HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
How to Preserve Wealth on a Fixed Income
During a Precious Metals Bull Market
I have been on a fixed income, living off my investments, since retiring at the end of 2005, so I think a great deal about how to maintain my standard of living and preserving my wealth.
For this discussion, let’s make two assumptions:
1) We are in a precious metals (hard assets) bull market and financial assets (bonds and cash, and to a lesser extent, stocks) bear market that will last until about the end of this decade.
2) Because gold will be the best way to preserve your wealth (purchasing power), learn to define your wealth in terms of gold.
For ease of discussion, I will use round numbers (do not consider these numbers applicable to me personally). Say that as of today, I convert my entire investable net worth ($2.8M at $1,400 per ounce) into 2,000 ounces of gold. Say my current yearly living expenses are $100K=70 ounces of gold, 3.5% of my total. And to maintain this purchasing power in the future, I will need to spend 70 ounces of my gold every year.
Unless I can find some way to generate more ounces of gold, I will lose wealth as I must sell gold for living expenses. It doesn’t matter what gold does in terms of dollars. If gold is $3,000 per ounce but I have only 1,500 ounces of gold, I have lost purchasing power (I am poorer).
Here are the options.
1) Work to generate money to buy gold. If you are still working, this is exactly what I suggest you do. In 2011, my writing and speaking will generate about three months of living expenses, so for me, this is pretty negligible.
2) In a precious metals bull market, silver and the miners tend to out-perform gold bullion. This has certainly been apparent over the last week. For example, say you have ½ of your money in gold ($1.4M) and ½ in silver ($1.4M). If gold goes up 5% but silver goes up 10%, you have generated an extra $35K=almost an extra 24 ounces of gold.
3) Time the market and buy the dips. I will tell you straight-away; this takes a full-time, almost obsessive, devotion, following the market closely every day. If you think you can do this by spending one hour a week; forget it.
With that being said, it can be done, because I did it last year. One of my retirement accounts has about ¾ of my retirement money, the other about ¼. Last year I generated an additional 7% return in the smaller account by timing the market.
Here is the key; you must be convinced that we are in a bull market in the precious metals; that they are going higher; because it takes real stones to buy when the market is falling. See the chart (p3) of GDX (Market Vectors Gold Miners ETF). It is not uncommon to have a range of 1-2% per day; ex, 56.8 to 58.1, open at 57.4, close at 57.75 one-half percent is about 0.3. Just once per month, selling at 57.4 and re-buying at 57.1 times 12 months augments your return by 6%.
Note this strategy is much better for a retirement account than a taxable one.
4) The above discussion not to the contrary, I actually believe that in this bull market gold will actually increase in purchasing power because people will pile into it because it is the best alternative.
There are two points to this letter.
1) Don’t think of your wealth in terms of dollars, because dollars (all paper money) will lose purchasing power. Think of your wealth in terms of gold.
2) I am as sure about this bull market in the precious metals as I have been about anything in my investing career: But the dips.
RMD
Saw someone today I hadn’t seen for a while. “Bob, I took your advice and bought $100K of gold when it was $800 per ounce. Wish I had bought more”.
RMD comment: That gold is now worth $175K, so that wasn’t bad advice. Maybe he’ll take me out to supper, because I told him to buy more.
I was walking across the U. of Missouri campus today to give a talk at the Med School on investing. The person I was with started to smile and said “Whoa—a hundred dollar bill”. He picked it up. Sure enough; a hundred dollar bill. Unfortunately, it was Monopoly money.
RMD comment: He had me going for a minute. Then during the rest of the walk I thought about what a US $100 bill will be worth in 10 years.
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