Metals A Safe Padding For Portfolios

BMG President and CEO Nick Barisheff, spoke with Jonathan Chevreau of the Financial Post and discussed the economy, inflation and how the financial industry’s stance on asset allocation completely misses the mark.

With the U.S. Fed’s QE2 set to expire and some believing it will continue in disguised form, the media is full of stories on inflation, stagflation, deflation and hyperinflation. Or even “hyperstagflation,” a term I learned from Nick Barisheff, founder of the BMG Bullion Fund.

Wikipedia defines hyperstagflation as a period when the global economy is mired in stagnation, combined with hyperinflation due to the “massive monetary expansion being orchestrated by the world’s governments and central banks.”

Consumers and investors well know garden-variety inflation and continual rises in the cost of living. Governments tolerate (and arguably create) modest annual inflation rates of 2% to 3%. This seems innocuous, but purchasing power of dollars will steadily erode unless you can generate real returns beyond inflation. With interest rates near historic lows, short-term savings vehicles have negative real returns.

The fear is governments and central banks will fail to maintain a balancing act between mild inflation and economic growth, with runaway inflation morphing into the kind of hyperinflation Weimar Germany experienced in the 1920s or currently afflicts Zimbabwe.

Gold enthusiasts like Mr. Barisheff believe the best protection against debauched paper currencies and inflation is physical precious metals. That’s why his flagship BMG Bullion Fund holds equal parts gold, silver and platinum, all stored in a bank vault in Toronto.

Mr. Barisheff is personally 90% long bullion, which he treats as a long-term buy-and hold. The other 10% he trades via puts and calls on securities like the two NYSE-traded bullion ETFs with which his fund competes: GLD and SLV. If stock markets correct sufficiently, he plans to buy certain stocks on the cheap, but not the broad indexes. He plans to load up on commodity stocks such as Cameco for uranium or Potash Corp. for fertilizer.

You’ll find no bonds in his portfolio: His website (bmgbullion.com) includes a bonds vs. bullion calculator showing how systematic withdrawals from bullion portfolios may serve investors better than bonds.

Mr. Barisheff criticizes the mainstream financial industry’s stance on asset allocation via the big three asset classes of stocks, bonds and cash. Once things deteriorate, he warns many investors will sue financial institutions for creating portfolios that claimed to be diversified but consisted mostly of assets correlated to each other, like stocks and bonds.

He views a 20% bullion position as a minimum portfolio position, a percentage two to four times the common “5% or 10% insurance” position some advisors recommend in case of black-swan events like, well, like hyperstagflation.

Over the last decade, BMG Bullion Fund has passed $600million, attracting investors in 33 countries. All three precious metals in the fund have skyrocketed over that time, even as gold mining stocks like Newmont languished.

To view the Jonathan Chevreau article: Metals A Safe Padding