Over a year ago I posted here on the worst political outcome I could imagine happening at that time: Hillary Clinton being elected president in November 2008. The portfolio I suggested was short term municipal bonds and gold. The reasons were obvious at the time: President Clinton II would raise income taxes, and we would have inflation. Actually that probably is the worst that could have happened politically, although the Obama cabinet and sub cabinet looks extremely Clintonian at this time. But still, the past year is a lesson in humility for me on personal opinions.
Nevertheless, despite an inflation boom and a deflation bust, gold is still doing pretty well, and so are short term munis. Along the way I added short term "federales", by which I mean Treasury notes and similar duration notes of GNMA, FNM, and FRE. And I trimmed out a lot of other things like stock exposure and commodity exposure. As of Friday December 12, all accounts are down 1.58% on the year including necessary disbursements into beneficiary budget accounts. The chart shows most of those investment entities or their proxies as well as the Vanguard SP500 total return fund.
Why has a portfolio chosen for one expected outcome worked for one not expected? Was it just luck? Well, yes it was, of course. But it was also a bare bones low risk portfolio. Gold could have crashed, of course, but not two year munis and "federales". But given the high anxiety of the times, gold was a decent bet as well. Today I saw several reports, including one by Stephanie Pomboy in Barrons, exalting munis as a "pro-socialist" investment as the FEDS wouldn't ever let the cities and states go down. And every where I go I see novel explanations for why gold is an essential investment at this time.
Short term in fixed income, virtually zero in equities, and hedged in gold has worked well as it should normally work in extremely trying times. Income has taken a hit but at least current obligations can be paid out of cash and near cash if there isn't enough income.
What about the current arguments for gold? There are a number of people from quite different professional and ethnic/national backgrounds making cases for total currency and banking system meltdowns or at least long lasting economic deflations.
I grew up in investing from the late 1960's as a pro-gold person because of the inflation I saw and lived through. But I was and am a post-gold standard investor, and not an economist, so I had very little or no knowledge of how or why the gold standard really worked. In my investment era, credit just always flowed to where it was needed when it was needed. It worked, so it will always work. That was my impression and that of most of us. Buy a little or a lot of gold "just in case", just as one buys auto, health, liability, life, and homeowner's insurance. But could the whole system just evaporate? I never bought into that scenario. All the academic and market economists assured me they could "do it" right and save us in a pinch.
In the past week I have read numerous newsworthies telling me why the system is on its death bed and gold is key. An ex-FED governor (Lyle Gramley) rather calmly suggested that the FED did not have a weak balance sheet since US gold might be revalued if necessary.
R.P.W. Millar of Scotland just had a report of 2006 reposted at G. A.T. A. on gold revaluation, as in 1934 under Roosevelt: http://www.gata.org/node/4843 Millar remains pro-gold on an intrinsic value basis.
Professor Antal Fekete who was an important at-a-distance mentor to me fifteen years ago on the Great Depression has posted at length on the current acute shortage of gold as shown in the inversion of normal carrying charges for gold futures to a premium for cash gold. This historic event suggests to him that no one owning gold wants to give it up now, and that means paper money is on its deathbed: http://www.goldisfreedom.com/ (Look under Popular Economics for recent posts.)
There are others, both original, like the highly respected Gary Shilling http://www.agaryshilling.com/, and many derivative commentators of all stripes, developing this story. As my college European history professor, Frederick Artz, always asked, is this one of those turning points of history upon which history failed to turn? Or is it for real this time?
I'm just a private non-professional investor, so I can and will plead ignorance and non-licensing as excuses for not giving out definitive opinions. Each of us has to judge events and consequences based on personal needs, demands, and resources. We all walk in different shoes. I'm as worried and unclear as the next person. But I still think the Hillary portfolio makes a lot of sense as a starting point: some modest tax-free income but with some gold insurance in case of the worst outcomes. As Joan Didion wrote, "Play It As It Lays", although she was talking about ennui and we're living through tough excitement.