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. 15
  16. 16. “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 16
  17. 17. Fat Tail Events “Fat Tail” Events refer to protection against a sudden financial crises, such as: War Bullion vs. The Dow Terrorism Natural Disasters Health Pandemics Systemic Financial Risks • Derivatives Accident • Bankruptcies of major financial institution, and • Defaults Disruption of Oil Supply Precious Metals act as portfolio Source: 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%. 17
  18. 18. “… Derivatives are financial weapons of mass destruction, carrying dangers that while now latent are potentially lethal.” - Warren Buffet, 2003 18
  19. 19. 3. Tactical Asset Allocation A Solid Foundation for Every Portfolio 19
  20. 20. The Dow-Gold Ratio Dow- 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. 20
  21. 21. 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 Platinum +200% same period, the Dow Jones remained almost flat. DOW +13% To determine if this trend will continue , it is important to look at some key drivers for these increases in precious metals. Source: 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. Source: 21
  22. 22. U.S. Dollar 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. 1989-2006 Moore 2006 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. 22
  23. 23. 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
  24. 24. Precious Metals are safe heavens for alternative currency holdings…-Ibbotson & Associates holdings… 24
  25. 25. 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 imported commodities. 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. 25 Source:
  26. 26. 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. 26
  27. 27. 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 Source: 27
  28. 28. 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
  29. 29. 4. Conclusion “We have gold because we cannot trust governments” – President Herbert Hoover 29
  30. 30. 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 almost 130%. Source: 30
  31. 31. 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, 31
  32. 32. Who Expects 4-Digit Gold… and WHY? 4- 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." 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,, - "Any portfolio designed to counter government-mandated inflation has to be bedrocked in gold" - New York Magazine 32
  33. 33. 1-866-924-GOLD 866-924- 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.